[Senate Hearing 109-811]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-811
 
                       RUSSIA: BACK TO THE FUTURE

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             SECOND SESSION



                               __________

                             JUNE 29, 2006

                               __________



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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  
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                            C O N T E N T S

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                                                                   Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening 
  statement......................................................    17
Jaffe, Amy Myers, Wallace S. Wilson fellow in Energy Studies, 
  associate director, Rice University Energy Program, James A. 
  Baker III Institute for Public Policy, Rice University, Houston 
  TX.............................................................    19
    Prepared statement...........................................    23
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1
    Letters from CEOs of Ford and DaimlerChrysler................    38
Sestanovich, Hon. Stephen, George F. Kennan senior fellow for 
  Russian and Eurasian Studies, Council on Foreign Relations, 
  Washington, DC.................................................     3
    Prepared statement...........................................     5
Trenin, Dmitri, deputy director, program cochair, senior 
  associate, Foreign and Security Policy, Carnegie Moscow Center, 
  Carnegie Endowment for International Peace, Moscow, Russia.....     9
    Prepared statement...........................................    12

                                 (iii)

  


                      RUSSIA: BACK TO THE FUTURE?

                              ----------                              


                        THURSDAY, JUNE 29, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:07 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee) presiding.
    Present: Senators Lugar and Biden.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. The Foreign Relations Committee meets to 
examine the current status of political developments in Russia 
and the future of the United States-Russia relationship. 
Today's inquiry builds upon two hearings on Russia that the 
committee held last year. At those hearings, I noted that 
President Putin's increasingly authoritarian style, his control 
of the media, and his retribution against political opponents 
have left the fate of the democracy in Russia more ambiguous 
than at any time since the collapse of the communist system. 
These internal developments, coupled with Russia's increasing 
pressure on its neighbors, its resistance to resolute 
international action to the proliferation threat in Iran, and 
its willingness to use its energy supplies for political 
leverage, have complicated United States-Russian relations.
    Russia's membership in the G-8 was once a hopeful sign of 
its evolution toward a more open society and economy. Now, as 
Russia prepares to host the G-8 summit in St. Petersburg, the 
other seven G-8 nations are dealing with the incongruous 
elements of Russian membership. And while some have called for 
the United States to boycott the summit, I support the 
administration's decision to participate. Rather than boycott, 
we should build cooperation with our allies in challenging 
negative trends that we perceive coming out of Moscow.
    The United States, Europe, and Japan should show strong 
support for Russian civil society, a free and independent 
media, the application of the rule of law, and a resolution of 
conflicts in the region, while keeping under careful scrutiny 
the implementation of Russia's new NGO law.
    Russia is an important country with which the United States 
must have a working relationship. Attempting to isolate Russia 
is likely to be self-defeating and harmful to American 
interests. The dilemma for American policymakers is how to 
strengthen Russia's respect for democracy while simultaneously 
advancing cooperation with Russia on issues that are vital to 
American security and prosperity. The United States must take 
the long view. Russia is still in the early stages of a 
complicated post-Soviet evolution. The United States and Russia 
do have many convergent goals. We share a strong interest in 
combating terrorism and safeguarding weapons of mass 
destruction. Russia's oil and natural gas reserves have 
provided it with an economic windfall. But, over the long run, 
it will need to achieve economic diversification and greater 
integration with Western economies if it is to have more than a 
one-dimensional economy.
    The Putin government's foreign policy and domestic 
political strategy depend heavily on energy revenues. And, 
according to the Energy Information Agency, Russia will earn 
about $172 billion in 2006 from oil exports. For every one 
dollar increase in the value of a barrel of oil, Russia earns 
an additional $1.4 billion per year in revenue. In the short 
run, this influx of hard currency has eased many structural 
problems of the Russian economy and provided the Putin 
government with the means to reward supporters. It also gives 
Russia enhanced influence over nations in Europe and elsewhere 
who are dependent on Russian oil and natural gas.
    This was underscored last January, when Russia stopped 
pumping natural gas to Ukraine after the two sides had failed 
to reach agreement on Russia's proposed quadrupling of the 
price of gas. The agreement that resolved the crisis will soon 
expire, and President Putin again faces a choice of whether the 
world should view him as a reliable and productive energy 
security partner. But, even beyond Ukraine's situation, threats 
to divert energy supplies eastward and interference in 
development of energy resources in Central Asia are 
unacceptable.
    The United States must engage with Russia on energy 
security to send a clear and strong message promoting 
principles of transparency, rule of law, and sustainability. 
Efforts under the current United States-Russia energy dialog 
are an integral part of our diplomatic relationship with Russia 
and should be expanded and fully supported.
    I've introduced Senate bill 2435, the Energy Diplomacy and 
Security Act, which recognizes the new reality of energy as a 
national security priority. It enhances United States energy 
diplomacy capabilities to support the type of rigorous energy 
security dialog we must have with Russia and other important 
nations in the global energy equation. Such a dialog must 
recognize the long-term mutual interests shared by the United 
States and Russia in stable energy markets.
    We are joined by a distinguished panel this morning that 
will help us examine the trends in Russia and options for 
United States policy, particularly as they relate to the G-8 
summit. We welcome Ambassador Stephen Sestanovich, the George 
F. Kennan senior fellow for Russian and Eurasian Studies at the 
Council on Foreign Relations; Dr. Dmitri Trenin, Deputy 
Director at the Carnegie Moscow Center, in Moscow; and Ms. Amy 
Myers Jaffe, the Wallace S. Wilson fellow at the Baker 
Institute Energy Forum at Rice University. And, 
parenthetically, I would like to say I am pleased Ms. Jaffe 
will be speaking on domestic energy security issues at the 
Lugar-Purdue Energy Summit at the end of August. We look 
forward to seeing you again on that occasion in Indiana. Now, 
we thank our witnesses for joining us today. We look forward to 
their insights.
    As I have mentioned to our witnesses, we will try to 
conclude our hearing sometime in the area of 10:45 to 11 
o'clock to make it possible for the committee to have an 
important markup of the India nuclear security legislation, 
which we will also take up today in an eventful morning. But we 
should not be rushed in the process. I ask each of the 
witnesses to know that your full statements will be made a part 
of the record, and to summarize, as you wish, but to take time, 
because we are here to hear you and your counsel today. Then 
we'll have a round of questions with members who will be 
joining us.
    As my colleague, Senator Biden, our distinguished ranking 
member, joins us, I will ask him, also, for his opening 
statement.
    Now, we'll recognize you in the order that I first listed 
your presence, and that would start with the Honorable Stephen 
Sestanovich. And if you would please proceed, Steve, we'd much 
appreciate it.

STATEMENT OF HON. STEPHEN SESTANOVICH, GEORGE F. KENNAN SENIOR 
  FELLOW FOR RUSSIAN AND EURASIAN STUDIES, COUNCIL ON FOREIGN 
                   RELATIONS, WASHINGTON, DC

    Ambassador Sestanovich. Mr. Chairman, thank you. It's an 
honor to appear before your committee again with such 
distinguished colleagues and to have the opportunity to address 
the important policy questions you've sketched in your remarks.
    It won't surprise you that I'm armed today with many copies 
of the recent report of the Council on Foreign Relations Task 
Force on Russia. My hope is that you will instruct committee 
staff members to remind you of the report's recommendations on 
a daily basis.
    The Chairman. And to advise members to read the report, 
perhaps.
    Ambassador Sestanovich. Let's hope so.
    I have prepared a brief written statement, and hope that it 
can be entered into the published record of this hearing. It 
touches on a series of issues that I'm sure we will address in 
the course of our discussion.
    First, Russia's economic and social transformation, not 
only the surge of economic growth in this decade, but the 
gradual emergence of a middle class, with all that that should 
mean.
    Second, the political transformation that has accompanied 
these economic and social changes, a centralization of power 
that has undone much of Russia's post-Soviet pluralism.
    Third, the persistence of Russian-American cooperation on 
first-order security issues, cooperation that is always 
incomplete and never problem-free, but that serves the 
interests of both sides. We see this most recently, as you 
noted, Senator, and most notably, in diplomatic efforts to 
check Iran's nuclear activities.
    Finally, the fourth theme, the erosion of Russian-American 
partnership on other problems. Even issues that were supposed 
to involve the clearest examples of common interest, like 
energy security or counterterrorism efforts, have been 
affected. The most acute disagreements arise from Russia's 
relations with its neighbors and from Russia's internal 
evolution.
    Mr. Chairman, we're entering a new phase of Russian-
American relations, not so tense and dangerous that it should 
be thought of as a new cold war--one hears this phrase these 
days--but, all the same, one that will confront us with some 
unfamiliar choices. For this reason, rather than summarize the 
analysis contained in the statement I've submitted, I'd like to 
offer a few thoughts about the dilemmas that American 
policymakers will face as they try to define this new 
relationship.
    I see three dilemmas--one having to do with the traditional 
goal of integrating Russia into international frameworks, a 
second involving the steadily more challenging problem of 
Russia's relations with its neighbors, and a third involving 
what a colleague of mine has called Russia's ``de-
democratization.''
    First, about integration. We're almost at the 15-year 
anniversary of the collapse of Soviet communism. Throughout 
this period, American policy has tried to increase Russian 
participation in multilateral structures--the G-8, APEC, the 
OSCE, the WTO, the Council of Europe, even NATO. One could go 
on: ASEAN, the Bosnia Contact Group, the Mid-East Quartet. In 
this effort, doubts about how well Russia fits in, whether it 
has really bought into the group aims and ethos, have generally 
been overridden by a desire to have Moscow inside the tent. The 
current controversy over President Putin's chairmanship of the 
G-8 is just the latest version of this dilemma.
    Most people, like the members of the CFR Task Force, I 
might add, generally favor inclusiveness. But Russia's internal 
evolution makes the choice a less obvious one. After all, a 
member that doesn't buy into group norms usually makes the 
group work less well. There's much to say on this subject, 
whether in connection with WTO accession or with the OSCE's 
election monitoring role or with Rosneft's IPO, but let me 
simply state the dilemma. If we're entering a period in which 
Russia's lack of buy-in is a greater problem, do we come down 
on the side of greater inclusiveness or of protecting the 
effectiveness and integrity of our institutions?
    Second, a dilemma concerning Russia's policy toward 
neighbors. For 15 years it has been American policy to try to 
develop good relations with almost all the post-Soviet states 
and to finesse problems that arose when their relations with 
each other were not good. The approach was usually a workable 
one, and it particularly served the interests of states that 
were hoping to expand their ties to the West without provoking 
Moscow's wrath. But Russia's deteriorating relations with 
several of its neighbors, and their own readiness to take more 
dramatic steps, may make this strategy of finesse harder to 
apply. Remember, several states are now talking about quitting 
the CIS, the Commonwealth of Independent States, the regional 
organization that Russia dominates, for good. And applicants 
for NATO membership now include core constituents parts of the 
former Soviet Union; for that matter, of the Russian empire.
    Here's the dilemma we need to bear in mind. If we value 
good relations with all sides among the post-Soviet states, 
will we end up giving vulnerable states less support than they 
need? If, however, we offer them fuller support, will we only 
feed Russia's sense of grievance and stimulate greater 
confrontation with states that are hard to help?
    Finally, a word about Russia's drift away from democratic 
institutions and values. For 15 years, American policymakers 
have wanted to see the best in what was happening in Russia. We 
have sometimes pulled out punches so as not to weaken 
democratic leaders who were, we thought, doing their best under 
difficult circumstances. Criticizing them, it was feared, would 
undercut them and undermine American influence.
    Today, this problem looks a little different to all of us. 
It's harder to think of Russia's leaders as well-meaning 
democrats simply doing the best they can. And at a time when 
anti-American sentiment seems to be on the rise in Russia, the 
question of how to have real influence is more acute than ever.
    It frames choices for us like the following. Will speaking 
out more openly about democracy only identify it as a lever 
that Westerners use to weaken Russia? Won't we, thereby, weaken 
support for democracy, even among people who should be its 
natural advocates? On the other hand, if we confine Russian-
American dealings to narrow, practical matters of what we would 
call national interest, won't we confirm, once and for all, for 
skeptical Russians, that the United States does not understand, 
as one Russian friend put it to me recently, the difference 
between good and evil?
    Mr. Chairman, these are genuinely hard questions, and there 
may be no ``one size fits all'' answers for them. But we're 
going to need answers of some kind. Let me venture one 
suggestion about how--or, more precisely, where--to start 
thinking about these questions. However cleverly we may analyze 
these issues in this hearing room, in our government, in the 
op-ed pages of our newspapers, we're unlikely to hit on good 
answers--and, still less, on good policies--unless we undertake 
this effort with our friends and allies in Europe, in both the 
European Union and in NATO. And we're unlikely to have the 
influence that we want with any of the post-Soviet space--with 
the post-Soviet states unless we are pursuing a policy that has 
been developed jointly with our allies. There are few policy 
problems more worthy of urgent collective thought with our 
closest friends than these.
    Thank you, and I look forward to this discussion.
    [The prepared statement of Ambassador Sestanovich follows:]

Prepared Statement of Hon. Stephen Sestanovich, George F. Kennan Senior 
Fellow for Russian and Eurasian Studies, Council on Foreign Relations, 
                             Washington, DC

