[Senate Hearing 110-668]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-668
 
                   OIL, OLIGARCHS, AND OPPORTUNITY: 
                   ENERGY FROM CENTRAL ASIA TO EUROPE

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED TENTH CONGRESS



                             SECOND SESSION



                               __________

                             JUNE 12, 2008

                               __________



       Printed for the use of the Committee on Foreign Relations


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                COMMITTEE ON FOREIGN RELATIONS          

           JOSEPH R. BIDEN, Jr., Delaware, Chairman          
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
              Antony J. Blinken, Staff Director          
       Kenneth A. Myers, Jr., Republican Staff Director          

                             (ii)          

  


                            C O N T E N T S

                              ----------                              
                                                                   Page

Baran, Zeyno, director, Center for Eurasian Policy, Hudson 
  Institute, Washington, DC......................................    26

      Prepared statement.........................................    30


Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware...........     1

      Prepared statement.........................................    13


Brzezinski, Hon. Zbigniew, counselor and trustee, Center for 
  Strategic and International Studies (CSIS), Washington, DC.....     1


Fuerth, Leon, research professor, The Elliot School of 
  International Affairs, the George Washington University, 
  Washington, DC.................................................    14

      Prepared statement.........................................    22


Kupchinsky, Roman, partner, Azeast Group, Mahwah, NJ.............    37

      Prepared statement.........................................    39


Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared 
  statement......................................................    15

                                 (iii)

  


                   OIL, OLIGARCHS, AND OPPORTUNITY: 
                   ENERGY FROM CENTRAL ASIA TO EUROPE

                              ----------                              


                        THURSDAY, JUNE 12, 2008

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:33 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Joseph R. 
Biden, Jr. (chairman of the committee) presiding.
    Present: Senators Biden, Bill Nelson, Cardin, Lugar, and 
Hagel.

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

    The Chairman. The hearing will come to order, please.
    I welcome all our witnesses. After a brief conversation 
with my colleague, Senator Lugar--we have a very distinguished 
group of--who are going to testify today, none more 
distinguished than the Honorable Zbigniew Brzezinski, and 
because of a 3 o'clock vote, and because of a time constraint 
our first witness has, we're going to do something a little 
unusual. Senator Lugar and I are going to forgo our opening 
statements and invite Mr. Brzezinski to make his statement. 
We'll get a chance to answer--ask him some questions, and we 
will then give our opening statements.
    But, we're honored to have you here, Zbig. We're honored 
that you would come before the committee. And you're--as you 
can tell by the way we're proceeding, we always look forward to 
your testimony. And so, the floor is yours.

 STATEMENT OF HON. ZBIGNIEW BRZEZINSKI, COUNSELOR AND TRUSTEE, 
    CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES (CSIS), 
                         WASHINGTON, DC

    Dr. Brzezinski. Thank you very much, Mr. Chairman. Thank 
you, Senator Lugar.
    I'm not an expert on the energy problem, as such, but I am 
willing to discuss that issue in the larger context, both of 
the longer range and the shorter range prospects for the 
relationship with Russia. And let me, accordingly, do so.
    I very much partake of the view that, in the long range, 
Russia and Euro-Atlantic community will come to share deeper 
and larger and wider interests. There is a fundamental comity 
of historical purpose, of culture between Russia and the rest 
of Europe, and I envisage, at some point in the more distant 
future, the emergence of something that has been vaguely 
describe as a larger community, from Vancouver to Vladivostok. 
In that broad context, closer energy cooperation between the 
West, the European Union, and Russia--namely, Russia provides 
the energy, the West provides the foreign direct investment--is 
a shared interest, and it is a balanced interest, and it is an 
interest that potentially produces positive geopolitical 
consequences.
    The problem is not in the long run, the problem is in the 
short run, because in the short run that shared long-term 
interest can become quite complicated, and, indeed, aspects of 
it will begin to collide against one another. More 
specifically, I have in mind several policies currently pursued 
by Russia that, in my view, create complications that adversely 
affect that otherwise desirable long-range vision.
    First of all, we have the problem of Russia's ongoing 
efforts to limit the West's role in upstream aspects of energy 
cooperation, even while Russia energetically promotes its right 
to seek more active downstream role. That asymmetry is a 
problem.
    Second, Russia seeks, very actively, to isolate the central 
Asian region from direct access to the world economy, and 
particularly to its energy supplies.
    Third, we have had repetitive cases of Russian pressure on 
Ukraine, a pressure derived from political concerns and 
otherwise unrelated to the energy relationship, as such.
    We have, fourth, seen instances of possible threats to 
Georgia from Russia, motivated not so much, in reality, by any 
serious territorial problems, though there are territorial 
problems between Russia and Georgia, but derived more from the 
desire to gain a controlling hand over the Baku-Ceyhan line. If 
the Georgian Government were to be destabilized, Western access 
to Baku, to the Caspian and beyond would be limited.
    And last, but not least, we have seen a number of instances 
of energy supplies being cut to both the countries, for 
political reasons. These instances have been repetitive, they 
have occurred in several instances since 2002, and they 
continue to this day, insofar as actual cutoff of supplies for 
political reasons is concerned.
    Moreover, beyond the specific problems, there is the 
potential, but quite serious, short-term asymmetry or 
vulnerability in the existing relationship between the European 
Union and Russia, insofar as energy supplies are concerned. To 
be sure, the EU needs Russian energy. To be sure, Russia needs 
the EU's direct investments. But, the problem is that, in any 
hypothetical cutoff, the consequences for the West would be 
immediate, the negative consequences for Russia would be much 
delayed, the stoppage in the flow of energy would have an 
immediate political and social impact, and a halt in Western 
direct investment, even any restrictions imposed on Russian 
investments in the West, would only make themselves felt much 
later. And thus, the political consequences would be 
asymmetrically unfavorable to one party--namely, to the EU--and 
more advantageous to the party imposing them.
    Thus, we need a policy in the West that, in fact, enhances 
the prospects that short-term cooperation will be more 
consistent with the otherwise desired long-term interdependence 
between the West and Russia. And that should be the object of 
Western policy.
    Let me, therefore, in a nutshell, summarize a few points 
pertaining to what needs to be done.
    First of all, the West should more consistently, and at a 
higher level, seek more direct access to Central Asia. The fact 
is that Central Asian leaders would welcome that, but they're 
in a squeeze, they're basically isolated and vulnerable. It is 
up to the West to push hard to establish more direct links with 
Central Asia and to promote more direct opportunities for 
access. This means pushing the Baku line, the so-called 
``southern access to the East'' for the Baltic countries--
Turkey, the Black Sea, through Caspian; it means, eventually, 
even a much more energetic effort to explore the possibilities 
of a pipeline through Afghanistan from Central Asia to the 
south. That would maximize access to the Central Asian markets, 
energy markets, for the world community.
    Second, we need to back the Baltic States, as well as 
Sweden, as well as Poland, regarding their reservations 
concerning the north-stream pipeline being planned from Russia 
to Germany. The ecological concerns that have been articulated 
in this context are pertinent, they have political 
implications. I think there is a reason to be responsive to the 
concern of the states affected--Sweden, Poland, the Baltic 
States--and the United States should do so.
    In addition, we should encourage Germany to diversify the 
benefits of any North Stream flow, once it becomes available, 
to make certain that it is not limited to Germany alone, but 
that countries east of Germany, which are part of the EU, would 
benefit from these additional supplies, as well.
    I think, in this regard, the negative role played by a 
former German chancellor who is now an employee of Gazprom is 
noteworthy, and it does introduce a complication which cannot 
be entirely ignored.
    Third, we should encourage and support the flow of energy 
from Odessa and east of Odessa, from the Caspian Sea region and 
Central Asia up to Brody, in Poland, and thence, either north 
to the refineries in Poland or west to Western Europe. 
Moreover, the West should more actively press Ukraine to 
enhance the opportunities for Western investment in the Ukraine 
energy sector, which has become very much dominated by corrupt 
practices, and has become rather exclusive.
    Fourth, we should encourage continued support of the West 
for Ukraine and Georgia, given their vulnerability and the 
risks that would arise to the West if these countries were in 
any way subordinated or limited in their freedom of action. And 
I've already mentioned the significance of Georgia to the 
continued independence of the Baku-Ceyhan line and Western 
direct access to Azerbaijan.
    Fifth, we should seek greater symmetry between 
opportunities for Russia's downstream investments in return for 
Western opportunities upstream in Russia. That is an issue 
regarding which the Europeans would be responsive, and symmetry 
in this regard is desirable.
    Last but not least, in the longer run we should also not 
ignore the significance of Iran's potential energy contribution 
to Western energy independence. We have to be aware of the fact 
that energy diversification, which we seek as a goal, would 
become easier if both oil and gas from Iran became available to 
Western purchasers. That, of course, is related to the ongoing 
crisis with Iran, but it is a calculation that should also be 
taken into account in any grand strategy that we choose to 
define.
    In brief, Mr. Chairman, you have before you an issue of 
enormous complexity regarding which a much more purposeful 
Western response is needed and much more visible American 