    Mr. Chairman, I want to thank you and your colleagues for the 
invitation to join you in today's hearing on Russia and Russian-
American relations.
    Your discussion of these questions is important and timely. Not so 
long ago, Russia's internal evolution and the state of relations 
between Moscow and Washington were hardly topics of public debate. We 
can already regret this inattention. Certainly when the leaders of the 
G-8 agreed in the summer of 2002 to hold this year's meeting in St. 
Petersburg, they did not imagine that 4 years later legislators, 
policymakers, and experts might be discussing whether we have entered a 
``new cold war'' with Russia.
    Has the cold war resumed? My emphatic answer to this question is 
no. The interests of neither side would be served by such a conflict, 
and there is no serious basis for it. But something does appear to have 
gone wrong with the widely-shared expectation of a few years back, that 
Russia was rejoining the West. Its internal evolution, its foreign 
policy, and the outlook of its leaders were thought to be creating the 
basis for a stronger partnership with the United States and the world's 
leading democratic states. How differently things have turned out is 
suggested by the very title of Dmitri Trenin's article in the current 
issue of Foreign Affairs: ``Russia Leaves the West.''
    I should note here that, to understand precisely what has gone 
wrong, the Council on Foreign Relations last year constituted an 
independent task force on U.S. policy toward Russia, under the 
cochairmanship of John Edwards and Jack Kemp. Its members included 
distinguished scholars, business leaders, representatives of 
nongovernmental organizations with long experience in Russia, and 
former senior officials from administrations of both parties. My 
remarks to you today are shaped by the conclusions and recommendations 
of this group, whose report was issued last March under the title, 
``Russia's Wrong Direction: What the U.S. Can and Should Do.''
    The Task Force began its deliberations with this assumption, to 
which it remained committed throughout its work: Russia matters. If one 
looks at the big issues that affect the security and well-being of the 
United States now and in the future--terrorism, the proliferation of 
weapons of mass destruction, tight energy markets, climate change, the 
drug trade, infectious diseases, human trafficking--it's hard not to 
notice that Russia is a major factor in almost all of them. The United 
States will have a better chance of dealing effectively with these 
issues if Russia is on our side, sees problems the way we do, and can 
contribute to resolving them.
    Of course, it would have been possible to say exactly this at 
virtually any point in the past 15 years. During most of this period, 
Russia was treated as a major power largely as a matter of courtesy. In 
1998, had the other members of the G-8 doubted Russia's fitness to sit 
at the same table with them, it would probably have been because Russia 
was the only one present in danger of an imminent financial meltdown.
    The revival of sustained economic growth has changed all this. In 
the 1990s Russia struggled to pass its annual budget, limped from one 
unsatisfactory agreement with international lenders to the next, and 
attracted less foreign investor interest than tiny countries of Central 
and Eastern Europe. In 2006, Russia will record its eighth consecutive 
year of growth (a cumulative expansion that has increased GDP by 65 
percent), and its fifth consecutive budget surplus. Last week its 
finance minister announced that Russia will pay its remaining Paris 
Club debt early. Wage and pension arrears--for years a source of 
routine hardship for teachers, civil servants, doctors, and millions of 
other Russians--have virtually disappeared. The national unemployment 
rate has dropped from 10 percent to 7 percent since 2000; and the 
number of Russians living below the government's poverty line dropped 
from 42 million in 2000 to 26 million in 2004 (and strong growth since 
then has surely reduced the number further).
    This success story goes beyond the easing of everyday life for the 
poorest of Russian society, or the burgeoning number of its 
billionaires, or the strength of the government's credit rating. For 
the first time in a century, a Russian middle class is emerging. 
Measured by many Russian sociologists at approximately a quarter of the 
national population, it reflects changing consumption patterns, the 
confidence of those who have at last become property owners, the 
expansion of small business, higher educational levels, greater travel 
opportunities, and a mindset of new attitudes and expectations.
    Any political scientist can tell you that such a social and 
economic transformation is the essential guarantee of a ``normal'' 
political system--and should cement a positive Russian-American 
partnership. This was the hope and conviction of all who were involved 
in U.S. policy toward Russia in the 1990s, and I am sure it remains so 
today. Over the long term, the emergence of a Russian middle class may 
well play exactly this crucial historical role. But in the short term 
it has not done so.
    Instead, at every level of Russian politics, the dominant trend of 
the past 5 years has been toward the erosion of pluralism and, in its 
place, the arbitrary and unregulated exercise of state power. This has 
been true of relations between the branches of the Federal Government, 
between center and periphery, between the government and the media, 
between government and civil society, and between those who wield 
political power and those who command economic resources.
    The result of this concentration of power is easy to summarize: 
Russia's institutions are less transparent, less open, less pluralist, 
less subject to the rule of law, and less vulnerable to the criticism 
and restraints of a vigorous opposition or independent media. In 
today's Russia there are no real counterweights of any kind to the 
Kremlin and the state bureaucracy. The most important decisions 
concerning the future of the nation are made by a handful of people 
exercising power for which they will not in any meaningful sense be 
held accountable.
    Even where elections continue to take place (and this is for a 
shrinking number of offices) they are under very careful and effective 
control. Opposition parties can be kept off the ballot by denying them 
registration. Once on the ballot, they can be removed in the course of 
a campaign if they seem to be building too much popular support. They 
can be denied television time and starved of political contributions. 
This past spring the leader of one opposition party was actually 
removed from his post because he had fallen out of favor with the 
Kremlin.
    In 1998, then, Russia may have stood out at the G-8 as the only 
member on the verge of financial collapse. Today it stands out as the 
only member moving away from the modem political mainstream.
    It is often said that by the end of the 1990s--a decade that 
brought economic privation, fractious politics, bureaucratic corruption 
and a seeming breakdown in the effectiveness of state institutions--the 
Russian people desired relief from disorder. They do not really mind, 
it is thought, a little authoritarianism if that's what it takes to 
solve their country's problems. President Putin's centralization of 
power, in this view, is exactly what the people want.
    It is impossible to question Mr. Putin's popularity--polls 
consistently give him a high approval rating, most recently 70 percent. 
And if Russians like their President, Americans have no business 
second-guessing them. But we should not over-interpret Mr. Putin's 
popularity--or equate it with stability and, still less, effective 
governance. It is one thing to say that Russians like their leader, 
quite another to say that they think he is actually solving their 
problems, or that they like bureaucratic authoritarianism, think it 
should continue, and would vote for it if presented with serious 
alternatives in an open political process. The same polls, after all, 
show that 70 percent of Russians disapprove of the performance of Mr. 
Putin's government. And although one sometimes hears that he captured 
strong support for his populist campaign to exile or imprison a number 
of ``oligarchs,'' a recent poll suggests that ordinary Russians have 
different priorities: 79 percent answered that it is corrupt state 
officials that are harming the country most. (Only 12 percent said rich 
businessmen were doing more harm.)
    Similarly, while it is very common to hear that Russians do not 
understand and are not ready for democracy, polls show that, in fact, 
strong popular majorities want a vigorous opposition and independent 
media able to criticize public officials. In this, they seem to know 
something that President Putin does not. Although he promises to attack 
official corruption, he has apparently not made the connection between 
this goal and a competitive political system, bureaucratic transparency 
and accountability, investigative journalism, and a vigorous 
nongovernmental sector. To the extent the Kremlin has a policy on 
corruption, it is this: Systematically to weaken the most potent tools 
for combatting it.
    Mr. Chairman, this reading of Russia's domestic evolution is not a 
matter of much dispute among informed observers, either here or in 
Russia itself. Specialists may disagree about certain points, such as 
how great the differences are between the current situation and that of 
the 1990s. There are also disagreements about the likely future 
trajectory of Russian politics--about whether things are likely to get 
worse before they better, about how unified the current ruling group 
is, about the time frame over which a more normal system serving the 
interests of the emergent middle class might take shape.
    But these disagreements are at the margin. They do not really alter 
the basic judgment about the extreme centralization of power in 
contemporary Russia or about the absence of checks on its arbitrary 
use. There is, however, more room for disagreement about what all of 
this means, or should mean, for Russian-American relations.
    Let me first focus on what it does not mean. It does not mean that 
the United States and Russia cannot or should not cooperate on first-
order problems involving the security interests of both sides. Some of 
these issues have lately been a prominent part of the Russian-American 
agenda, and the record suggests that Washington and Moscow are not 
having any difficulty working together. Iran's effort to develop its 
nuclear-weapons options is an outstanding case in point. I doubt that 
any other issue has been more frequently discussed between Secretary 
Rice and Foreign Minister Lavrov over the past year. During this same 
period worries about Russia's internal direction have been more openly 
expressed by American officials at all levels--most recently, by the 
Vice President. Even so, Russian and American approaches to Iran have 
remained broadly convergent. Russia does not refuse to cooperate on 
security issues because we refuse to call it a democracy.
    The same is true of cooperation on the so-called ``loose nukes'' 
question. Less than two weeks ago, Russian and American negotiators 
were able to finalize an agreement to renew the umbrella agreement 
under which ``Nunn-Lugar'' programs to improve the safety and security 
of sensitive, especially nuclear-weapons-grade materials have been 
conducted. There is no reason to expect this pattern to change. When 
cooperation rests on a compelling Russian security interest, 
disagreement on other matters is not going to derail it.
    The fact that cooperation on such issues is possible does not, of 
course, mean that it is automatic or complete. There remain important 
differences between the way Russian policymakers view these issues and 
the outlook of American and European officials. Moscow, for example, 
appears reluctant to associate itself with a strategy of threatening 
Iran with international isolation if it continues on its present track. 
By the same token, it is Russian policy to assure Tehran that it will 
be able to resume an enrichment program once it addresses questions 
about past nuclear activities and accepts appropriate safeguards.
    Despite these differences, the United States has over the past year 
been able to win increased Russian support for measures that isolate 
Tehran. Without forgetting the possibility of disagreements in the 
future, it should be American policy to create an even stronger 
foundation for Russian-American nuclear cooperation in general. (For 
this reason, I might note that the Kemp-Edwards CFR Task Force 
supported the opening of bilateral negotiations on a so-called ``123 
agreement''--which would make possible cooperation on civil nuclear 
energy projects. Without such an agreement, the U.S. lacks the legal 
and institutional infrastructure to expand cooperation in this field.)
    Nonproliferation and nuclear security represent one extreme in 
Russian-American relations. They are the issues on which two sides have 
retained an ability to work together, largely unaffected by the 
negative trends of Russian domestic politics. Unfortunately, these 
issues do not represent the whole of the relationship. In other areas, 
cooperation has often given way to discord, even in instances where 
American policy has until recently taken for granted a strong common 
interest.
    Counterterrorism provides one of the most striking--and in some 
respects, most surprising--examples. Since at least 2001, the threat of 
terrorist attacks has been Exhibit A for the argument that in dealing 
with the new security challenges of our time Russia and the U.S. have 
to stick together. How then to understand the strange Russian 
initiative at last year's summit meeting of the Shanghai Cooperation 
Organization, calling on Washington to end its use of military bases in 
Central Asia? Access to these bases by NATO and American forces has, of 
course, only one purpose--to support their operations in Afghanistan. 
Russia professes to agree with what we and our allies are doing in 
Afghanistan, but for Moscow this interest was apparently trumped by 
another factor. Recall that last summer the United States and the 
governments of the European Union found themselves in the middle of a 
disagreement with the President of Uzbekistan about what kind of an 
inquiry there should be into the mass killing of civilians by Uzbek 
forces. What President Putin apparently saw in this standoff was an 
opportunity--too inviting to resist--for a partial roll back of the 
American presence in Central Asia. His stance surely encouraged the 
Uzbek government's decision to end Western use of the most important 
airfield in the region. More significantly, it demonstrated that a 
seemingly strong common interest can easily be subordinated to petty 
geopolitical point-scoring.
    Moscow's confrontation with Ukraine over gas supplies and prices 
teaches a similar lesson. It would be hard to imagine a more 
significant Russian interest than its reputation as a reliable supplier 
of energy to international, especially European, markets. Nothing has 
ever done more to damage this reputation than the unprecedented 
decision last January to turn off the gas to Ukraine--and with it, to 
the rest of Europe. It is still not easy to make commercial sense of 
this action, since neither Ukraine nor Russia's other European 
customers (nor for that matter, the United States) disputed the idea 
that energy relations should be governed by market pricing. The strange 
Russian handling of the affair--in particular, President Putin's 
aggressive public role as the lead policy spokesman--made it clear that 
for Moscow this was in reality a political confrontation, not simply a 
commercial one. Ukraine's new leadership had come to power in one of 
the most embarrassing Russian policy debacles of recent years. Now, on 
the eve of parliamentary elections, the leadership of the ``Orange 
coalition'' was divided, and energy clearly seemed a tool for dealing 
it a further political setback.
    Mr. Chairman, this affair was deeply shocking for European 
policymakers. Subsequent Russian actions and statements--such as the 
blunt comment last spring by Gazprom management that Russia might 
simply sell its gas elsewhere if European countries are not willing to 
cede targeted chunks of their energy infrastructure, or last week's 
announcement that Russia has no intention of ratifying the European 
Energy Charter--have only deepened this concern.
    These two episodes--one involving counterterrorism cooperation; the 
other, commercial energy contracts--have a unifying theme. They suggest 
that over the next several years Russia's interactions with its 
neighbors are likely to play an increasing--and increasingly negative--
role in Russian-American relations. As former prime minister Yegor 
Gaidar put it recently, Russia has entered a ``dangerous period of 
post-imperial nostalgia.'' Already the apparent desire to assert a 
vanished primacy has prompted Russia's leaders to take actions that 
other governments find irresponsible. It is important to note that 
Russian policymakers have also shown themselves capable of quick 
backtracking once they see how deeply counterproductive their actions 
really are. This rapid learning has kept conflicts from escalating, but 
it too has its costs. In any country, retreating in the face of fierce 
international criticism stores up resentments for the future; in Russia 
it feeds a conviction that the other major powers consistently treat it 
unfairly.
    Mr. Chairman, over the next 2 to 3 years, the U.S.-Russian 
relationship will sometimes seem like two different relationships, 
based on different principles and expectations. Particularly on those 
security issues where the interests of the two sides make it easy and 
necessary to work together, cooperation will continue. Yet on other 
issues--indeed, on a growing number of them--disagreement and discord 
seem more likely.
    Without dramatizing this transformation, or calling it a ``new cold 
war,'' we should recognize that accumulated frictions between Russia 
and the United States can over time have consequences that go well 
beyond a downturn in bilateral relations. They raise the prospect of a 
broader weakening of unity among the leading states of the 
international system. If growing consensus among the major powers gives 
way to a new line of division between democrats and authoritarians, if 
their energy strategies diverge, or if they respond in different ways 
to terrorism, America's chances of success in meeting global challenges 
will be reduced. At present, the risk that such divisions will emerge 
may seem remote, but policymakers in both the Congress and the 
Executive Branch should not fail to anticipate the tipping point. 
Americans should understand how much Russia's future course--above all, 
whether its policies, at home and abroad, move further from the Western 
mainstream--can affect the outcome.
    Thank you.

    The Chairman. Well, thank you very, very much for that 
excellent testimony and for your entire paper, which will be 
made a part of the record.
    Ambassador Sestanovich. Thanks.
    The Chairman. Dr. Trenin, we're delighted to have you again 
before the committee, and would you please proceed?

 STATEMENT OF DMITRI TRENIN, DEPUTY DIRECTOR, PROGRAM COCHAIR, 
SENIOR ASSOCIATE, FOREIGN AND SECURITY POLICY, CARNEGIE MOSCOW 
  CENTER, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, MOSCOW, 
                             RUSSIA