leadership is needed. I have great respect for the U.S. 
officials that have been toiling in this area, and have been 
doing their best to improve the prospects of the West, but I am 
concerned by the fact that, by and large, this issue has not 
had the kind of leadership visibility in the United States that 
is needed for very good geopolitical and historical reasons, 
and particularly reasons related to the much more promising 
vision of the longer range relationship with Russia, which I 
mentioned briefly at the outset of my remarks.
    Thank you.
    The Chairman. Thank you very much.
    Let me start off with a question. I think on the surface 
something you said that seems inconsistent. You talk--and I 
fully agree--that the long-term prospects for being able to 
work with Russia are promising, but short-term cooperation is 
the issue, and we need a strategy to enhance that cooperation, 
short term. And then, the things which you've listed, none of 
which at least I personally disagree with, from more direct 
access to Central Asian leaders to pushing the Baku line, et 
cetera--on the surface, they seem to fly in the face of what 
the Soviet--what the ``Soviets''--Freudian slip--what the 
Russians would view as cooperation. My impression is, based on 
Putin's actions--which I think are very, very aggressive, in 
Georgia, but also in Azerbaijan-- are directly related to the 
one thing we don't want to see happen, a disruption of the oil 
flowing through Georgia, through Turkey, and into Western 
markets. So, can you square that circle for me? How do you 
think--can you tell us, from your perspective, how they view 
this notion of greater Western access to oil that is in Central 
Asia beyond their direct control?
    Dr. Brzezinski. I think it's quite evident, from the 
record, that the Russian approach to this issue is essentially 
derived from a monopolistic ambition; namely, to maximize the 
degree of Russia's control over energy resources of the entire 
former Soviet Union. And, in that sense, the newly independent 
states that are major producers of energy are viewed by the 
Russian leadership as somehow subordinate to the Russian desire 
that their access to the world economy be channeled exclusively 
through Russian territory, through Russian facilities. In any 
sort of business relationship, obviously there is a temptation 
to maximize one's control to widen the scope of one's 
monopolistic authority. It's true to any contractual business 
relationship, almost. But, the party involved in that 
relationship--namely, the West--has every reason to oppose the 
effective implementation of such a state of affairs, because 
its longer range consequences are potentially dangerous. So, 
we----
    The Chairman. Was the----
    Dr. Brzezinski [continuing]. Shouldn't be shy in speaking 
up, in raising these issues, but we should also be more active, 
at a very high and visible level, in negotiating, particularly 
with those non-Russian suppliers who, in the long run, want to 
be accessible to the world, but, in the short run, are 
squeezed.
    The Chairman. Yup.
    Dr. Brzezinski. And the top leaders in these countries, by 
and large, are also top energy executives, and, in fact, 
probably benefit from it materially, as well. They have to be 
approached at a very high level with a degree of respect for 
their sensitivities and vulnerabilities.
    The Chairman. Chairman Lugar has been preaching from this 
hymnal for a long time about the potential benefit that can 
flow from this access. In the last 2 months, I have recently 
attended several conferences with our EU and NATO partners, and 
what I'm a little surprised at--and I wonder if you could, (a) 
tell me whether you see the same thing, and (b) if you do, an 
explanation as to why--is the failure of a direct, coordinated 
European Union-United States response to the very heavyhanded 
way in which the Russians have used their oil dollars and oil, 
and access to oil, to apparently affect policy, from the 
expansion of NATO to maintaining this and increasing the 
prospect of a monopoly.
    I find it surprising that--from my perspective--that Russia 
has been as effective in dividing Europe, preventing it from 
coming up with coherent, aggressive strategy to--not just with 
us, but with them, at the highest levels--deal with these 
central powers, to generate the very access to oil that we're 
all talking about. Am I making any sense by the question?
    Dr. Brzezinski. Yes; you are. And I think there are several 
causes for this condition, which you describe very accurately. 
First of all, the fact is that over the last several years, for 
reasons that we know all too well, there has been a rift in the 
Atlantic relationship, and, as a consequence, it has become 
more difficult, in general, to shape a common Western policy. 
Hopefully, that will begin to end, one way or another, after 
the elections, but that reality, I think, has impeded a common 
transatlantic position on this complex issue.
    Beyond that, within Europe itself, the absence of this 
common Atlantic posture has further enhanced different European 
emphases on the part of different European players. So, we 
have, in Germany, a former chancellor, in effect, becoming an 
employee of a major Russian conglomerate, which itself is an 
extension of a Russian state. That's a rather peculiar 
circumstance. We have an Italian Prime Minister, currently and 
recently returned to office, who practically made a sport out 
of genuflecting in front of Putin. We have a government in 
Greece that, for a variety of historical reasons--the Cypriot 
problem, the conflict with Turkey--has been much more 
sympathetic to some of the Russian initiatives in the energy 
sector. We have a government in Hungary which has been 
strangely receptive to Russian behests, and maybe even 
financial inducements, which has, thus, adopted a stance on the 
Nabucco pipeline, which has been damaging to it. Very recently, 
we have had some financial interests in Austria pointing in the 
same direction.
    Now, all of these divergent orientations or strands of 
conduct were made more possible by the rift in the Atlantic 
relationship. If that relationship had been closer, it would 
have been possible to maintain a common perspective on global 
issues. Some of these tendencies would not have manifested 
themselves.
    The Chairman. Thank you very much. My time is up.
    Senator Lugar.
    Senator Lugar. Thank you, Mr. Chairman.
    Dr. Brzezinski, you were present at the Riga summit of NATO 
at a time that I gave a talk about the need for NATO to 
consider cutoffs of energy, or aggression of that sort, as an 
article V situation in terms of having supplies and a plan, not 
in the sense of sending troops. Now, I don't know what the 
reaction was as people visited with you; as they came up to me, 
they pointed out, ``Well, you make a lot of sense. But, this is 
something we don't talk about publicly. This is a private 
business for each one of us, in an existential way, to work 
out.'' Subsequently, EU and NATO conferences have been held, 
but they've had the results that you've described well, country 
by country.
    I took a trip in January to Kazakhstan and Turkmenistan, to 
name two of the countries that are in the orbit you described. 
In both cases, the leadership understands the desirability of 
having a portfolio of something beyond direct pipelines to 
Russia so that they have diversification. But, in the case of 
the Kazakhs, they have, also, issues with other private oil 
companies working out the Kashagan field problem, which is 
still daunting. In the case of Turkmenistan, our relationship 
is a very new one, with the new government. At the time of my 