    Dr. Trenin. Thank you very much, Mr. Chairman. It's--is it 
working? Yeah. Thank you very much, Mr. Chairman. It's a high 
honor and a rare privilege for me to testify before the 
committee.
    I, too, produced a written statement, which, as you said, 
will be made----
    The Chairman. Yes.
    Dr. Trenin [continuing]. Part of the----
    The Chairman. In full.
    Dr. Trenin [continuing]. Official record.
    Let me highlight some of the things, and expand some of the 
things, which form the basis of that statement.
    I agree, in many respects, with what my distinguished 
colleague and friend Steve Sestanovich has laid out, but let me 
add a different dimension to what he has said.
    Russia is a country which has what I would call a tsarist 
political system, with all major decisions taken, essentially, 
by one institution, the Presidency. Over the past 6 years, the 
degree of power centralization in Russia has grown 
dramatically. While authoritarian and overcentralized, however, 
the Russian political system rests on the acquiescence of the 
governed. If you like, this is a version of authoritarianism 
which is democratically legitimized. Now, this is something 
which is occasionally not given proper attention.
    Seen historically, I do not think that Russia is heading in 
the wrong direction. Whatever the current ups and downs of 
Russia's domestic politics are, and Russia's economic 
development are. Russia--rather, in my view, it has returned to 
the path of natural development which--that she was forced to 
abandon by the Bolsheviks. It was never serious to expect 
Russia to become a liberal democracy after three-quarters of a 
century of communist rule. By the same token, to regard 
Yeltsin's Russia as a democracy was wishful thinking. Russia 
was freer and more pluralist in Yeltsin's times, but this was 
mostly the result of the state being too weak, rather than the 
democratic forces assuming a major role in the country's 
politics.
    In the future, as well, there will be no cutting corners. 
For a number of reasons, Russia's modernization cannot proceed 
through integration into the European and Euro-Atlantic 
institutions, as was the case in Central Europe, and could be 
the case in Eastern Europe, as well. Russia would have to 
perform the feat of modernization on its own. There are many 
factors working against that. However, there are several 
important and powerful factors working for that. And one of the 
factors is the development of capitalism, and the other one is 
the openness of the country to the outside world.
    I would submit to you that Russia's story is not the story 
of a failing democracy. I think democracy in Russia is a thing 
for the future. But, rather, this is a story of evolving 
capitalism. It's not yet market capitalism, but it's a very 
real and vibrant, if rough, capitalism.
    What I find as a weak point in the criticism of the current 
Kremlin policies is the assumption, either stated or not, that 
should pressure on the Russian authorities be kept up at a high 
level for a sufficiently long period of time, either the 
Kremlin will relent or it will be defeated in some version of a 
democratic revolution, and a new, better Russia would somehow 
emerge. I have been caricaturizing a little bit, but I find 
this to be a very dangerous illusion.
    Positive changes in Russia will come, and they will come 
from within, but they will need time--and, I would say, a long 
time--to coalesce. I think that what was highlighted in--at the 
very beginning of Ambassador Sestanovich's presentation, the 
growth and the future role of the middle class, is the thing 
that will ultimately lead Russia on the road to a functioning 
democracy.
    That does not mean, however, that the outside factor has no 
role in how Russia is developing. However, this outside factor 
will not be some foreign government's pressure; but, rather, 
the general openness of Russia, which I have already mentioned, 
to the outside world, and, in particular, its proximity to the 
European Union--again, another issue that Ambassador 
Sestanovich highlighted in his presentation.
    Throughout Russian history, impatience with the pace of 
Russia's modernization has been a recurring theme--and, I would 
add, a recurring problem. It is understandable, but it is not 
necessarily very helpful.
    Turning to Russia's foreign policy, one thing I want to 
stress from the very beginning, that in contrast to the 1990s 
and the early 2000s, the Russian leadership is no longer 
practicing accommodation and adjustment par excellence to the 
international environment; rather, it is seeking to return to 
the world scene as a major independence player. There is a 
widespread perception among the Russian leadership that in the 
1990s their country was anything but sovereign, that it was 
weak and overdependent on others, led by the United States. 
Russia's policies today could be seen as a backlash to that 
reality or perception, however you choose to look at that.
    In this situation, it is a reasonable policy for the United 
States to look for that in various areas of common ground, and 
those areas have been richly defined in Ambassador 
Sestanovich's presentation, and I do not want to go over the 
same ground again.
    But let me focus on one issue in the remaining few minutes 
that I have, and that is the United States-Russian interaction 
in the former Soviet Union. Let me state very frankly that the 
Putin administration's strategic objective is creating a 
Moscow-led power center in the former Soviet Union. They look 
at Russia as a great power, and they look at the former Soviet 
Republics as areas where Russian business influence, political 
influence, security influence, and cultural influence should be 
bolstered.
    Most of the member states of the still-functioning, still-
existing Commonwealth of Independent States are likely to 
respect Russia's interests and will seek, in return, to draw 
benefits from their close relations with Russia. However, none 
of them is likely to become Russia's satellite. I don't think 
that, even today, one can name a single post-Soviet country 
that is controlled by Moscow.
    Let me address one issue within this context which I think 
is extremely important and potentially very dangerous. Over the 
past decade and a half, Russia has internalized both Ukraine's 
independence and the border that divides the two countries. 
More recently, it has learned to live with the consequences of 
the Orange Revolution and Ukraine's political pluralism. 
However, Ukraine's bid to join NATO and the prospect of a 
membership action plan being offered to Ukraine at the next 
NATO summit in Riga, in late November this year, puts this 
relationship to a very major test. Ironically, the step 
designed to finally guarantee Ukraine's territorial integrity 
has the potential of reawakening the sleeping issues, such as 
the status of the heavily Russian-populated Crimea, home of the 
Russian Black Sea fleet. The situation is highly complex due to 
the low popularity of NATO accession among the Ukrainian 
population, who will need to vote on the issue in the national 
referendum. There are differences on the NATO issue even among 
the coalition partners and ambivalence within the principal 
political parties. The stakes are unusually high, not to be 
compared with either the Polish-Czech-Hungarian or the Baltic-
Romanian-Bulgarian accessions to the Atlantic Alliance. Not 
only is Ukraine different from Poland or Latvia, the Russia of 
2006 is very different from the Russia of 1996, or even the 
Russia of 2002.
    Shall I continue, Mr. Chairman?
    The Chairman. Yes, please.
    Dr. Trenin. In the next few months and years, Ukraine can 
become a political battleground between the competing domestic 
forces and also between Russia and the United States with 
important and not yet predictable consequences for all the 
parties involved.
    To put it very mildly, not everything depends on Russia in 
the United States-Russian relationship. Russian cooperation on 
the United States agenda items will depend on how the Russian 
leadership will judge United States actions on the Russian 
agenda priorities. Although many in the Russian policy 
establishment today view the situation in the former Soviet 
Union in terms of a zero-sum game, and, in their view, with the 
United States actively working to undermine Moscow's influence 
in the new states, developments in Ukraine and also in Georgia, 
which are approaching danger points, call for a serious 
thinking and dialog which would help avoid misunderstanding and 
even confrontation which would put the United States-Russian 
relationship toward a new low.
    Let me say, in conclusion, that the title of the hearing, 
``Russia: Back to the Future?'' could be read, in my view, as 
``Russia returning to the path it quit 90 years ago on its 
communist adventure,'' rather than backsliding to Soviet days. 
It is tsarist, capitalist, open, relatively free, in many 
respects--though not, I emphasize, in the political sphere--
increasingly nationalist, another thing which needs to be 
highlighted. And Russia is the last former communist country to 
have discovered nationalism, though of a peculiar post-imperial 
variety. Russia is also assertive internationally. At this 
point, it is neither pro-United States nor anti-United States. 
It is a challenge to deal with Russia, but ignoring or 
misreading it, as my friend and colleague has said, carries a 
price.
    Thank you very much.
    [The prepared statement of Dr. Trenin follows:]

   Prepared Statement of Dr. Dmitri Trenin, Deputy Director, Program 
Cochair, Senior Associate, Foreign and Security Policy, Carnegie Moscow 
   Center, Carnegie Endowment for International Peace, Moscow, Russia

    Mr. Chairman, ladies and gentlemen of the committee, it is an honor 
and a privilege to be asked to testify before this committee. Let me 
address the issues I was asked to comment on in the letter of 
invitation signed by Senator Lugar.
developments in russia and their potential impact on the future of the 
                   united states-russia relationship
Political reform
    Russia has a tsarist political system, in which all major decisions 
are taken by one institution, the Presidency. In fact, this is the only 
functioning political institution in the country. Separation of powers, 
enshrined in the 1993 Constitution, does not exist in reality. On the 
contrary, unity of power and authority has become the new state-
building doctrine. All other federal institutions (i.e., the 
parliament, the cabinet, the high courts) are dependent on, and de 
facto subordinate to the President and his private office (collectively 
referred to as the Kremlin). The tradition is back in the saddle.
    Over the last 6 years, the degree of power centralization has grown 
dramatically. Regional legislation has been brought in conformity with 
the federal Constitution and federal laws. The Federation Council 
(upper chamber) has ceased to be the regional leaders' club and has 
become a Russian version of the German Bundesrat, with its members (who 
proudly call themselves senators) appointed, and recalled, by the 
regional authorities. The governors of Russia's 88 regions have lost 
their independence rooted in direct elections, and are now hired and 
fired by the Kremlin. Single-mandate constituencies in the elections to 
the State Duma (lower chamber) are being phased out. From the next 
election (December 2007) on, only party lists will compete, with the 
entrance bar set very high (7 percent of the popular vote). The reform 
of the judiciary has not resulted in expanding its independence. The 
courts are even more dependent on the authorities, and the State 
Prosecutor's office has become the principal political instrument in 
the hands of the Kremlin for dealing with its adversaries.
    While authoritarian and over-centralized, the Russian political 
system rests on the acquiescence of the governed. Vladimir Putin has 
remained popular throughout the 6 years he has been in power. Above 
all, he is credited with reinstating stability lacking under both Boris 
Yeltsin and Mikhail Gorbachev. For this democratically legitimized 
authoritarian system to continue to operate in the current mode, 
Putin's successor needs to be genuinely popular.
    Managing succession under such conditions is extremely difficult. 
All indicators point to Putin's desire to step aside when his term is 
up (spring of 2008) and let a new man take over. Yet, both informal 
successors (first deputy Prime Minister Dmitri Medvedev and Defense 
Minister Sergei Ivanov who is also a deputy PM) have obvious problems 
with electoral appeal. Thus, Putin may make an 11th hour surprise 
choice in favor of a lesser-known figure who would be able to galvanize 
support for the supreme authority and allow it to sail smoothly through 
the succession straits.
    There can be no guarantee of a smooth sailing, of course. It is 
true that political opposition in Russia is no match for the 
authorities. The Communist party, Yeltsin's former nemesis, has been 
much reduced in influence and effectively locked up in a niche of 
elderly nostalgics. The liberals and democrats remain pathetically 
disunited and are growing increasingly marginal. Nationalists represent 
a more serious challenge. In the past, the Kremlin was been able to 
tame them with the help of super-loyal Mr. Zhirinovsky. However, a 
recent project to found a pro-Kremlin nationalist party, Rodina 
(Motherland), led by Dmitri Rogozin, had to be terminated when the 
party threatened to spin out of control and become a real opposition 
force. Currently, the Kremlin's strategy is to give a new lease on 
political life to Mr. Zhirinovsky; to co-opt the more conformist 
nationalist elements within the ruling bloc, United Russia; and to 
present extreme nationalists as a ``clear and present danger'' (to 
replace the now emasculated Communists) which can only be effectively 
dealt with by the Kremlin itself.
    It is true that ultranationalism and populism are the biggest 
threat to Russia's domestic development and to Russia's relations with 
the rest of the world, starting with its neighbors. The problem is the 
Kremlin's own political effectiveness.
    All the unity of power notwithstanding, the Kremlin itself is far 
from united. The constellation of clans, which could be visibly 
represented by the many towers of the Kremlin fortress, is never 
static. There have always been different interests (including some very 
material ones), different instincts (depending on the people's past 
experiences), and different views about the way the world goes and the 
way Russia should be run. While the President reigns, he acts as an 
arbiter. As he is preparing to hand over power, the situation becomes 
highly dynamic.
    Grosso modo, there are two competing groups whose membership does 
not neatly coincide with the popular notions of the siloviks vs the 
liberals. Both factions agree on the need for a strong authority at 
home and a great-power policy abroad. They differ (apart from their 
private business interests) on the degree of bureaucratic control over 
the economy and the assertiveness and unilateralism in Russia's foreign 
policy. Thus, it is the internal rivalries and clashes, whether within 
the Presidential administration, the cabinet, or the ruling bloc as a 
whole, rather than open political competition, that is likely to mark 
and shape Russia's politics in the near and even medium term.
    The implications for the United States and indeed for all other 
countries are as follows. One has to accept the reality of a highly 
centralized political system with a sole decision maker. One needs to 
acknowledge the weakness of the political forces who seek to modernize 
the system by bringing the competition into the public domain and 
turning the presently undivided ``authority'' into a combination of an 
accountable government and a professional civil service. One has to 
guard against the (still distant) possibility of ultranationalists and 
populists taking over the state machine and pushing Russia down the 
path of absolute state domination at home and revanchism abroad.
    Yet, Russia, seen historically, is not going in the wrong 
direction. Rather, it has returned to the path of natural development 
which she was forced to abandon by the Bolsheviks. It was never serious 
to expect Russia to emerge as a liberal democracy after three quarters 
of a century of Communist rule. By the same token, to regard Yeltsin's 
Russia as a democracy was wishful thinking. Russia was freer, and more 
pluralist, and the state was very weak, but it was not democratic. In 
the future, there will be no cutting corners. For a number of reasons, 
Russia's modernization cannot proceed through integration into the 
European and Euro-Atlantic institutions, as it did in Central Europe 
and can do in Eastern Europe. Russia would have to perform that feat on 
its own. There are many factors working against it. There are a few, 
however, two working for. One is the factor of money, i.e., indigenous 
capitalist development. The other one is the country's openness to the 
outside world.
The economy and social affairs
    The effect of high energy prices on the Russian economy is twofold: 
Robust economic growth has continued for 7 years; but the serious 
economic reforms started in 2000 have been stopped for the time being. 
The Russian government now wields substantial financial power. Yet, it 
has been rather conservative with regard to spending money. The Kremlin 
has created a stabilization fund as a cushion against a steep fall in 
oil and gas prices. Russia's currency reserves are third-largest in the 
world. Moscow has been repaying its foreign debt ahead of schedule.
    Russian living standards have been steadily rising since the 1998 
financial collapse. In the 2000s, an average annual increase in take-
home pay has been in the range of 10 percent. In fact, most Russians 
have never had it so good in their entire history. This, however, is 
not how a significant portion of the population view things.
    In contrast to Soviet uniformity, Russia's social picture is 
characterized by striking inequality. The top 10 percent of the 
population have an income 15 times higher than the bottom 10 percent. 
The middle class comprises a mere 25 percent, but it shows signs of 
growing. The future of the country will depend on whether some two-
fifths of the population immediately beneath it will rise to join the 
middle class or finally sink into poverty.
Freedom and independence of the media
    Russia's electronic media, a powerful political instrument, are 
controlled by the authorities. The printed press is relatively free 
still, although this is changing, but their print runs are very small. 
The Internet is vibrant and free, with the number of users rapidly 
rising. It has to be borne in mind, however, that the former pluralism 
of Russian TV was part of the arrangement between the Kremlin and the 
oligarchs rather than a result of a genuine development of civil 
society.
    On civil society itself, let me say that the process of its 
formation is clearly linked with the emergence of the middle class, a 
long and difficult process. At present, the authorities attempt to 
build institutions of civil society ``from above,'' even as they seek 
to minimize or eliminate the role of potential political challengers, 
such as the former oligarchs, or foreign fenders, who are feared to be 
promoters of ``orange-style'' revolutions.
Status of the rule of law in Russia
    President Putin's first-term slogan was establishing the 
``dictatorship of law.'' He promoted a legal reform, designed by his 
close associate, Dmitri Kozak. Among other things, the reform 
introduced trial by jury in the more serious cases, and transferred 
control over the penitentiary system from the Ministry of Internal 
Affairs (i.e., the police) to the Ministry of Justice. Not 
surprisingly, reforming the legal system, traditionally but a tool of 
the authorities, has proven to be exceedingly difficult. Moreover, 
President Putin has been using the Prosecutor General's office as an 
instrument of choice to destroy the power of the more ambitious 
oligarchs: Berezovsky, Gusinsky, and Khodorkovsky. Since the initial 
accumulation of capital in Russia was essentially lawless, virtually 
all new capitalists can be plausibly accused of breaking laws. In this 
situation, political challengers or business rivals can easily be 
subjected to selective application of justice.
    Yet, property ownership requires protection. It would not be too 
far-fetched to suggest that the Russian elites will be progressively 
more interested in establishing a system which would guarantee their 
possessions irrespective of which group happens to control the Kremlin. 
The emerging Russian middle class, too, is interested in a system that 
would protect their rights against both the swindlers in the private 
sector and the arbitrariness of the government bureaucracy. Small 
public campaigns have already spontaneously risen in defense of a 
falsely accused motorist; crooked property developers; and homeowners 
evicted from their houses without fair compensation.
What should be on the United States agenda at the G-8 summit
    The G-8 summit and the bilateral meeting of United States and 
Russian Presidents in St. Petersburg next month offer a chance to 
clarify the United States agenda regarding Russia.
    While Russia is by no means a priority for U.S. foreign policy, it 
deserves more attention than she is usually given. Very importantly, to 
bring positive results and satisfaction, that attention needs to be 
properly focused.
    The United States will be best served by a frank, principled, and 
realistic attitude toward Russia. American leaders should feel free to 
raise any concerns that they have regarding developments in Russia or 
in Moscow's foreign policy. Even as they do it, however, they must 
realize that their chances of influencing the Kremlin's behavior at 
home or abroad are at best very limited. They should also be ready to 
hear Russian criticism of U.S. Government's policies, and Russian 
dismissal of many U.S. claims as either based on double standards, or 
disingenuous, or devalued by America's own imperfect record.
    The common weak point of many Russian and Western critics of the 
Kremlin is the assumption, either stated or not, that should pressure 
on the Russian authorities be kept up at a high level for a 
sufficiently long time, either the Kremlin will relent, or it will be 
defeated in some version of an democratic revolution, and a new and 
better Russia would emerge. This is an illusion. Positive changes in 
Russia will come, and they will come from within, but they will need 
time to coalesce. The principal outside factor will not be some foreign 
government's pressure, but Russia's general openness to the outside 
world, in particular, the proximity of the European Union.
    Americans need to realize that in contrast to the 1990s and the 
early 2000s, the Russian leadership is no longer practicing 
accommodation and adjustment par excellence to the international 
environment. Rather, it is seeking to return to the world scene as a 
major independent player.
    In this situation, a reasonable policy by the United States would 
be to look for areas of common ground. There are several such clusters. 
One is nuclear issues, starting with WMD proliferation. Though Russia 
disagrees with some United States policy options regarding Iran and 
North Korea, nuclear weapons in the hands of either regime would 
adversely affect Russia's national security. United States-Russian, 
although understandably not easy, would further United States 
nonproliferation goals; a break with Russia on that fundamental issue 
would encourage the proliferators. Thus, Iran and North Korea should be 
at the top of the list.
    Nuclear arms control is another area which needs revisiting. United 
States-Russian relations are not as amicable as they should be. Mutual 
suspicions are high. As the bilateral treaties governing nuclear 
weapons reductions are approaching expiry dates, some thought needs to 
be given as to the nature of the nuclear weapons relationship between 
the two nuclear superpowers.
    Finally, nuclear energy is a potential area of very productive 
collaboration. Letting Russia be a significant player in the market 
presently dominated by the United States and France would be a major 
incentive for a closer overall relationship between Washington and 
Moscow. Indeed, it would put a major economic pillar under that 
relationship, thus stabilizing it.
    Another such pillar would be created through United States 
companies' participation in the exploration of the Shtokman gas field 
in the Arctic, and the Russian company Gazprom's access to the U.S. LNG 
market. While Russia cannot be expected to allow foreigners majority 
stakes in its oil and gas fields, its policy of swapping upstream 
assets for downstream ones would create real energy interdependence and 
thus a much higher degree of security.
    One way for the United States to contribute to Russia's 
modernization is through sharing with Russia its best business 
practices. It is the evolution of Russian capitalism which will push 
the evolution of Russian society and eventually also Russian polity. In 
the area of education, creating opportunities for many more Russian 
students to come to study in the United States would be a major 
investment in a better future for Russia and a safer world for the 
United States.
    Finally, the challenge of international terrorism and related 
security threats require closer cooperation in places like Afghanistan. 
Russia cannot be interested in a U.S./NATO failure in Afghanistan and 
the return of the Taliban whom Moscow regarded only 5 years ago as the 
greatest external military threat. The issue of drugs trafficking from 
Afghanistan calls for joint action between Russia and the United States 
(and others, including NATO states and the neighboring countries).
    Dealing with the problems in United States-Russian relations is as 
important as exploring the potential of the areas of common ground.
Russia's policies and influence in the former Soviet Union
    The Putin administration's strategic objective is creating a 
Moscow-led power center in the former Soviet Union. This is not a new 
version of the Russian empire of the U.S.S.R. Rather, the goal is to 
help Russian companies to acquire lucrative economic assets in the 
neighboring states (starting with the energy sector), ensure those 
states' general political loyalty to Russia and full cooperation with 
it in security matters, and promote the Russian language and culture 
across the former Soviet space. The principal instruments of this 
policy, alongside the bilateral contacts, and its symbols, are the 
Eurasian Economic Community and the Collective Security Treaty 
Organization.
    Most of their member states are likely to respect Russia's 
interests, and will seek in return to draw benefits from their close 
relations with Russia. However, they are unlikely to become Russian 
satellites. Kazakhstan and Belarus, the two countries that are most 
integrated with Russia economically, are good examples. The former is 
pursuing a carefully balanced foreign policy, maneuvering among Russia, 
China and the United States. The latter, though effectively isolated by 
the United States and the European Union, and heavily dependent on 
Moscow, refuses to merge into the Russian Federation. Armenia, though 
it looks to Russia as its historical protector, seeks to strengthen its 
ties to both the United States and Europe. Uzbekistan, which only last 
year abruptly turned away from the United States and embraced Moscow, 
has a long-standing ambition of a regional power, which complicates 
(also Russia's) relations with the smaller countries, such as 
Kyrgyzstan and Tajikistan. More ominously, Uzbekistan's Fergana valley 
continues to be the hotbed of Islamist extremism.
    Not all former Soviet countries belong to the Eurasian Economic 
Community or the Collective Security Treaty Organization. Some of them 
have come together in alternative communities, supported by the United 
States, which challenge Russia's policy goals. Among these countries, 
Ukraine and Georgia are of special importance, from the standpoint of 
Russia's relations with the United States.
    Over the past decade and a half, Russia has internalized both 
Ukraine's independence and the border dividing the two countries. More 
recently, it has learned to live with the consequences of the Orange 
revolution, and Ukraine's political pluralism. However, Ukraine's bid 
to join NATO and the prospect of a membership action plan (MAP) being 
offered to Ukraine at the next NATO summit in Riga (late November 2006) 
puts this relationship to a very major test. Ironically, the step 
designed to finally guarantee Ukraine's territorial integrity has the 
potential of reawakening the sleeping issues such as the status of the 
heavily Russian-populated Crimea, home of the Black Sea Fleet. The 
situation is highly complex due to the low popularity of NATO accession 
among the Ukrainian population who will need to vote on the issue in a 
national referendum. There are differences on the NATO issue even among 
the coalition partners, and ambivalence within the principal political 
parties. The stakes are unusually high, not to be compared with either 
the Polish/Czech/Hungarian or the Baltic/Romanian/Bulgarian accessions. 
Not only is Ukraine different from Poland or Latvia; the Russia of 2006 
is very different from the Russia of 1996 or even 2002. In the next few 
months and years, Ukraine can well become a political battleground 
between the competing domestic forces, and also between Russia and the 
United States, with important consequences for all the parties 
involved.
    Georgia's prospects of joining NATO are more remote. Here, as in 
Moldova, the relevant issue is the frozen conflicts. Tbilisi's desire 
to resolve the conflicts in Abkhazia and South Ossetia by imposing a 
solution, if necessary, contrasts with Moscow's references to the 
Kosovo model, i.e., promoting a final separation of rebel enclaves. The 
solution of the Kosovo problem by means of separation and conditional 
independence, expected by the end of the year, will not lead to 
Russia's automatic recognition of the breakaway regions, but it would 
push the situation closer to the red line: Formally revising post-
Soviet border arrangements.
    Although many in the Russian policy establishment view the 
situation in terms of a zero-sum game, with the United States actively 
working to undermine Moscow's influence in the new states, developments 
in Ukraine and Georgia, which are approaching danger points, call for a 
serious dialog which would help avoid misunderstanding and avert 
confrontation which would push the United States-Russian relationship 
toward a new low.
    In conclusion, let me say that the title of the hearing, ``Russia: 
Back to the Future?'' should be read as ``Russia returning to the path 
it quit 90 years ago on its Communist adventure, rather than 
backsliding to Soviet days.'' It is tsarist, capitalist, open, 
relatively free in many respects (though not in the political sphere), 
increasingly nationalist (the last former Communist country to have 
discovered nationalism, though of a peculiar post-imperial variety), 
and assertive internationally. It is neither pro-U.S. nor anti-U.S. It 
is a challenge to deal with, but ignoring or misreading it carries a 
price.
    Thank you very much.