visit, we had no ambassador there, and we still do not.
    I mention this because President Putin himself was 
personally on the phone with the Presidents of Kazakhstan and 
Turkmenistan. He personally has been a negotiator, to underline 
your point of strategic importance. At best, our diplomacy with 
regard to all of this has been fledgling. We are thinking about 
these issues in meetings like one with you today, but 
diplomatic activity has been much less than desirable. Our 
trips to Ukraine have demonstrated that point. The point that 
you've made about the lack of development in Ukraine, of energy 
resources that are in that country, is manifest, even though 
the vulnerability is very clear to President Yushchenko. I came 
away from that trip with the feeling that the United States 
cared more about the energy problems of many European states 
than the leadership does. Now, that's an unfair judgment, 
obviously. They understand their problems, but, at the same 
time, are, really, unwilling to take steps toward unified 
policy in Europe. Maybe the rifts with us--that is, the United 
States--are because they don't want to talk to us a whole lot 
about those problems.
    We saw the Czech Foreign Minister yesterday, here at a 
coffee the Foreign Relations Committee had, and I asked about 
the Nabucco pipeline. He said that hopefully something will 
come of the pipeline. It's been having so many reverses, it's 
really not clear. But, for the moment, the Czech situation is 
just as grim as it was a year or two ago.
    I raise all of this because I'm wondering where, maybe, as 
you say, the election brings a new President, a new 
administration, a new relationship, somehow either the EU or 
NATO, one or the other, begins to take hold of the problem. 
But, at this particular point, this is a pretty bleak terrain.
    Now, one good point is that the Azeris have been reaching 
out to the new Turkmenistani Government--I think, with some 
good results. And, likewise, they are trying very hard to get 
the Kazakhs more interested in their pipeline. Georgia still is 
alive and able at least to support that part of it. And the 
Turks could have additional pipelines if our relationship there 
might improve and we had needed dialogue.
    What optimism do you have, as you analyzed the problem so 
well today, that those that we are hoping to help, as the 
potential victims of this kind of aggression, will take some 
steps to help themselves and to work with us or to work with 
others?
    Dr. Brzezinski. Well, first of all, let me note that I was 
in Riga when you gave your speech, and I thought it was a 
terrific speech at the time. And I think it is a well known 
fact that people like yourself, like the chairman and others, 
have taken more of an interest in this issue than our executive 
branch at a very high level. And there has been a woeful lack 
of a real strategic involvement of our top leaders in this 
issue, and of their public involvement on this issue.
    In addition to it, there have been conflicting signals from 
the United States. We have occasionally signaled to the effect 
that a strategic partnership with Russia was already a reality; 
whereas, at best, it's only in the process of emerging, and 
that we have not been particularly responsive to some of the 
concerns of some of the European states that wish to take the 
lead on this issue, but don't have very visible American 
backing even in their own internal intra-European discussions.
    Worse than that, occasionally there are even some signals 
from here, from one of your colleagues, a Senator from New 
York, who recently advocated to deal with Russia on Iran, which 
would, in effect, leave the former Soviet space to the tender 
mercies of the Kremlin. That also sends a signal to the 
Europeans that's perplexing.
    So, I think, ultimately, the issue of leadership in the 
West still depends on what transpires in the United States; how 
visibly, at what level, and how energetically is the United 
States engaged in shaping some sort of response. If we do that, 
then I think the Europeans are much more likely to begin to 
diminish their internal differences and begin to take a common 
stand.
    There is a constituency within the EU, of roughly half the 
members of the EU, which is quite alarmed over this issue, but 
there are a few key countries that are in a position either to 
obstruct the emergence of a common policy or, in some more 
extreme cases, to make their own deals.
    Senator Lugar. From your own experience in the 
administration, who should take this initiative? The President 
the Secretary of State, Secretary of Energy, or some special 
person delegated for this? How should we organize ourselves?
    Dr. Brzezinski. Well, I would think that the public 
leadership and signals of real interest in the issue ought to 
come from the President, because these issues involve also the 
vital interests of our key allies, from the Secretary of State, 
as well. And then I think it would be highly desirable if there 
was some individual who had the capacity to set in motion 
genuine initiatives on an intradepartmental basis, because the 
issue itself is wider than the jurisdictions of any particular 
department, including the Department of State.
    Senator Lugar. Thank you very much.
    The Chairman. Thank you.
    Senator Nelson.
    Senator Bill Nelson. Mr. Chairman, thank you.
    And they've just called the vote, so I'll be mindful of 
that, and do it quick so that Senator Hagel--
    What dramatically illustrates to me the threat to Western 
interests, which is what I want to ask you, is the map that's 
been supplied from the Department. You can't see this from 
there, but basically this is the existing gas fields and 
pipelines delivering natural gas to Europe, and most of those, 
in red [slightly darker in black and white], are controlled by 
Russia. And then, this is what is expected in 2020, in 12 
years, that Russia still has its ability, but then there's the 
alternative of the South Caucasus pipeline and its extension on 
into Eastern Europe and into Southern Europe. And if that were 
not to occur, if Russia kept it like this, then doesn't that 
mean that they're going to exert political control, not only 
the gas from which they take it in Central Asia, but the gas 
and oil that they are sending it to in Europe?
    Dr. Brzezinski. Well, we know from recent years that when 
the opportunity arises, and particularly when the other party 
is much weaker, as, for example, the Baltic States, the 
reluctance to succumb to the temptation to use power--energy as 
political influence is very weak. The temptation is overriding. 
It has happened. So, that is precisely why the West has to be 
concerned.
    I do think that, with some imagination and some initiative, 
it is possible to enhance diversification to obtain more access 
to Central Asia, either through the Caspian, more directly to 
Turkmenistan. And the new President of Turkmenistan seems to be 
at least interested in that possibility. There is the longer 
range Afghan possibility, pipelines to the south. And last, but 
not least, we shouldn't forget that Iran, which I don't think 
is going to be forever hostile toward us, is potentially a very 
major supplier of, not only oil, but especially of gas.
    Senator Bill Nelson. Frequently, what they will say--and, 
Senator Hagel, I'll stop with this question, because I want to 
hear your questions--frequently, they will rebut that, saying, 
``Well, no, Russia really isn't going to have control, because 
Russia needs Europe and their energy market.'' And what's the 
answer to that, that Russia needs the European markets?