    The Chairman. Well, thank you, Dr. Trenin, once again, for 
a very, very thoughtful statement.
    I want to recognize, before we come to Ms. Jaffe, the 
distinguished ranking member of the committee, Senator Biden, 
for his opening statement.

 OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR 
                         FROM DELAWARE

    Senator Biden. Thank you very much, Mr. Chairman, for 
holding this hearing.
    And I say to the witnesses, all the flooded tracks along 
Amtrak kept me from being here on time. I do apologize.
    Mr. Chairman, my time and yours and the Senate has spanned 
the years of Brezhnev, Gorbachev, and a few like Andropov in 
between, Yeltsin, and Putin. And it's because of that 
perspective that I'm so concerned about what's going on in 
Russia today. For most of the last 20 years, Russia has been 
moving slowly toward Europe, the United States, democracy, and 
human rights. Obviously, there were a lot of detours along the 
way, but things were generally headed, in my view, in the right 
direction.
    Since President Putin took office in 2000, Russia has 
experienced, in my view, the biggest rollback of democracy 
that's occurred anywhere in the world in decades. The Putin 
administration has tranquilized the Russian media, muzzled 
political opponents, neutered the Duma and regional governors, 
and it has cracked down on the civil society groups, and, I 
think, to state the obvious, has attempted to undermine the 
democracy of neighboring countries.
    An essential factor enabling and exacerbating these 
disturbing developments is something you've pointed to often, 
Mr. Chairman--oil wealth--the oil wealth that Russia possesses. 
Bullied by the resurgence in global oil prices, even Russia's 
corrupt and capital-short energy sector has been highly 
profitable. That wealth has masked fundamental distortions in 
an increasingly state-influenced energy sector and purchased 
some democratic support--I mean, purchased some domestic 
support for Putin and for his administration. That wealth has 
also become a weapon to threaten and coerce Russia's neighbors 
and energy customers.
    Mr. Chairman, I believe the United States has mismanaged 
the relationship with Russia over the last 6 years. Many 
people, myself included, have been speaking about the Kremlin's 
authoritarian impulses for a long time. Unfortunately, until 
recently, the administration has not evidenced much interest in 
such warnings.
    I believe that the Putin administration is dealing with two 
conflicting desires. On one hand, it is determined that Russia 
be accepted as a great power and respected around the world; on 
the other, it wants to continue to bully its neighbors, 
suppress political dissent, and use energy as a weapon of mass 
disruption.
    I hope that President Bush and other leaders of the G-7 
will use the summit in St. Petersburg to deliver a simple 
message, ``You can't have it both ways. You can't be a revered 
great power and a corrupt authoritarian petrol state at the 
same time.'' The two categories are mutually exclusive.
    Some Russians have become fond of saying that the West 
needs them more than they need the West. I'd respectfully 
suggest that they're wrong, but I learned a long time ago, 
never tell another man his politics or another country what's 
in its interest. But, from my perspective, it seems to be 
wrong.
    Despite its recent energy windfall, Russia is facing huge 
problems. The country's population is plummeting by--has 
plummeted--is plummeting by over 700,000 each year, mostly due 
to epidemics such as AIDS, tuberculosis, and alcoholism. 
Pervasive corruption is rotting the people's faith in the 
society and its government. And Russia is facing serious 
security threats from terrorism and instability in the North 
Caucasus.
    The Kremlin would do well to realize the magnitude of these 
challenges and welcome the assistance of NGOs, civil society 
groups, and the West in promoting the rule of law and 
transparency. Russia's government won't be able to use oil and 
gas money to buy its way out of all this trouble. 
Unfortunately, some in Russia view any international criticism 
of the Kremlin as part of a broader plot to weaken their 
country. If anything, I would argue the reverse is true.
    I hope, for Russia, that it's respected--my hope for Russia 
is that it become a respected, prosperous, and democratic 
state--strong. I believe that the current policies of President 
Putin's government work against these goals. They may, in my 
view, condemn Russia to a future of weakness and instability 
and deny Russia its rightful place as a great power.
    I'm hopeful, if not optimistic, that we can change the 
dynamics of our relationship with Russia, but, for that to 
happen, I believe the United States needs to do at least three 
things. And I will conclude, Mr. Chairman.
    First, the President should pick up the phone today and 
start coordinating with other leaders of the democratic G-7 
nations. The Kremlin has been very successful in dividing 
democratic nations, many of whom share the blame for glossing 
over the negative trends in Russia. It's time for that to 
change. The G-7 nations should issue a tough, coordinated 
statement in St. Petersburg which would make it clear to the 
world that Russia's recent behavior is unacceptable.
    Second, the United States should make sure that NATO 
provides Ukraine and Georgia with membership action plans by 
the end of this year. If those two countries are put on track 
to join NATO, it will help consolidate the reforms that have 
occurred since the Orange and Rose Revolutions. It would also, 
I think, defer--deter future Russian meddling in other nearby 
countries. If Georgia and Ukraine are not offered MAP 
agreements, I worry Russia will see that as a green light to 
continue undermining democratic governments in other states. 
It's time to give these countries the security assurances they 
need to move ahead with the tough work of building the 
democracy.
    And, last, I believe that the United States and democracies 
everywhere need to be--need to dramatically increase their 
support for NGOs and civil society groups working to promote 
democratic values in Russia. Despite new laws cracking down on 
NGOs in Russia, they are still the best hope for promoting 
freedom, transparency, and the rule of law, in my view. If the 
West wants democracy to be an issue in Russia's 2008 
Presidential elections, we've got to start doing more to help 
build the infrastructure of democracy now.
    Mr. Chairman, again, I apologize for interrupting the 
witnesses' testimony here, but I am pleased that you allowed me 
to make my statement at this time, and I'm eager to hear what 
our last witness, I guess--or maybe there's two more to go, I 
don't know, having come late--what they have to say, and the 
recommendations, how we can move forward with these and other 
needed changes in our relationship with Russia.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much, Senator Biden. As 
you would know, if you had heard all the testimony, your 
statement fits well into the dialog we were having.
    Senator Biden. Good.
    The Chairman. These are issues on which we are all 
expressing opinions before we come into our question-and-
answer.
    I'd now like to call upon Ms. Jaffe for your testimony. We 
look forward to hearing you.

   STATEMENT OF AMY MYERS JAFFE, WALLACE S. WILSON FELLOW IN 
  ENERGY STUDIES, ASSOCIATE DIRECTOR, RICE UNIVERSITY ENERGY 
 PROGRAM, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, RICE 
                    UNIVERSITY, HOUSTON, TX