    Dr. Brzezinski. Well, it's true, actually. But, the problem 
is the asymmetry of consequences in the event of crisis. If 
there's a crisis and a cutoff, the recipients of the energy 
suffer immediately, the beneficiaries of reciprocal FDI suffer 
much later, which gives the aggressive party 6 months to a year 
during which to really insist on accommodation to its demands. 
And that's the problem.
    Senator Bill Nelson. Could Putin's title change from prime 
minister to tsar?
    Dr. Brzezinski. Putin's title has changed from President to 
National Leader and Prime Minister--the term ``National 
Leader'' is quite often used. The National Leader of fascist 
Italy was the Prime Minister, the head of the state was an 
impotent king. The head of the state in the Soviet Union under 
Stalin was a person whose name practically nobody in this room 
will remember, but the effective leader was a person who didn't 
have any state position: Stalin.
    Senator Bill Nelson. Well said.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Hagel.
    Senator Hagel. Senator Nelson, thank you.
    Welcome, Doctor. I wanted to make just a brief overview 
comment on your testimony, and then ask you a specific 
question.
    I subscribe to your analysis that you have presented; in 
particular, more direct and complete and wide-lens engagement 
in this part of the world. If there was ever an area that is 
clearly in our interest, and, in fact, our interests intersect 
from upstream to downstream, to use the term you used, the 
energy term, from Russia through Central Asia and deep into 
Europe, that intersection of interests for America is very 
clear. Why we have not, evidently, understood that, or why we 
have not framed a reference point and implemented policy to 
address that, I don't know. But, as you note, we will have a 
new opportunity, come January, with a new President, new 
administration, new Congress. And I would, like you, Doctor, 
hope that this will be very high on the agenda, because it does 
interconnect all of our interests in a very vivid way. And I 
don't know of a more vivid way than energy for the world.
    You just noted again, in your response to Senator Nelson, 
the possibility of Iran playing some potential role here. That 
obviously would require a different frame of reference than our 
current policy toward Iran. And I happen to also agree with 
your thinking, that we've got to think beyond today and frame 
the world in what's possible, and then do that in a strategic 
context, not compartmentalize, like I think we have been in 
every country in the Middle East and on. But, we are where we 
are. We have another opportunity coming up.
    Would you define the Iran comments a little more 
specifically as to what you see that could possibly happen, 
potentially, as you had noted in your testimony, as well as 
your response to Senator Nelson?
    Thank you.
    Dr. Brzezinski. I happen to believe that the present 
character of the Iranian regime is quite transitional, that the 
large majority of younger Iranians--they are now the most 
significant part of the Iranian society--is not sympathetic to 
their fundamentalist fanaticism, that they want to be, in 
varying degrees, increasing the part of what might be called 
the Western way of life. This is a very sophisticated country, 
which, in many respects, is a potentially stabilizing force in 
the Middle East, as it was in the past. It is a country which, 
at one time, had a very good relationship with Israel, a 
strategic relationship with Israel, based on the principle 
that, ``The neighbor of my neighbor is my friend.'' And I think 
that is a natural geopolitical relationship between Iran and 
Israel. And hence, the longer range prospects, if we're 
intelligent about it, and if we don't plunge into some sort of 
a conflict with Iran which then is likely to absorb us for many 
more years in the current problem in Iraq, I think the prospect 
of real geopolitical change in Iran's orientation is pretty 
good in the long run. But, we have to be intelligent and 
patient about it.
    And if that happens, then all of the energy resources of 
Iran could be part of the answer to what we're discussing. Part 
of the answer. Not the entire answer, but part of the answer, 
because Iran has enormous gas reserves, probably the second 
largest in the world. It has underutilized oil supply. They 
have a very retarded energy sector. If they became part of the 
international community, so to speak, of the world economy, we 
would be the beneficiaries, in terms of price; the Europeans 
will be the beneficiaries also, in terms of diversification.
    So, there is this additional element in the background of 
the current crisis which obviously cannot determine our 
strategy and tactics towards the challenge, the ongoing crisis, 
but which should not be ignored as a later aspect, a beneficial 
aspect, of a constructive resolution of the problem.
    Senator Hagel. Thank you.
    The Chairman. Time is up.
    And you've been gracious with your time. You can choose not 
to answer this question, but there's an awful lot of talk in 
this town--we don't know whether it's true--that there may be a 
very short-term view about Iran between now and the election, 
and that there may be some provocation, either emanating from 
us or from Israel. What would be the consequences, in terms of 
the issue we're talking about here, if, in fact, there were a 
direct confrontation, physical confrontation, a military 
confrontation, in some way, with Iran now?
    Dr. Brzezinski. I think the consequences, in the short run, 
would be extraordinarily destabilizing, insofar as a calm and 
rational electoral process in this country is concerned. And I 
think it would create public anxiety and anger, both of which 
will be very susceptible to demagogy. And it would make a 
rational national choice more difficult.
    In the longer run, by becoming involved in some sort of a 
collision precipitated by the hypothetical events that you have 
mentioned, the United States would become bogged down in an 
ongoing conflict, which would then span Iraq, Iran, 
Afghanistan, probably Pakistan, and we would be bogged down for 
many, many years to come, unable to exercise a constructive 
global role, with some countries that we have a complicated 
relationship with clearly benefiting from that, in terms of 
their influence. Certainly, in terms of the issue we have been 
discussing, it would obviously be adverse to our interests, of 
the interests of the West. And I think we would enter a much 
more chaotic phase in world affairs.
    So, I certainly hope that, in the foreseeable future, 
common sense and rationality will dominate our approach, and 
that no one seeks to exploit what is a very vulnerable 
situation for very short-term national benefits.
    The Chairman. Doctor, we should have you here more often. I 
appreciate you taking the time.
    We have two distinguished panelists to follow. We're going 
to recess to go vote. We'll be back. At which time, I'm going 
to make an opening statement, and Senator Lugar will make an 
opening statement. We've already opened, but we'll both make a 
statement, and then we'll invite our panelists to make 
comments, and then we'll ask questions.
    Again, Dr. Brzezinski, it's always a pleasure to have you 
here. I always learn something when you are here.
    And we are now recessed to vote. We'll be back in about 10 
minutes.
    Dr. Brzezinski. Thank you, Mr. Chairman.
    [Recess.]
    The Chairman. We'll come to order.
    I thank the witnesses for their indulgence. Probably all of 
you know, but I know for sure Leon knows the way this place 
works; we're like Pavlov's dog, the bell goes off and we have 
to respond.
    We have a very distinguished panel: Dr. Leon Fuerth, 
research professor at The Elliot School of International 
Affairs, George Washington University; and Ms. Baran, who's the 
director of the Center for Eurasian Policy, the Hudson 
Institute, in Washington, DC; and Mr. Kupchinsky--am I 
pronouncing it correctly? Mr. Roman Kupchinsky--I said it right 
the first time--is a partner in--is it pronounced the AZ----
    Mr. Kupchinsky. AZEast.
    The Chairman.--AZEast Group, from New Jersey.
    And we welcome all of you here. And I think what I'll do, 
since the chairman got grabbed, as he was getting in the 
elevator, by a group of press people--why don't we do our 
statements? I apologize to you all having to listen to this, 
but I'm going to ask unanimous consent--and since I'm the only 
one--no, I'm not the only one here, I see Ben Cardin is here--I 
might be able to get it--to ask that the opening statement I'm 
about to make be placed at the appropriate place in the record.
    Senator Cardin. I was going to object, Mr. Chairman, as I 
really wanted to hear it, but I won't object. [Laughter.]
    The Chairman. Well, I'm going to be very brief and put my 
statement in the record, but I'd like to hear, if he's back in 
time, Senator Lugar's statement.
    The biggest worry for American families today is the state 
of the economy, and the biggest worry of our economy is the 
explosive rise in the price of oil. And, as we all know, it's 
hitting family budgets every time they fill up their tanks. 
And, as we heard in a previous hearing in this committee, our 
dependence on oil has weakened our economy, driven up our 
defense expenditures, and put our foreign policy in a 
straightjacket, and that's why, following the leadership of 
Senator Lugar, this committee has made an issue of energy 
security and its role in our foreign policy in the focus of 
many of our hearings in recent years, and will continue to be 
the focus of additional hearings.
    We already heard from Dr. Brzezinski on the game being 
played out in the Caspian Sea region, and, as he pointed out, 
the stakes are very high, they involve hundreds of billions of 
dollars in oil and infrastructure, and the resurgence of Russia 
and the emergence of the issue of energy security in Europe. 
And it has played out in the region, rife with its own 
historical instabilities, shifting alliances of shaky regimes. 
And this region is one of immense importance to our security 
and the security of our allies. The mostly Muslim nations that 
are uncertain whether to look East or West are the field on 
which these issues are being played out. Its energy resources 
could offer significant additional supplies to the global 
market that is basically maxed out now. But, there is also 
opportunities there for us to pursue, opportunities for 
diplomatic and security successes, that could contribute to a 
more stable region and a more stable global energy future.
    These opportunities are out there, but only if we seize 
them and only if we give this region and these challenges the 
attention, resources, and diplomatic skills they need, and, as 
Dr. Brzezinski says, attention at the highest levels of our 
Government.
    So, the--I would ask unanimous consent the remainder of my 
statement be placed in the record. But, let me end by saying 
that I cannot think of anything that is of a greater 
consequence to our foreign policy right now; and the key, to me 
at least, is figuring out how--and I'm going to ask the 
witnesses this--how we can form a common response by the West 
to the power of the energy exporters.
    So I hope we'll explore those issues. And, unless Senator 
Lugar is in the wings here, I don't want to hold the panel up 
any longer, I would--is he out there? OK.
    [The prepared statement of Senator Biden follows:]