    Ms. Jaffe. Thank you very much, Senator.
    It's really a great honor to be here today to submit my 
verbal, and also written, testimony into the record. I'm very 
much looking forward to the Purdue summit, and I'm very pleased 
that someone of your stature has taken up the mantle of 
focusing on the energy issue. It's such a big challenge for our 
Nation. I'm glad to see your leadership and Senator Biden's 
leadership on this issue.
    I have this tendency to see everything, everything that my 
other distinguished colleagues have talked about, only through 
the energy prism, so let me just excuse myself for that myopia, 
but I do want to commend your perspective, Senator Lugar, 
because we really do need to have a shift in approach to our 
energy diplomacy, and it's important to recognize how things 
have changed. When, first, Vice President Gore, and, later, 
President Bush, through Don Evans, began the energy dialog with 
Russia, the approach was very commercial, and that was 
appropriate to the time. We did run our approach through the 
Commerce Department. The focus was on helping open investment 
to United States investment and making a more competitive 
energy industry in Russia. And that was a very good goal at the 
time. But as oil has become more political, as the market has 
tightened, and as oil producers have felt they have more 
leverage, the temptation to use oil, and have it become more 
politicized, has increased, and that means that the United 
States has to have a different strategy. And I would say that 
it probably would be not too harsh a criticism to say that, at 
this moment in time, we have no strategy. And, recognizing that 
as a first step, and thinking about what we would like that 
strategy to be--the second step--is a very important debate and 
future that we need to take, as a country.
    I'll argue, in my written testimony, and a little bit in my 
verbal, that we really do need to focus on institution-
building. Ambassador Sestanovich mentioned all the institutions 
that are failing with the Russians. I would take a sort of 
different point of view. We have failed to try to press Russia 
to accept the binding issues related to energy in, say, WTO or 
the European Energy Charter, bringing them into the fold of the 
International Energy Agency. We've missed the opportunity to 
work together with our allies to use these institutions to 
demand reciprocity. In other words, Putin and Gazprom and those 
institutions want to be able to invest freely in Western 
assets, and there's nothing wrong with that. What's wrong with 
that is, if we don't insist for the reciprocity in return. And 
so, I really do think that the multinational institutional 
frameworks that exist today could be better utilized if we did 
work with our G-7 allies to really show what we think is 
important, in terms of free access to energy for trade and 
investment.
    And so, just having a rhetorical reaction on every 
response, where we just make a declaration about what we don't 
like, is not as effective if it's not backed up with something 
which is a real program to talk about what we think the 
alternative is, what's in it for Russia, what's in it for us, 
what's in it for the global community.
    So, with that as my, sort of, backdrop of where we need to 
go, let me just make four or five points on questions that I 
think people are thinking about.
    The first thing we have to recognize, in being too 
threatening about Russian energy, is that actually today Russia 
is the largest exporter of energy in the world. If we think of 
Saudi Arabia and some of the other countries as being more 
important, but actually, on a volumetric basis, if you combine 
the oil that Russia produces--9.3 million barrels a day--and 
add to that its gas exports, it's actually larger than Saudi 
Arabia, and we need to recognize that, because Russia 
recognizes that.
    The second thing we need to understand in worrying about 
the Ukraine matter is that Russia was going to have a problem 
supplying Europe with the gas it's promised, regardless of the 
politics of the Ukraine situation. There was going to be a 
problem anyway. And in the technical community, people, like 
the Baker Institute and the Carnegie Endowment, were having 
conferences about this issue, because it's going to be--it's 
a--should be--should have been a concern for Europe, and people 
were--sort of had blinders on, that even though Gazprom was 
buying up oil companies and saying they want to go into nuclear 
power and diversifying, that they weren't actually investing in 
the assets they were going to need to supply the contracts 
they've promised and fill the new undersea pipeline to Germany 
and elsewhere, because they weren't really making the kinds of 
reforms and investments they needed to, to keep--meet that 
rising demand.
    The other point that I'd like to make about the Russian 
energy sector--and Senator Biden correctly pointed out the 
retrenchment to go back to a centrally controlled, centrally 
planned system, and there is that trendline backwards--is that 
we cannot ever forget that Gazprom is a monopolist. And, in 
respect to my colleague, Dr. Trenin, who talked about Russia 
moving in a capitalist direction, in the energy sector that is 
not true. There's this shift back to the monopolies really 
reasserting themselves. When we think about how--what Gazprom's 
goal is in Europe, and what their ultimate strategies are in 
the Caspian, we need to go back to Economics 101 and reread the 
little chapter on monopoly behavior, because Gazprom has been, 
for decades, a monopoly, and that's all they know. They want to 
capture the supply, and then they want to control who--that 
only they get to sell it. And that's their strategy. And it's 
why, after there was a conflict with Europe, they went right to 
Algeria to talk to Algeria about forgiving their loans and 
making a friendship, because they think like a monopolist.
    Now that allows me to sort of wrap in the Caspian. We have 
a fundamental complex situation with energy and the Caspian and 
the Russians. It's really fundamentally too complicated to be 
simplistic. On one hand, we understand Russia's monopolistic 
behavior. I block all the export routes for Caspian countries. 
That forces them to sell the natural gas to me at a very low 
price. And then, I make a huge amount of money selling their 
gas, or my own gas, on to Europe at a huge profit. Like I said, 
we always need to remember that Gazprom was--you know--started 
its life as a monopoly.
    So, the question is--when we think about the Caspian, 
fundamentally, we're asking the Russians, ``If we go in as a 
United States policy''--and that has been the traditional 
United States policy, which is to come up with extra routes, 
whether it's through Greece, in Bulgaria, whether it's allowing 
the Caspian countries to get to China on their own, as 
Turkmenistan is now trying, right?--that means that the 
fundamental question is, ``Are we going to let Russia grab the 
premium for that gas, or is our foreign policy to let that gas 
come to market without letting the Russians take a cut?'' 
Because that's--really, it's a just a business proposition. You 
can--we can make it complicated, about the extension of the 
Soviet empire and their desire to be a superpower, and that 
might be what the foreign policy establishment's thinking 
about, but that's not what Gazprom's thinking about. And when 
they lever themselves into the domestic scene, they're just 
thinking as businessmen.
    So, the problem that we face, as the United States, is, we 
have these two desires. One is to make sure that Europe gets 
reliable supply, and the second one is to make sure that the 
Caspian countries can sell their energy in a free and 
unfettered way in a competitive market. The problem is, the 
logistics of those two goals somewhat conflict with each other, 
because the Russians can definitely meet their European 
contracts if they have the Caspian supply. Right? But if the 
Caspian supply goes to China, or if it's going to other 
customers in Russia through a different route, then the 
Russians, if they don't shore up their own sector and don't 
make their own investments in the Yamal Peninsula, they may 
actually come up short to supply Europe with the gas that's 
been promised. So, as I say, it's a very complex game of who's 
got the barrels and who's going to deliver the barrels. And it 
really does require some serious thought of strategy on the 
part of the United States to really think about what's our top 
priority and how do we want to order the priorities regarding 
this question of gas? And it's not just as simple as to declare 
that it shouldn't be used as a weapon. We need to understand 
the complexities of the choices that face Gazprom and face the 
Kremlin, and then also all the different allies whose needs we 
want to support.
    The other thing I guess I should mention is this whole 
question of the China threat or not the China threat. We tend 
to start to think about China as a competitive factor. I do 
like to think about the oil market like a swimming pool. If you 
put water in, in one end, there's more water in the pool for 
the whole swimming pool. And so, having the Chinese get supply 
from somewhere is not necessarily a bad thing, as long as 
there's enough supply for the global community.
    In the latest deal, where the Chinese company, Sinopec, 
purchased assets from BP-TNK, and even in the negotiations 
about whether China is going to buy natural gas from east 
Siberia, the thing we need to remember in thinking about 
Russian gas exports is that Russia is not an LNG seller. And by 
that I mean they're not putting the gas on a tanker, liquified, 
and they can't shift where the tanker goes. They have 
pipelines. And if the pipeline goes to Europe--and that's the 
only physical pipeline that exists today--their choice is to 
either leave the gas in the ground or sell it to Europe. And 
that is really on--right at this moment--that is really their 
fundamental choice. And when we look out past 2010, they have 
more choices, but the economics of taking the gas that's now 
going to Germany and moving that to China is not as attractive 
as building new infrastructure to go from east Siberia to 
China, which would never--that east-Siberian gas would never 
have gone to Europe anyway. So, the Russians are really, in my 
opinion, making a bit of a rhetorical statement when they say, 
``Well, if we don't like the way you behave, and you don't let 
us buy this or that in Europe, we're shifting our gas to 
China,'' because, in the end, the projects that they're talking 
about doing to China were fields that were never slated to 
deliver natural gas to Europe. So, we need to understand the 
bluff. We need to think about what's creating the bluff. And 
then, we need to not be, sort of, overreactive to it. We need 
to think about, again, what are our goals, and we need to--I 
mean, to me, what's interesting in all the rhetoric is that the 
rhetoric isn't focused on the Caspian, when actually the 
Caspian probably is the critical conflict point in this whole 
question of Ukraine and European gas and whether Russia is or 
isn't a monopoly when it comes to thinking about routes for 
gas.
    At the end of my written testimony, I talk about some 
things that we've learned since the 1970s about how to deal 
with monopolies. Right? It is in our interest, and, I do 
believe, in the long-term interest of the developing middle 
class of Russia, to have competition in the market. Certainly, 
it's important to have competition in the global market. But 
it's also very important to have competition inside the Russian 
market. And that is our best defense against the kind of 
concerns we have about the politicization of oil and gas.
    And competition can come directly from different suppliers. 
It can come directly by having more privatization. It can 
come--competition--our Strategic Petroleum Reserve, in effect, 
is a means of competition, because if somebody cuts supply 
purposefully, we can add supply by having our strategic 
petroleum reserve. The United States and Europe need to think 
about whether it's necessary, at this point, to have natural 
gas stockpiles in storage. And--but, also, alternative energy 
is also a means of bringing competition in the market, and we 
also need to be thinking about getting together with our known 
allies, like Europe and Japan, but also our emerging trade 
partners, like China and India, and thinking together about 
these issues.
    Thank you very much.
    [The prepared statement of Ms. Jaffe follows:]

  Prepared Statement of Amy Myers Jaffe, Wallace S. Wilson Fellow for 
  Energy Studies, Associate Director, Rice University Energy Program, 
   James A. Baker III Institute for Public Policy, Rice University, 
                              Houston, TX

    Russia's status as a current and future energy producer is close to 
unrivaled. It holds the eighth-largest proven oil reserves in the 
world, but ranks a close second in oil production to Saudi Arabia (at 
9.3 million barrels a day), far ahead of most other world suppliers and 
well ahead of the United States (at 5.1 million b/d) and Mexico (3.4 
million b/d). In fact, when both oil and natural gas exports are 
considered, Russia exports more hydrocarbons than Saudi Arabia.
    Thus, Russia's position as a major energy supplier has great 
significance not only for its own foreign policy development but also 
for its relationships with major energy consuming countries. During 
President Putin's first administration, in the aftermath of the 
September 11, 2001 terrorist attacks on the United States, Moscow 
responded to its geopolitical circumstances as a growing supplier of 
hydrocarbons by initiating high-level energy cooperation dialogs with 
important oil consuming countries, including the United States, China, 
Japan and the European Union. Breathtaking reorganization and 
privatization in the Russia industry, while creating growing pains and 
financial inequities inside Russia's economy, opened the promise to a 
steady expansion in Russian energy supply and a great opportunity for 
Moscow to tap its new position as a world energy superpower to build 
constructive and important links with other world powers.
    By President Putin's second term, however, a retrenchment back 
towards fuller state control and centralization of investment and 
export policy has aggravated political, bureaucratic, commercial and 
regulatory barriers that could plague Moscow's ability to deliver 
secure and expanding supply. Indeed, Russian oil production has been 
relatively stagnant over the past year, after showing rapid gains 
between 1991 and 2003 (recovering from a low of 6 million b/d to 9 
million b/d). There is still huge potential, with some analysts 
projecting that identified projects could contribute a further 2 
million b/d or more to Russia's oil export rates over the next 5 years. 
But it remains unclear whether internal conflicts over ownership and 
control will adversely impact Russia's production rates, ongoing 
stability of supply, and future export availability. It happens that 
the areas with the greatest expansion potential are production areas 
previously controlled by Yukos--whose assets' ownership has been under 
a disruptive reorganization--as well as prolific areas currently 
controlled by Lukoil, BP-TNK, and Sugutneftegas, the latter two who are 
currently fending off interference and investigations by the Kremlin.
    The insecure nature of competitive and tense relations between the 
Russian government, the Russian government-controlled oil and gas 
monopolies, domestic private industry, and foreign investors remains a 
barrier to stability of Russian energy supply--both oil and natural 
gas. It is an area where creative American or multilateral diplomacy 
(say, under the framework of G-8 cross investment protocols or the 
European Energy Charter) could perhaps ease pressures on some key 
projects. But the current trend towards the ``politization'' of energy, 
culminating in the short but unexpected cut-off of Russia gas supplies 
by Russian state gas monopoly Gazprom last January during a conflict 
between Russia and the Ukraine over pricing and politics, has left a 
bad taste in everyone's mouth and bodes poorly for Russia's potential 
status as an energy superpower whose supplier bona fides are willingly 
and comfortably accepted in the West. To quote Ambassador Keith Smith, 
``Gazprom's January 1 cutoff of natural gas to the Ukraine was a much 
delayed wake-up call for Western Europe and the United States regarding 
Moscow's willingness not only to use its energy resources as political 
leverage in Europe, but also to undermine the new democracies that most 
recently emerged from decades of Kremlin control.''\1\
---------------------------------------------------------------------------
    \1\ Testimony before the House Government Reform Subcommittee on 
Energy and Resources and the Subcommittee on National Security, 
Emerging Threats, and International Relations.
---------------------------------------------------------------------------
    As energy markets have tightened in recent years, the issue of 
energy security has risen to a higher order concern among major 
economies. At the same time, key oil producing nations have recognized 
their enhanced geopolitical position, increasing the leverage of these 
key suppliers in markets and opening the possibility for greater 
politization of oil as a commodity as seen in the rhetorical statements 
of leaders such as Venezuelan President, Hugo Chavez, and in new 
concerns about Russian energy politics. U.S. foreign policy has not yet 
adjusted to this new reality of politization. A hint emerged on the 
United States political scene with the debate whether China's national 
oil company, CNOOC, should be allowed to purchase United States oil 
from UNOCAL. But the United States is not fully preparing to deal 
diplomatically with the emerging challenges of the politization of oil 
and the Energy Diplomacy and Security Act (S. 2435) recognizes this 
deficit. There are multilateral institutions and trade and investment 
protocols that can be tapped to optimize U.S. energy diplomacy to 
address the politization of oil by large oil exporters and the United 
States could do a great deal more to enhance energy security by 
developing a more coherent, less reactive diplomatic strategy.
    Attempts to politicize oil are not new. Indeed, even the United 
States itself is guilty of politicizing oil through its use of economic 
sanctions against oil exports and investment in countries of concern 
such as Iran, and previously, Iraq and Libya. But the impact of 
politically motivated linkages between geopolitical goals and oil were 
muted in the past because market supply alternatives were abundant 
enough to prevent any large supplier from gaining much leverage. 
Indeed, as history showed, Saudi Arabia's King tried to organize the 
use of the so-called oil weapon against United States support for 
Israel in 1967 but failed due to plentiful market conditions and lack 
of consensus among a group of suppliers. It wasn't until market 
conditions changed in 1973 that a boycott was able to be implemented in 
a more effective fashion. So it is today. Political actions tied to oil 
will have more impact because of the greater likelihood of creating a 
large price swing and the greater difficulty of shifting to alternative 
supplies.
    During the Bush administration's first term, oil market conditions 
facilitated the possibility of a commercially oriented strategy towards 
Russian energy. Indeed, a high-level dialog was begun, led in the 
United States by our Secretary of Commerce, Donald Evans. The dialog 
was even labeled as ``commercial'' with bilateral sessions entitled 
the`` United States-Russia Commercial Energy Summit.'' But as the 
trendline on United States-Russian relations has worsened and on oil 
and even natural gas to be viewed more in political terms, the U.S. 
commercial strategy towards energy dialogs has become less effective. A 
new strategy is needed that rests more with institution building in the 
international energy arena and taps the strategic and economic 
interests of key suppliers while simultaneously protecting the 
interests of major consumers.
    It is in this broader context that the United States needs to 
consider its evolving relationship with Russia and the question of 
Russia's geopolitical motivations in setting its international energy 
policies.
    The security concerns of our European allies with regard to the 
supply of natural gas from Russia has come front and center since the 
brief tangle with Gazprom last January. However, in the technical 
community, even prior to the January conflict with Ukraine, questions 
were being raised about whether Russia was making the kind of 
investments needed to meet rising European demand for natural gas.
    European demand for natural gas currently totals more than 18 
trillion cubic feet (tcf) per year. As natural gas production in the 
United Kingdom North Sea declines, Russian market share could rise from 
around 28 percent in 2005 to 40 percent in 2015, according to some 
analyst projections. The Russian state-monopoly, Gazprom, supplied 
European countries with 4.8 tcf of gas in 2003, and contractual 
obligations portend an increase to 6.6 tcf by 2010. To meet rising 
European demand for gas, it was projected that Russia would need to 
expand development of natural gas fields and associated export routes 
on the Yamal peninsula and Shtokmanovskoye region, but Gazprom was 
showing no inclination to press forward with these needed investments. 
Instead, the state gas monopoly was resisting needed reforms and 
liberalization in the Russian gas industry and embarking on a new 
strategy to diversify its asset base to include oil, power generation, 
and now even a discussion of investment in nuclear power. Gas 
production has been relatively flat in Russia in recent years, and many 
analysts were already predicting that Russian gas production could 
actually decline in the coming years. Some believe that without an 
influx of private capital, new exploration and transportation 
construction activities will fall short of both domestic and export 
market requirements. Major projects such as field development in the 
Yamal peninsula take as much as 10 years to implement and discussion of 
such projects has not progressed in recent years. Instead, Gazprom has 
spent hundreds of millions of dollars acquiring new diversified assets 
such as Sibneft, a Russian independent oil and gas producer. The 
purchase raised new questions about how revenue constrained Gazprom 
will be able to raise financing for important gas export projects such 
as the $35 to $40 billion Bovanenskoye and Kharasaveiskoye fields of 
the Yamal Peninsula and the $20 billion Stockman LNG project.
    Thus, the question of the security of Russian gas supply to Europe 
goes beyond President Putin's near abroad policies towards Central 
Europe. It also rests with the state of internal policy of reform in 
the Russian gas industry where independent producers would be able to 
supplement production by Gazprom were the industry to be properly 
restructured.
    Problematically, Russia is biding its time by grabbing trapped gas 
resources in Central Asia at very reduced prices, and using those to 
supplement its own higher priced, lucrative gas sales to Europe. 
Negotiations between China and Turkmenistan, to conclude an elaborate 
gas export plan that would create an export grid from Turkmenistan, and 
including Uzbekistan and Kazakhstan to pipe natural gas to Western 
China and into China's existing West-East pipeline would throw a monkey 
wrench in Gazprom's ability to control Central Asian supply. Were the 
Central Asian states to find an independent outlet for their gas, it 
would reduce Gazprom's flexibility to meet European demand with its 
purchases from these Caspian producers. The geopolitics of such 
machinations is complicated by Russia's own gas sales dialog with 
Beijing that includes a planned sale of 80 billion cubic meters of 
Russian gas per year to China via two pipelines. The sale of BP-TNK's 
Udmurtneft subsidiary to China's Sinopec is the first step in this 
process, and senior Russian officials linked the sale, which involved 
the vast majority of the asset to be retransferred back to Russian 
state monopoly Rosneft, to a demonstration that the Kremlin was serious 
in its threat that it could shift its supplies to Asia, were Europe to 
be too belligerent to growing tensions over the Ukraine incident and 
Russian aspirations to buy into key gas and power companies in Europe.
    In analyzing the real impact of Russia's contention that it can 
shift its sales East, it is important to recognize that this is not an 
immediate threat. Since Russia does not sell seaborne cargoes of 
natural gas in the form of LNG, it has little flexibility to change 
suddenly the flow of its gas exports which are wedded to European 
markets by pipe. Pipeline connections to China will take years to 
build, with even the Udmurtneft gas a few years away from delivery. The 
more ambitious gas pipeline from East Siberia fields to China and Japan 
remains to be negotiated and would unlikely impact European supplies 
because supplies from those distant fields were never slated to 
traverse Russia westwardly. Even if a final deal with China for East 
Siberia were to move forward this year, which is still questionable, it 
would be difficult, given the magnitude of the construction entailed, 
for deliveries to commence before 2009, if even that early. Thus, the 
United States should not focus its attention on whether Europe's gas is 
about to be redirected to China because the reality is that for Russia 
to cut off its sales to Europe, it must spend billions of dollars 
constructing new infrastructure. In the short term, Russia's only 
option would be to forego gas exports altogether. The larger risk may 
well be that Russia cannot meet European needs due to its inability to 
reform and reorganize its sector in a manner that promotes commercial 
investment in the supplies needed to fill the new undersea Northern 
Europe Gas Pipeline (NEGP). There are good reasons to question whether 
Russia's sector will have the managerial skills, financing, and 
wherewithal necessary to meet Russia's export goals, even without any 
interference of intimidation strategies.
    There has been no coordinated push by the United States and 
European Union together to require that Russia reform and open its 
energy market to foreign investors as a response to the Kremlin's 
insistence that it can only meet Europe's growing energy demand if it 
be allowed to buy large stakes in key Western energy assets. We should 
be using the leverage of international institutions to press Russia to 
play by the same transparent, competitive rules that guide energy 
investment and trade in the West. The pipeline monopolies of Transneft 
and Gazprom are contrary to the European Energy Charter (signed by 
Russia) and few countries are pressing the Kremlin on the subject of 
full reciprocity in investment policies even as the Kremlin is yelling 
for attention to its acquisition aspirations.
    Gazprom is a monopolist and thus we shouldn't be surprised when it 
behaves like one, protecting its interests. Moreover, Russian leaders 
are responding to the popular sentiments of its locals. A recent poll 
taken in Russia as part of an academic study on energy and 
environmental issues by the Russian Academy of Science shows that 38 
percent of Russians surveyed believe that keeping the status of 
superpower for Russia best meets their individual and family interests 
than strengthening democracy and freedom of speech (12 percent), with 
only economic growth mattering more. Less than 10 percent of those 
surveyed thought continued privatization was important while at least a 
third favor state regulation and support of basic industries. Over 68 
percent felt foreign investment in the oil and gas sector was ``not 
acceptable at all.'' The dismantlement of Yukos and its competitive 
market principles were highly popular in Russia as are policies that 
show that Russia remains a great country on par with other superpower 
nations. Thus, the temptation to use energy to assert itself, when 
other avenues are so clearly lacking, will be strong.
    The extent to which Russia or any small group of gas exporters will 
be able to exercise monopoly power or utilize a gas weapon effectively 
will be determined, among other factors, by technological improvements 
that will affect the cost and attractiveness of other competing fuels 
such as coal, nuclear, or renewable energy. Moreover, privatization of 
gas reserves and gas transport networks present an impediment to the 
formation of a successful gas cartel and blocks the monopoly power of a 
state actor such as Gazprom. It will be easier for national, state-
owned producers like Gazprom to participate in a cartel than for 
privately held firms that might have different objectives from the 
state. Indeed, already, Gazprom responded to pressures on it from 
Europe by soliciting coordinated strategies with another major European 
supplier, Algeria, which has long argued for a Gas OPEC.
    If a number of private Russia gas producers emerge, it will be more 
difficult to reconcile their conflicting corporate ambitions, as the 
Putin administration has so keenly experienced in recent years. Thus, 
the retrenchment away from privatization and market competition in 
Russia's energy sector runs against U.S. and global interests and 
should remain a target for the United States-Russia dialog and the 
European Union-Russia dialog.
    Options available to consumer countries are well known. 
Deregulating their own energy sectors, to permit utilities more freedom 
in setting prices, in choice of technology and in contracting with fuel 
suppliers will have the effect of increasing the elasticity of their 
demand for gas and limiting the market power of gas sellers. Consuming 
countries can also actively promote the technologies that will increase 
competition between gas and alternative energy sources. Also, as the 
European Union is discussing, strategic inventories of natural gas will 
help limit the impact of any supply cutoff, reducing the incentive for 
an ambitious supplier to try to assert its market leverage.