           Prepared Statement of Senator Joseph R. Biden, Jr.

    The biggest worry for American families today is the state of our 
economy. And the biggest worry for our economy is the explosive rise in 
the price of oil. It is hitting family budgets every time they fill 
their tanks--it threatens a new wave of inflation as the price of 
everything from food to textiles to chemicals is pulled up by 
skyrocketing oil prices. As we have heard in previous hearings before 
this committee, our dependence on oil has weakened our economy, driven 
up our defense expenditures, and put our foreign policy in a 
straitjacket.
    That is why, following the leadership of Senator Lugar, this 
committee has made the issue of energy security and its role in our 
foreign policy the focus of many hearings in recent years. We will 
continue that focus with additional hearings.
    Today we will hear from a panel of distinguished witnesses, 
beginning with Dr. Zbigniew Brzezinski, on the Great Came being played 
out in the Caspian Sea region. The stakes are high. They involve 
hundreds of billions of dollars in oil and infrastructure, the 
resurgence of Russia, and the energy security of Europe.
    It is played out in a region rife with its own historical 
instabilities, shifting alliances, and shaky regimes. And this region 
is one of immense importance to our security and the security of our 
allies. It is mostly Muslim nations that are uncertain whether to look 
West or East. Its hydrocarbons fuel Europe and could offer additional 
supply for a global market that is maxed out.
    But there are also opportunities there for us to pursue, 
opportunities for diplomatic and security success that could contribute 
to a more stable region and a more stable global energy future. These 
opportunities are there, but only if we seize them, only if we give 
this region and these challenges the attention, resources, and 
diplomatic skill they need--at the highest level.
    As complicated as the flows of oil and gas into, through, and out 
of this region look on a map, the basic elements we will examine today 
are clear.
    Russia controls the old, Soviet-era infrastructure for moving oil 
and gas in the region. That infrastructure reinforces Russian influence 
because on top of its own oil and gas, Russia is the major buyer of its 
neighbors' hydrocarbon resources and a major seller of those same 
resources, through its pipelines to Europe. that arrangement suits 
Russia just fine. As we discussed in our hearing yesterday on Sovereign 
Wealth Funds, Russia has amassed a ``Stabilization Fund'' of over $127 
billion. They have used some of that wealth to buy into the parent 
company of Airbus, and have threatened to expand those holdings 
substantially. That company is a major European defense supplier.
    No wonder the President and Prime Minister of Russia spend more 
time running Gazprom than they do running the country. It is not just 
the sheer volume of oil and money that is enhancing Russia's power; 
they have shown that they are willing to use their dominance of both 
ends of most existing pipelines to extract not just economic deals, 
but, increasingly, political influence.
    Russians love chess. Our strategic response on the chess board of 
Central Asia must be to establish a presence on parts of the board they 
do not yet control. That means laying down new pipelines that add 
alternatives--that introduce real competition--to the monopoly Russia 
has enjoyed. Giving more choices to both suppliers and customers should 
help wring waste and inefficiency out of the system--bringing a 
situation where supply and demand, not threats and bribes, set prices.
    Those pipelines need not just billions of dollars of investment, 
but also the rule of law, property rights, and predictability that 
investor demand. Those pipelines require building alliances among the 
nations they traverse, the suppliers needed to fill the pipelines, and 
the consumers at the other end.
    And we need diplomacy to forge a common strategy among energy 
consuming countries in Europe, a shared effort that can confront 
Russian dominance. That puts diplomacy at the center of our approach to 
this region. a key question for this hearing must be: Are we deploying 
the diplomatic resources, the attention, this issue demands?
    Senator Lugar and I are particularly interested to know if our 
government has the right people, in the right positions, to achieve our 
goals. Do we have the right pieces in play to confront the Russian 
position?
    One way to form a common response to the power of energy exporters 
is a global deal to reduce the threat of climate change by cutting 
emissions from fossil fuels. That will mean global-scale commitment to 
alternatives and to rules that give investors a predictable future, a 
smart deal that protects economic growth. The longer we delay that 
deal, the longer we delay our own domestic energy and climate plan, the 
weaker our hand in dealing with Russia, or with OPEC. Our addiction 
empowers them.
    I have worked with Senator Lugar on a Resolution calling for 
renewed U.S. leadership in international climate negotiations. Progress 
on those talks will be part of a move away from our dependence on oil, 
the root of so many of our foreign policy issues.
    Senator Lugar is a genuine expert on this region. He has been there 
more than half a dozen times, most recently in January of this year. 
He's the most senior U.S. official to visit Turkmenistan since their 
new President took office.
    I can't think of anything that is more important to our energy 
policy than the issues we will discuss at this hearing. Of particular 
interest to me, is why we seem to have an inability to form a powerful 
common response and how we can form that common response.
    I want to welcome Dr. Brzeznski back to this committee, and I look 
forward to hearing from our panel of distinguished experts on this 
topic.