    The Chairman. Well, thank you very much, Ms. Jaffe.
    We'll have a 10-minute round of questions.
    Let me just begin the questioning by noting, Dr. Trenin, 
that your colleague, Andrew Kuchins, was with Members of 
Congress this morning at the Aspen Institute breakfast. It was 
a wonderful warm-up for our hearing today, because he is just 
back from an extraordinary trip from the caucasus with the 
Chinese delegation, observing all the problems that are there. 
He brought a chart. You will not be able to see it from here, 
but this is the chart he has. Now, essentially, this is oil in 
Russia. There is a huge peak, about 1981, and then it comes 
down rather abruptly, by 1986-1987. Things are getting pretty 
thin. Certainly, by the time the Soviet Union came to an end, 
in 1991, we're at a nadir point. But now, the spike goes up. He 
would not predict that it will continue to spike in quite that 
way, although who knows precisely what the price of oil will be 
in the world. He makes the point that you've made today--that 
the largest exporter is the largest factor in the oil trade, by 
far. He cites a figure that I hadn't heard before, an estimate 
that in the last 7 years the gross national product of Russia 
may have climbed from somewhere around $200 billion a year to 
$900 billion a year. That is a four-and-a-half-fold increase in 
the income of the country in 7\1/2\ years. That illustrates 
what a startling development we are looking at, in terms of the 
amount of income that is available, but it'll also track some 
charts that Tom Friedman has been showing. There was a great 
difference between all of the ferment that was going on in 
Russia or in other places, for that matter, and when suddenly 
that oil prosperity changes as people accept stability that 
comes from being able to pay your debts, to say to the rest of 
the world, ``We're rich, and we're back,'' and so forth. Thus, 
the popularity of Vladimir Putin. If we wanted to look at this 
in a democratic way and have a referendum on Vladimir Putin, 
the odds are that he would win, with a fairly good plurality, I 
suspect. And even Mr. Kutchins suggests that the transition in 
2008 may be a reasonably smooth one, given what now is called 
``controlled democracy''--that is, that you pretty well 
extinguish the hopes of anybody else that is not really on 
track. The problem for Russia, he would suggest, is after 2008, 
because, as some of you suggested, of the strategies that the 
United States plus Europe and the G-7 partners, and other 
people, may use. They may get brighter about this whole 
business, as opposed to being all over the place, maybe 
characterizing current policies, not only in our own country, 
but elsewhere.
    This does explain a part of why things have changed in 
Russia, and maybe our relationship to this. I don't attribute 
this to Mr. Kutchins, but others have suggested that Russians 
see our bantering about democracy as a thought, first of all, 
that we simply don't have sufficient respect for whatever they 
are doing, and, second, that it represents a different period, 
really a sort of a failed period, when there was no oil, there 
were no prospects; there was indebtedness, supplicants. As 
Russians come over now, that's one of the first things they say 
to Joe and to me, ``We're not supplicants. We're rich. We're 
back. We would love to visit with you, cooperate a bit in 
international relations. We don't want to kick the can down the 
road into isolationism, but you have to understand, this is 
different.'' This is not the case of whether our Nunn-Lugar 
program goes over and they need contractors. We just signed 
another umbrella liability agreement, but they indicated that 
they would be calling more of the shots from now on.
    Vice President Cheney's testimony over in the Baltics 
criticizing Russia was one thing, but then, combined with 
extolling the virtues of Kazakhstan the next day, and our 
entertainment of the Azeri President, they made the point, at 
least in the Kremlin, that, once again, we are harping about 
democracy and the lack of self-respect and so forth. On the 
other hand, we're fully prepared to deal with people who are 
not very democratic. You have all pointed out the dilemma posed 
by governments in the Caspian region. They have strategically 
important pipelines running through their territory. And their 
commitment to democratic values is not yet assured. 
Nevertheless, the United States must develop strong relations 
with each of them.
    This probably is a good time for the G-8 to meet. We're 
going to be in Russia. It's going to be Russia-centralized and 
focused. Many people abhor that thought, but the fact is that 
the energy agenda was supposed to be uppermost. For Europeans, 
this is extremely important, because they feel, still, very 
uneasy after their visit from President Putin. And, as you 
point out, Ms. Jaffe, it may be an empty threat to send the gas 
out to the East. But, at the same time, we note the fact that 
it was even a suggestion that there are alternatives, as 
opposed to making good the promises to Europe, the stability 
that comes to Europe, having that great dependence, the anxiety 
that comes with President Putin going to Algeria, visiting with 
President Bouteflika about what the two of them can do, vis-a-
vis Europe or each other. This is an opportunity for a much 
more secure situation, giving more self-respect to the 
Russians, more certainty to Europeans, and, once again, the 
United States entering with the Europeans and the Russians into 
this dialog. We have something constructive to come out with.
    Can you suggest some signal points for our U.S. agenda, 
with that in mind? Please talk about energy, self-respect, the 
enhancement of the United States-European relationship. Do any 
of you want to have a try at that?
    Yes, Ms. Jaffe.
    Ms. Jaffe. I'll take a short stab at that.
    There was a time in history when Algeria, with their 
pipelines to Europe, and also their LNG shipments to the United 
States East Coast, took this step that Putin is trying to take. 
In other words, they saw they had a captive market--it's very 
hard to switch off of gas once you decide to go to gas--so, the 
Algerians just said, ``Hey, we've got you captive, we're 
raising the price.''
    And the result of that effort--which maybe people can read 
up, we just have a book coming out from the Baker Institute 
that's a case study on it--was that Algeria lost their markets, 
both on the East Coast--they lost their markets to Trinidad--
and in southern Europe, they lost their markets to other 
suppliers, partly as a result of suddenly being seen as an 
unreliable supplier.
    So, I think that we need to go into this conversation with 
the Russians, especially taking into account the things that 
Ambassador Sestanovich and Dr. Trenin have said, where we have 
to treat them as an equal partner, because this whole question 
of self-respect and being a superpower is not only just coming 
from the administration in Russia, it's coming from the public 
in Russia.
    But, also, we have to know what our options are. In other 
words, if you come in and you say, ``Well, you can't act this 
way,'' even if we're willing to offer the carrot, like, ``Well, 
let's talk more about reciprocal investments,'' you have to 
know what you would do if they're going to continue to take a 
belligerent stance. We need to actually, unfortunately--because 
I know the meeting is coming up--we need to know what Europe is 
proposing, or we are proposing with Europe, to do as the 
alternative. So, maybe we needed to have flown over to Algeria, 
as well. Maybe we need to have a plan with European and the 
United States collaboration on building natural gas stockpiles. 
Maybe we need to have a plan of what fuels we would use in the 
future, besides natural gas, if we can't--and an initiative, if 
we say we're going to have to wean off of Russian gas--that, 
really, we need to show, not so much, I think, even the 
administration in Russia, but Gazprom--right?--that there is a 
plan that might involve our own companies' investments in other 
countries or an initiative so that we know what we would do to 
wean ourselves off, because we're in just the same situation as 
they are. It takes several years to change suppliers when 
you're coming from a pipeline route. It takes them several 
years to shift material to Asia. Right? And, really, it's in 
their best interest to try to at least get some entry into--
some better entry into Europe, if that's what they want, in 
exchange for what it is that we want, which is to see them 
actually doing more reform and more investment and having a 
more competitive marketplace in Russia. And I think the dialog 
has to come, but, again, we have to get our own ducks in order 
and know what our alternative would be so that we're coming in 
from a stronger position.
    The Chairman. Dr. Trenin.
    Dr. Trenin. Let me say--thank you--let me say, Mr. 
Chairman, that I believe it's a fallacy to regard energy as a 
weapon. There is no one-side dependencies in energy business. 
Russia is as dependent on Europe as Europe is dependent on 
Russia. And that's the way it's going to be.
    I think one of the problems of the United States-Russian 
relationship is that that relationship lacks a solid economic 
foundation. There's a lot that's going on economically between 
Russia and the European Union, but not nearly enough between 
Russia and the United States. So, if some of the projects that 
are currently being talked about--like Stockman gas field in 
the Arctic--if those projects become developed and lead to 
interdependency between the United States and Russia, that 
would lead to a much healthier political relationship between 
the two countries and a much stabler--much more stable 
strategic relationship between Russia and the United States.
    Let me also add that the Russian leadership is--as you 
mentioned, Mr. Chairman--is extremely confident today. And this 
confidence needs to be taken into account. As you, yourself, 
said, sir, they will be looking for a coequal relationship, and 
this is something which is becoming a sine qua non for the 
Russian leadership.
    Let me also say, in all frankness, that in the view of the 
Russian leadership, the discussion of Russian democracy is--I 
don't think that they are right, but the way they seem to 
believe what it is--they think it's a reaction of the United 
States to Russia emerging as a more independent and more 
important power internationally. And it's up to the United 
States policy to disabuse the Russian leadership of that 
notion.
    Let me also add that I do not suggest that there is an 
automatic Marxist link between increase in the GDP and the 
formation of the middle class. And clearly this is a long, 
drawn-out process in Russia.
    I do not believe that the oil wealth has much to do, at the 
lower level, at the--in the middle level--with what I call 
capitalist development in Russia. Rather, it's property 
becoming the issue that people are talking about, worrying 
about, are concerned about. Property is becoming real. The 
property that people own, not the property that the government 
owns--the money that's been stashed away in all those 
stabilization funds and the gold reserves and currency 
reserves, what have you. But the money that people own. And 
that's revolutionizing Russia from below.
    I think that's what I wanted to say.
    The Chairman. Thank you.
    Steve.
    Ambassador Sestanovich. There's no doubt that the essential 
precondition of having an effective energy dialog with Russia 
is an effective energy policy of our own. And, as Amy properly 
points out, if we don't have our ducks in a row, we shouldn't 
expect the Russians to put them in a row for us.
    Second point. This is an issue where the rubber really does 
meet the road when one talks about cooperation with Europeans. 
Over the past several months, the Europeans have continued to 
express their shock about what happened in January between 
Russia and Ukraine. And they have pushed for Russia's 
ratification of the European Energy Charter. If we believe in 
strong American-European cooperation on energy issues, I think 
we have to ask what kind of support we have given to this 
proposal by the Europeans. How should we respond to the Russian 
dismissal of the idea last week? Are we going to keep pushing 
this, or not? Because it has real implications for how the 
Russian energy sector operates.
    Let me mention a couple of those implications. It is a pipe 
dream to think that we're never going to--that we can end our 
energy relations with Russia. We wouldn't want to. These 
relations are mutually beneficial. Yet it is an important 
objective of the United States, and of all energy consumers, 
that energy producers act like commercial entities rather than 
like arms of the state.
    If you look at the board of directors of the monopolies 
that Amy has talked about, you'll discover that they're Mr. 
Putin's assistants. This is not just a matter of corporate 
governance. These monopolies are managed by, directed by Mr. 
Putin's staff. And that's an arrangement that is unlike what 
you have in any other G-8 country.
    If the European Energy Charter were to be ratified, it 
would have implications for the monopoly not only that Gazprom 
exercises, but for other monopolies in the Russian energy 
sector--pipelines, in particular.
    We should, as part of a reinvigorated energy dialog with 
Russia, address the question of the access to our capital 
markets of these Russian energy companies. Are we satisfied 
with the kind of transparency that we see when those companies 
bring large share offerings to market?
    I might add a final point about energy efficiency. To my 
mind, the single most staggering sentence in the Council on 
Foreign Relations task force report, which I have invoked many 
times, is the following, ``If Russia used natural gas as 
efficiently as Canada, it would save three times the total 
amount of gas it exports to the European Union.'' Russia is not 
just the world's greatest energy producer, it's the world's 
greatest energy waster.
    Thank you.
    The Chairman. Well, thank you very much.
    Senator Biden.
    Senator Biden. I thank you all.
    You know, when you listen to three qualified and 
experienced people like yourself, there's certain things that 
just come through that are self-evident, that we don't talk 
about, really, up here very much, and policymakers don't talk 
about much downtown, and that is that there is no energy 
producer that's not a monopoly, other than us, and a few 
others. But, I mean, look, let's face it, you know, you don't 
have anything remotely approaching democracy in Saudi Arabia or 
in the gulf region or in Venezuela--that's technically a 
democracy, but it's become a--I think it's become difficult--
Nigeria--I mean, you look around, and we talk about the--you 
know, the G-8, and we should talk to them. Well, none of the G-
8, except one, has, really, energy that they can export. And 
so, that this really does come down to energy. It's more than 
energy, but it's energy. You know, ``It's energy, stupid, it's 
energy.'' And it has--it has many, many complicating 
ramifications. It's not a straight line. But we would be in a 
very different circumstance if Russia were China, in terms of 
energy resources. It would be a completely different world, 
just as it would be a completely different world if China was a 
net exporter of energy. And so, I mean, I--it's so simple, but 
it's so profound.
    The second thing is that the whole notion that we are going 
to deal with not just Russia, but--and Russia, obviously, is 
the biggest not only producer, but the most consequential 
nation that possesses that kind of energy, without a clear 
understanding of what their options really are.
    I went through--we went through the whole cold war assuming 
options Russia had that they never had, but we assumed they had 
them. We assumed they had capacities they never possessed. And 
we didn't look--we always looked at it in the--at least in my--
I realize all generalizations are false, including this one, as 
Clemens--Samuel Clemens once said--but we basically looked at 
them like they were 12 feet tall all the time, and we were 
probably 6 feet 1 inch, when, in fact, they were really, like 
4\1/2\ feet tall.
    And so, the thing that I'm most impressed with so far 
today--and I need to know a lot more about, and the question-
and-answer period doesn't lend itself to doing it--is with--Ms. 
Jaffe, I would love to have the most realpolitik look at what 
are the real options Russia has, what threats are ones that 
they are able to, relative to the energy sector, actually 
deliver on, and what timeframe can they deliver them on, so 
that we don't look at this in a way that--because we have 
agendas here in the United States. Everybody--the--politically, 
there are agendas here. And, you know, depending on how you 
perceive the amount of leverage Russia has today--impacts 
significantly on what you think your options are and what 
responses the United States can institute.
    One of the things I find--and I don't have as much 
interaction with Russian officials as my friend--matter of 
fact, I don't know anybody that has more interaction than the 
chairman--is that when we start talking about democracy and 
energy, all they do is point to the gulf, and they say, ``OK, 
great, wonderful. You guys are telling us about being a 
democracy. I mean, when is the last time you had a conversation 
with the Saudis about that?'' It may have nothing to do with 
anything, but it's an interesting talking point.
    And I guess what I'm getting--the third point here is, it 
seems it all comes down to one minimum--what you said, Mr. 
Ambassador--one minimum requirement to be able to arrive at a 
rational policy from our perspective, and that is, we have to 
have an energy policy. We don't have an energy policy. We do 
not have an energy policy. The swimming pool metaphor is a good 
one. We go ahead and pump all the oil in the--up in the Arctic 
area, all the oil in the gulf, all the oil in the Atlantic and 
Pacific. We fill the pool about 2 inches. It's--it affects it, 
but it doesn't affect price very much. You don't have them 
saying, ``Look, we've got all this oil, we're keeping it 
home.'' It's--goes into the pool. It doesn't get as much 
flexibility, it doesn't give the world much flexibility when 
you have a disparity of only two percent between supply and 
demand out there right now. Not a lot of cushion. So, it's sure 
in the hell not an answer. It may be useful to do. Forget the 
polemic arguments about--and the discussions about the 
environment and all that. Let's assume there was no 
environmental impact all, everybody said, ``Let's do it.'' Does 
anybody think you're going to turn to the American people or 
the Europeans and say, ``By the way, now your problem with 
Russia is really diminished a great deal here,'' or that we're 
really going to see gas prices or oil prices drop at all, of 
any consequence here, or give us more flexibility?
    And so, I guess what I'm saying is that the three things I 
come away with are, we don't know--I've not, at least--I don't 
know--how real the Russian threats of the use of their energy 
are relative to their ability to deliver on them, number one. 
Number two, how almost--how frightening myopic we are. I 
thought you said something very interesting, Ms. Jaffe. I was 
impressed with your testimony. You said, ``Maybe we should get 
in a plane and fly to Algeria.'' We don't do--I mean, you know, 
what the heck are we doing? What is the extent of our oil 
diplomacy? What is the extent to which we've actually had--I 
mean, I've not had anybody come up and say to me that, you 
know, at the State Department or at the White House they've set 
up a high-level group that is meeting on a regular basis with 
all our European allies to determine whether or not there is a 
possibility of us arriving at some sort of emerging consensus 
on how we deal with energy. It comes up in the G-8, it comes up 
in certain summits. But the idea there is not an absolute 
dialog that is totally continuous, that is--that's a poor way 
of saying it--that is ongoing, as fundamental as the dialog 
that took place in 1953, in terms of our physical security and 
NATO--I mean, it seems to me it's that basic, I mean, you know, 
for everybody. When are we going to wake up?
    So, I guess what I'm--you know, it's obviously not a 
question, but it is a clarification for me of my thinking--and 
all of you have suggested that--that no matter what's--how 
you--how you decide to proceed, one, it's pretty darn important 
to know what Russia's options really are, and--as hard baked an 
analysis, we could--as if we are making a judgment, as we were 
so used to doing for the last 30 years of sitting in the 
Situation Room, making a judgment of, ``What are the real 
options Russia has with all their nuclear weapons in a war?'' 
We sat down and thought through that in incredible detail. We 
may have been right, we may have been wrong. But it seems to me 
we have to be as hard baked about it as it relates to energy, 
not to use it as a--just to know what our options are.
    And, second, it seems to me that if we don't start talking 
with our allies about our mutual dependence--I mean, I think of 
it, Mr. Chairman, in terms of, what are our grandkids, when 
they write their senior thesis at Oxford, as Rhodes Scholars 
like you were, and hopefully not like I was--what are they 
going to be writing when they look back and say, ``Didn't these 
guys figure this out? Wasn't it self-evident, in the year 2006, 
that there were no good guys in the oil business?'' I don't 
mean--I'm not talking about American companies. ``There's no 
good guys in the oil business?'' [Laughter.]
    I'm not trying to be--I really--I mean it--I mean, you have 
Saudi Arabia and Venezuela and Nicaragua and Russia and maybe 
Canada, maybe Mexico, who knows? But I mean, ``There weren't a 
whole lot of good guys, and they sat there while the bad guys, 
or bad''--wrong word--``by the guys who didn't know how to 
shoot straight, screwed the world up. And they figured they had 
to respond by going, `mea culpa, mea culpa, mea maxima culpa.' 
'' ``Please send the pipeline to me, I will give you what you 
want.''
    I mean, it's kind of bizarre, when you think about it. 
Difficult. Difficult, difficult. But it's like, you know--I'll 
end, Mr. Chairman--you've heard me quote it before, allegedly, 
although I just read a new book, where I found out that half 
the quotes Kennedy gave as his weren't his, and who knows whose 
what quotes, I mean--but this is attributed to G.K. Chesterton, 
and it may not be accurate, but I've always heard it saying--
Chesterton said, ``It's not that Christianity has been tried 
and found wanting; it's been found difficult and left 
untried.'' I kind of think that's where we are on this whole 
relationship with Russia and our allies and our mutual 
dependents and our needs. We don't seem, in this--our 
unilateral thinking--we don't seem to quite understand that we 
can't do this alone. We can't figure this out alone, unless we 
decide to--just to become totally energy independent, if that 
were able to be done, if you could wave a wand. But what does 
that do for us, in terms of our alliances and our--I mean, it 
doesn't do a whole lot. I mean, it's--I'd like to have it. You 
give me the choice, I'd take it.
    So--and the one question, for the record, I won't even ask 
you to do it now, because I'm supposed to--I have to leave for 
20 minutes before I come back for our meeting--is, Doctor, 
other than oil, you--you made a very, very important point. You 
said that we have--we should base our relationship more on a 
solid international footing relation to--in relation to 
economic dependent--and mutual dependency. Is there anything 
other than oil or gas? I can't figure any out. And if there is, 
if that's the only one, we've got to do a lot of antecedent 
things to figure out how to get to there first. Because if 
they--if there's a pipeline coming across the Bering Straits, 
that's a great thing, except if they get angry and decide--and 
tell us--and watch everybody, like Nervous Nellies here, 
saying, ``No, no, we're going to divert that pipeline. We're 
going to go down through northern China.'' They can't, but we'd 
sure the hell go, ``Oh, my God. I guess they're going to do 
that, just like all that Siberian gas is going to go to China 
now, when it would have gone to Europe,'' when it couldn't have 
gone to Europe.
    End of my comments. Anybody who wants to respond, I invite 
it, but it's not necessary.
    Yes.
    Dr. Trenin. Senator Biden, I was talking more about 
Stockman, not about Bering. I was talking more about the 
project for liquified natural gas reaching the U.S. market.
    Senator Biden. Still energy, right?
    Dr. Trenin. It's still energy, that's right. But you talk 
as if energy were, today, a basis for the relationship. It's 
not. In fact, energy and--oil and gas are absent from the 
United States-Russian economic relationship.
    Senator Biden. No, I--please don't misunderstand me. Energy 
is the basis for Putin's ability to act in the way he's acting, 
which is contrary to the interests of the United States, 
Western world, the whole world, and his world, in my humble 
opinion. That's the basis for it. Were he not, were he energy 
deficient, were he China--we just switch the resources. God 
wakes--we wake up the next morning, and all the oil and energy 
that's in Russia is now in China, and all the energy, the lack 
of it, in China, is in Russia. It's a different world, Jack. It 
is a fundamentally different world. And old Vladimir's got a 
problem.
    Ms. Jaffe. Let me just respond, Senator Biden, to something 
that I've said in our dialog, our informal dialog, between the 
Baker Institute and Chinese think tanks. Fundamentally, you've 
hit the nail on the head. We have the same strategic interests 
as China. China is a net importer, they have to worry about the 
stability of the flow of energy from the Middle East, the same 
as we. Russia is a net energy exporter, their economy, as 
Senator Lugar has so correctly pointed out, is tied to the 
health of the energy market, from a producer-seller point of 
view. So, I'm not saying we shouldn't have good relations with 
Russia; they're the most important supplier. But we need to 
understand and recognize, especially in thinking about our 
foreign policy, that we have this strategic alignment actually 
with China, not Russia, when it comes to this issue, because 
the Russians are on the other side of the issue, and the 
Chinese are on the same side of the issue as we are, as a major 
consumer that has to worry about the future of growth of its 
economy, based on energy supply.
    And so, when we think about our diplomacy, we have to have 
not only diplomacy to deal with our producer-ally-friends 
relationships, superpowers, whatever, we also have to consider 
who's in the buyer club. It's not just the European Union and 
Japan or South Korea. We have to think about India and China 
and Brazil and those who are in the buyer club, as well.
    So--but you're right, you know, quirk of fate, what's under 
the ground matters. And you cannot get away from the strategic 
nature of the fact that we are a net buyer, and some countries 
are net sellers.
    Ambassador Sestanovich. If I could add two cents, Senator.
    One, I think it's important to bear in mind that energy 
wealth doesn't always keep corrupt regimes in power. And if 
there's any doubt about that, I suggest President Putin talk to 
the Shah of Iran.
    Senator Biden. By the way, it doesn't keep him in power, 
but what it brings about may not be more beneficial.
    Ambassador Sestanovich. Excellent point.
    You also asked what Russia can do with its energy in the 
way of coercion, what its options are. It's useful here to 
compare the use of energy to the way in which nuclear weapons 
add to a country's power. What was shocking about what Russia 
did in its confrontation with Ukraine in January was that it 
was the equivalent of actually using nuclear weapons, as 
opposed to merely having them in your back pocket as a reminder 
of how important you were. That got the Europeans' attention. 
Nobody had used energy as a weapon in that way in a very, very 
long time.
    There's a related question here which is not how big a 
problem Russian energy is, but how much can Russia contribute 
to the solution of global energy problems? And, here, I think 
it's important to pay attention to the limit on its energy 
production imposed by Russia's political and economic system. 
For years Russian gas production growth has lagged the 
international averages. Why? Because Gazprom is a monopoly. 
It's as simple as that.
    Senator Biden. Well, I--my observation is that nations 
usually don't spontaneously recognize those deficiencies, 
especially coming from those in power who control the 
monopolies. That has not been historically the case.
    I want to make it clear. I do not believe our relationship 
with Russia should be, or is primarily, based upon energy. The 
fact of the matter is, Russia forming a more democratic nation 
is critically important to our security interest and to the 
development of western Europe and the entire region than almost 
anything else I can think of. All I'm suggesting is, 
ironically, the oil has become the impediment, in the short 
term. It has all--it's the--if you had an enlightened leader in 
Russia, you could see how the use of energy could be an 
incredible tool for democratization. It could be a phenomenal--
a phenomenal tool. In the hands of an autocrat, who comes out 
of a system that is--well, anyway, without going--it is a very 
different tool. It is a very different tool. In the hands of a 
President of the United States, in the hands of the Prime 
Minister of Great Britain, in the hands of the President of 
France, it may be a very different thing. It may not, but I 
suspect it would be. But I don't want anybody to misread here. 
I--the point I made was, energy independence on our part would 
not--would not solve larger problems relating to Iran going 
nuclear and Russia's implication in, or cooperation or 
opposition to it. It would not solve the situation, in terms of 
European unity and how it views its relative strengths or 
weaknesses. It would not affect a whole range of things that 
are vitally important to us in the 21st century. It just 
happens to be the 800-pound gorilla sitting in the middle of 
the discussion right now, and our failure to understand its 
impact--not your failure--our failure, as a government, to 
understand its impact--or, if not understand it, act upon--act 
upon rational alternatives, seems to me to be not in our 
interest, not in Europe's interest, and, I would argue, not in 
Russia's interest. This is not about, in my view--I don't want 
anybody to misread--this is not about how you keep Russia in a 
box, how you keep Russia--we are better off if Russia is a 
thriving economy that has democratic rules. We are better off 
if it becomes a major economic power in a democratic mold. This 
isn't about, in my view, keeping Russia in a box. It's about 
allowing Russia to flourish. If it flourished, we're better 
off. We're better off. Competitor? Yeah. We're better off.
    And so, I just don't want anybody--not the three of you, 
but anybody listening--thinking that I think we've got to 
figure out how to, you know, keep Russia from reemerging as a 
major power. I'd like it to reemerge as a major power, as a 
major democratic power. That's a good thing, not a bad thing, 
in my view. I don't think it's a zero-sum game.
    The Chairman. Yes, Dr. Trenin.
    Dr. Trenin. If I may, I think you're absolutely right, 
Senator Biden. And this is really the fundamental thing that we 
should be concerned with.
    And, of course, we also realize that there is no shortcut 
to democracy. An enlightened leader--if one transplants an 
enlightened leader to the position that Mr. Putin occupies 
today--would probably have to deal with the same elites around 
him, with the same people who vote for Mr. Putin, and who are 
constantly supporting Mr. Putin at a pretty high rate. In other 
words, the problems of Russia are not only confined to the 
Kremlin.
    Senator Biden. I agree.
    Dr. Trenin. They are everywhere. And I think that it's the 
development of a new society. If you like, call it capitalism--
it's not market capitalism, but capitalism, still--that is 
transforming the country and eventually taking it closer to 
democracy. But we should disabuse ourselves of the notions, 
which were very popular back in the early 1990s, that somehow 
Russia could make a great leap forward and become a democracy. 
It is--it was possible, and it is possible, in some central and 
eastern European countries, because their modernization was 
linked to integration into NATO, the European Union, and other 
Euro--Atlantic European structures. For a variety of reasons, 
this is not the way that Russia is likely to go.
    So, I think that even as we wish Russia to become a 
democracy, we need to be aware of the current realities of 
Russia and that this is going to be a long and arduous path.
    And there's an--yet there's another thing which I think I 
would need to highlight. Democracy is--which--when they are in 
the process of becoming such, the process of democratization, 
could be accompanied by some pretty ugly things or some 
difficult things, like nationalism. I referred to nationalism. 
A more democratic Russia will not necessarily be--I mean, if 
you just turn the power to the people today, it may not 
necessarily be a nicer, friendlier whatever. So, I think that 
it's a complex reality. And as--even as we wish Russia well, 
wish Russia becoming a democracy as soon as she can make it, we 
need to realize that this path is going to be a very, very 
difficult and long one.
    Senator Biden. I couldn't agree with you more. I don't 
disagree with a thing you said.
    Ambassador Sestanovich. Can I just cast a vote for the 
great-man theory of history instead of the sociological 
analysis that you've heard from Mr. Trenin? I completely agree 
that the long-term development of Russia is going to depend on 
broad social trends of the kind that he's describing, but we 
shouldn't forget how important specific decisions are that are 
made by Mr. Putin and his associates in the Kremlin for the 
answer to this question: Will Russia, in the next couple of 
years, take steps forward toward----
    Senator Biden. Transition?
    Ambassador Sestanovich [continuing]. Modernizing itself in 
the way that Mr. Trenin has described, or will it take steps 
backward? The question of whether or not opposition parties are 
able to participate freely in elections is completely up to 
people in the Kremlin. The question of whether or not 
opposition parties are able to get financial contributions for 
their campaigns from Russians who support them is completely up 
to people in the Kremlin. The question of whether opposition 
parties are taken off the ballot days before an election is 
completely up to people in the Kremlin. The question of whether 
they're even allowed to register is completely up to people in 
the Kremlin. This is not a matter of broad sociological trends; 
it's a question of who signs the memo authorizing this or that 
restrictive policy to be implemented.
    So, I think we shouldn't take too long a view, when we can 
see how specific decisions are made in the Kremlin that block 
Russia's development.
    Senator Biden. It would be nice if they had a Madison and a 
Washington and a Jefferson, but I would agree with the 
professor that it would still take a helluva lot longer than it 
took here. I think you're both right, these--this makes--you 
know, individual leadership matters, that the great-man theory 
does have--in this country, the great-man and great-woman 
theory has some relevance, but you have to admit, it would be 
more difficult. It is necessary, and it's a shame, and it makes 
me realize--and it sounds somewhat chauvinistic about our 
country--but, damn, we were lucky in 1776. We were awful lucky 
to have some pretty damn smart people committed to a completely 
new notion of governance. And--but even if you had 'em all 
sitting in Moscow, I think it's going to be a little bit 
harder.
    The Chairman. Thank you, Senator Biden.
    Let me just make a summary comment, and then we'll bring 
this hearing to a conclusion, although you may have some final 
comment after my thoughts.
    It seems to me constructively this morning that we've had 
some agreement between the Senators and the panel that our 
country needs a more well-defined energy policy. I suppose if 
those who are responsible for our energy policy were here, they 
would say, ``Well, we do have various elements of this,'' 
perhaps. But, nevertheless, there appears to be some consensus 
that it needs to be more sharply defined and understandable to 
the American people, as well as to Russians, Europeans, 
Chinese, or whoever; and, as a subset of that, the suggestion 
that we need a natural-gas plan.
    Ms. Jaffe has provided some excellent charts which show all 
the routes of natural gas to Europe and to Asia, as well as 
prospective routes, with a red line heading out to China, for 
example--and this is very helpful, in a geographical sense. We 
discussed the various countries. Unless each one of us has a 
photographic memory of the map of Europe or Asia, it may be 
difficult to transpose where all these lines are and who is 
intersecting whom, or evading whom. We talk about the Caspian 
problem, and so forth. So, I commend, to Senators, staff, and, 
likewise, those observing this hearing, these remarkable 
charts, just as a basis for getting some grasp of the options 
that are available to countries that are involved in this.
    Now, let me just mention, also, that the thought has been 
expressed that the United States has an affinity with China 
with regard to the Russian energy situation. I would indicate 
that that, likewise, is the case with India for, obviously, 
some of the same reasons: The dynamic growth of these 
populations, and huge new demands for energy, now and for the 
foreseeable future.
    Likewise, in our country, we express the thought we need to 
have energy conservation. Most experts who have written about 
this subject have made the point that some of you have made 
about Russian use of energy--in the case of natural gas, that's 
the misuse, waste. It goes well beyond the amount that's being 
exported to Europe or elsewhere, where there seem to be 
contractual difficulties.
    I mention, once again, our legislation in Senate bill 2435. 
It's not the be-all and end-all, but it expresses the thought 
that energy policy has to be a cardinal point of our American 
diplomacy. We need to have, in our State Department, or 
elsewhere, if the President so desires, people who are actively 
involved in diplomacy on all of these subjects. In other words, 
people that might be working with the Europeans with regard to 
the European charter. As some of you have said, this is really 
a cardinal point, even as we approach the G-8. Even without the 
G-8, it is very important. I'm not certain I see that kind of 
diplomacy going on, nor diplomacy with China, with India, with 
other energy users, on either substitutes, or more efficient 
use of energy.
    Some Americans would say, ``Why should we work with other 
countries to help them become more efficient in using BTUs?'' 
Well, for the very reasons we're talking about today. On the 
supply side, the misuse of BTUs, or antiquated machinery or 
procedures, is extremely costly to them, and they have to 
become more aggressive in trying to overcome those 
deficiencies.
    In the Corinthia Hotel, in Tripoli, in Libya, where I was 
in August, I saw many, many people from India and China--in 
fact, the hotel appeared to be filled with persons from those 
countries--and as I was visiting with them, and asking them 
their mission. It was identical--namely, to identify acreage in 
Libya for areas of dominance, preemptive work. There were a few 
Americans in the hotel, but they were outnumbered in the 
process, although they had the same mission. In other words, 
there was an alliance of sorts. Now, we might have seen it as 
competitive, and the world may say, ``Well, this simply 
indicates that we're all headed toward collision,'' but not 
necessarily so if we identify the mutual interests that we have 
in this.
    This calls for an extraordinary amount of new diplomacy in 
our Government now, or in any one that may follow this 
administration. So, our committee's hope is, by having these 
hearings, inviting experts such as yourselves, taking advantage 
of a situation like the G-8 meeting, which is a focal point on 
Russia, on energy, to try to make some points in our own dialog 
in this country.
    Let me just mention one small success story. I was not the 
only Senator who received letters, but I'll make them a part of 
the record. These came from the chief executives of Ford and 
Chrysler.
    [The information previously referred to follows:]

                                   Ford World Headquarters,
                                   Dearborn, MI, December 14, 2006.
Hon. Richard G. Lugar,
U.S. Senate, Hart Senate Office Building,
Washington, DC.
    Dear Senator Lugar: Thank you for your letter of encouragement for 
our efforts to help transition away from foreign oil dependence. 
Innovative gasoline-saving technologies are leading the way forward in 
our product development plans. As you know, we have committed to 
produce 50 percent of the vehicles we make each year as flexible fuel 
vehicles capable of running on a renewable fuel by 2012, provided the 
fuel is available to consumers and sufficient incentives are in place 
to encourage the production of these vehicles.
    Our commitment to put more flexible fuel vehicles on the road, by 
itself, will not reduce the nation's dependence on foreign oil. Fuel 
providers, retailers, and consumers are key elements of any 
transportation policy equation and must be part of the solution. We 
need a strong, long-term focus on policies that increase ethanol 
production, accelerate E85 infrastructure development, and ensure 
competitive E85 pricing to consumers. Competitively priced renewable 
fuels and a nationwide refueling network are essential market drivers 
required to encourage active consumer participation in the federal 
fight for energy independence. An aggressive energy security strategy 
of federal tax incentives and loan guarantees for ethanol producers, 
distributors, and retailers would increase the supply of renewable 
fuels, accelerate the installation of refueling systems, expand the 
availability of renewable fuels, and reduce transportation fuel costs 
for consumers.
    Unfortunately, roadblocks to E85 infrastructure continue to arise. 
Recently, Underwriters' Laboratories (UL) have informed us they do not 
have a certification protocol for E85 pumps--this has halted 
development of several new stations and has raised questions about 
existing stations. Prompt resolution of this issue is necessary to 
continue the positive momentum.
    Ford shares many of the goals in your proposed National Fuels 
Initiative. We both recognize the need for dramatically increasing the 
production, distribution, and use of cellulosic renewable fuels. In 
fact, Ford's Vice President of Environmental and Safety Engineering, 
Sue Cischke, highlighted a few of our efforts and shared perspectives 
on a variety of renewable fuel issues as she participated in your 
August 2006, Energy Security Summit at Purdue University.
    Energy security concerns are driving significant investments in all 
areas of advanced technology vehicles including energy-efficient hybrid 
electric, clean diesel, and advanced internal combustion technologies. 
We plan an expanded application of hybrid electric technologies into 
the Ford Fusion and Mercury Milan in the next few years. We continue to 
research plug-in hybrids and the associated battery challenges. Our 
hybrid electric and flexible fuel vehicles represent the best of 
American ingenuity and engineering excellence.
    Ford Motor Company is committed to employing gasoline-saving 
vehicle technologies, enabling consumers to reduce the nation's 
dependence on foreign oil. I look forward to continuing our 
correspondence on these and other important public policy challenges 
facing our great Nation and the 110th Congress. Thank you for all your 
leadership in the Senate.
            Sincerely,
                                              Alan Mulally,
                                                 President and CEO.
                                 ______
                                 
                               DaimlerChrysler Corporation,
                                    Auburn Hills, MI, May 12, 2006.
Hon. Tom Harkin,
Hon. Dick Lugar,
U.S. Senate,
Washington, DC.
    Dear Senators Harkin and Lugar: This is in response to your letter 
of April 24, 2006, to Dr. Dieter Zetsche, requesting that 
DaimlerChrysler increase its production of flexible fuel vehicles 
(FFVs) as quickly as possible to reduce our consumption of petroleum. 
DaimlerChrysler shares your views that we need to shift the Nation away 
from petroleum consumption and that renewable fuels can, and must, play 
an important part in that shift.
    Earlier this year, I announced in a speech at the Detroit Economic 
Club that DaimlerChrysler would add to the 1.5 million FFVs that it had 
previously produced by manufacturing, by the 2008 model year, just 
under 500,000 FFVs annually. These 1.5 million vehicles represent about 
10 percent of our total production since 1998, and the 500,000 figure 
is nearly 25 percent of our expected annual production. Both 
percentages are the highest for any manufacturer, a fact of which our 
company is very proud.
    On April 25th, I had the honor of following President Bush to the 
podium of the Renewable Fuels Association conference, held in 
Washington. I announced that for the first time ever, beginning in 
model year 2007, our Jeep brand will offer flex-fuel vehicles, for both 
retail and fleet sales. Customers who order our popular Jeep Grand 
Cherokee or the new Jeep Commander with the 4.7 liter engine option 
will receive vehicles capable of running on E85 fuel. In addition, the 
Chrysler Sebring, Chrysler and Dodge minivans, Dodge Dakota and Dodge 
Ram pickups, and the Dodge Durango SUV will also offer FFV capability. 
In total, we anticipate sales of more than 250,000 FFVs in model year 
2007, which will then nearly double by the following model year. 
DaimlerChrysler is fully committed to increasing levels of FFV 
production.
    Our commitment to renewable fuels, though, extends beyond ethanol 
use. DaimlerChrysler is the only manufacturer to offer a diesel vehicle 
that leaves the factory fueled with bio-diesel. The Jeep Liberty 
diesel, manufactured in Toledo, Ohio, is fueled with B5 as it leaves 
the assembly line. We have also announced that beginning this Fall, we 
will endorse the use of B20 diesel fuel, for use by our military, 
government and commercial fleet Dodge Ram customers.
    Senators, we share your goals of reducing petroleum consumption and 
increasing the use of renewable fuels. The actions described above, 
plus our continuing efforts to improve the efficiency of gasoline-
powered vehicles, increase our use of diesel engines--which provide 20-
40 percent improvements in fuel economy compared to equivalent 
gasoline-powered vehicles--and our leadership in fuel cell vehicles--
with more than 100 vehicles, ranging from small cars to transit buses, 
in operation around the world today--are testimony to our commitment.
    DaimlerChrysler believes that incentives are the most efficient 
means to increase production, distribution, and sales of both renewable 
fuels and vehicles capable of operating on them. In this regard, some 
of the provisions of your bill, especially those regarding the 
elimination of a manufacturer's CAFE credits, are of concern to us. But 
given our shared goal of increasing the number of FFVs, we look forward 
to working with you and other Members of the Congress to resolve any 
different approaches we may have on this extremely important issue.
            Sincerely,
                                            Tom W. LaSorda,
                                                 President and CEO.

    The Chairman. They came, recently, to Washington, within 
the last two weeks or so and met with several of us. They have 
written back that they understand the need for alternative 
energy. They understand the need for fuel economy. They pledge, 
in this letter, that, quite apart from ads that I--we've all 
seen in the national papers--that the three companies will 
provide at least 1 million flexible-fuel cars in this 
production year. They pledged to increase that to at least 2 
million by the 2010 production year.
    Now, even that, we might say, is still very slow progress 
with regard to an entire fleet of cars in this country, but 
here is a public statement that this is important, in terms of 
their policy, producing cars in a commercial world in which 
they have to sell those cars. And then, furthermore, they point 
out, correctly, that a lot of E85 pumps are going to be 
required at filling stations around the country. And so, 
they're very hopeful that their friends in industry will take 
that seriously.
    Here you have advocacy by American business people who have 
come and visited with Members of Congress. They have come back 
and written down on a piece of paper to us, ``We pledge to do 
these things,'' because they are very important for America and 
for our energy policy, if there are not to be severe 
adjustments in the standard of life to which we've become 
accustomed.
    The good news is that there were also listeners and dialog 
that produces results, sometimes of a nongovernmental 
character. No one has mandated anybody to produce flexible-fuel 
cars, but there's a recognition, as Americans, that this is 
tremendously important to do. My guess is that other people in 
other countries, likewise, may have similar sentiments if they 
understand that there's a vanguard of the faithful prepared, 
really, to offer leadership in this regard.
    We appreciate your papers and your testimony very much as a 
part of this dialog. We look forward to staying in touch with 
all three of you.
    And before I conclude this hearing, let me ask if any of 
you have a final comment for the record this morning.
    [No response.]
    The Chairman. Very well. We thank you and ask that you stay 
in touch, as I've mentioned.
    And the hearing is concluded.
    [Whereupon, at 10:50 a.m., the hearing was adjourned.]

                                  
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