    The Chairman. Why don't we begin, Dr. Fuerth, with you. And 
the floor is yours.

STATEMENT OF LEON FUERTH, RESEARCH PROFESSOR, THE ELLIOT SCHOOL 
  OF INTERNATIONAL AFFAIRS, THE GEORGE WASHINGTON UNIVERSITY, 
                         WASHINGTON, DC

    Mr. Fuerth. Thanks, Senator Biden.
    I have to begin my comments with a request to the 
committee, and that is that you expunge the title ``Dr.''--
``Professor'' will do. My grandmother would have been so proud 
if the Ph.D. were there also, but plain ``Mr.'' will do very 
well. Thank you.
    The Chairman. Well, ``Mister''----
    Mr. Fuerth. Excellent.
    The Chairman. The chairman just walked in.
    Would you like to make your opening statement?
    Senator Lugar. Well, Mr. Chairman, I'll just ask that my 
statement be made a part of the record----
    The Chairman. All right.
    Senator Lugar [continuing]. Because I'd like to proceed, as 
you would, with the testimony of our witnesses.
    The prepared statement of Senator Lugar follows:]

              Prepared Statement of Hon. Richard G. Lugar

    Increasingly, access to energy is at the heart of security concerns 
for nations around the world, including the United States. The Foreign 
Relations Committee has undertaken a series of hearings on energy 
security since 2005. Among other conclusions, these hearings have 
pointed to an urgent need for developing alternative energy sources, 
expanding the attention given to energy issues in our diplomacy, and 
improving alliance cohesion on energy matters.
    In 2006, at the NATO summit in Riga, Latvia, I asserted that the 
Western Alliance must commit itself to preparing a range of options for 
jointly deterring the use of energy as a weapon and responding if such 
an event occurs. I argued that it would be irresponsible for the 
European Union and NATO to decline involvement in energy security, when 
it is apparent that the jobs, health, and security of our modern 
economies and societies depend on the sufficiency and timely 
availability of diverse energy resources. I noted that energy may seem 
to be a less lethal weapon than military force, but a sustained natural 
gas shutdown to a European country in the middle of winter could cause 
death and economic loss on the scale of a military attack. Moreover, in 
such circumstances, nations would become desperate, increasing the 
chances of armed conflict and terrorism.
    Unfortunately, since Riga, the trend has moved away from European 
unity on energy supplies. Recently, Russia has concluded energy supply 
agreements with Greece, Bulgaria, Hungary, and Serbia. The Kremlin has 
an agreement with Germany to construct the Nord Stream pipeline and 
with Italy's ENI to construct the South Stream pipeline. The current 
go-it-alone approach by many European nations will result in increased 
European dependence on Gazprom, greater vulnerability to supply 
disruptions, and less alliance cohesion on critical foreign policy 
issues.
    Meanwhile, the oil and gas rich nations of Central Asia are relying 
almost exclusively on Russia to transport their energy exports. 
Undoubtedly, these countries have an interest in maintaining productive 
trade relations with their large northern neighbor. But Central Asian 
nations need only look across the Caspian Sea to Azerbaijan to gain a 
sense of the potential benefits of maintaining a second option for oil 
and gas exports.
    Gazprom's monopoly-seeking activities cannot be explained by 
economic motives alone. It is difficult to distinguish where the 
Russian Government ends and where Gazprom begins. Clearly Gazprom has 
sacrificed profits and needed domestic infrastructure investments to 
achieve Russian foreign policy goals. The Kremlin and Gazprom have shut 
off energy supplies to six different countries during the last several 
years.
    The trans-Atlantic community must do more to establish a credible 
energy security strategy that diversifies energy sources for all of 
Europe, establishes a collective framework to work with Russia, and 
refuses to tolerate the use of energy as an instrument of coercion. A 
first priority should be completing the so-called East-West energy 
corridor to bring oil and natural gas across the Caspian from Central 
Asia to distribution points in Central Europe. This will help diversify 
gas supplies to Europe, thus increasing its collective bargaining 
position. Success requires leadership in three key areas.
    First, the United States Government must bolster its diplomatic 
engagement with Central Asian nations. When I visited leaders in 
Kazakhstan and Turkmenistan earlier this year, they told me that they 
want more dialogue with the West. The willingness of these governments 
to discuss trans-Caspian alternatives will not be converted into 
investments on the ground without high-level engagement. Former 
President Putin's personal diplomacy has been critical to Russia's 
success. It is time for a U.S. President to visit Central Asia. 
Likewise, I encourage President Bush to invite the President of 
Turkmenistan for his first visit to Washington.
    Second, we cannot take for granted the progress made in Azerbaijan 
and Georgia. To ensure maximum benefit from the Baku-Tbilisi-Ceyhan and 
South Caucasus pipelines, the trans-Atlantic community must continue to 
support the democratic transformations in the Caucasus. An unfortunate 
result of the recent failure to grant Georgia a NATO Membership Action 
Plan is the appearance that Russian intimidation can affect the 
alliance's approach to Caspian security.
    Third, numerous NATO and EU Member States have pursued agreement on 
the critical Nabucco natural gas pipeline--intended to be the final 
link connecting Caspian energy resources with European consumers--but 
it is being challenged by the Russian-backed South Stream pipeline 
proposal that would cross the Black Sea. Reluctant European governments 
must be convinced that their long-term security interests are served by 
the Nabucco pipeline.
    Chairman Biden and I have urged the administration to appoint a 
special energy envoy to help address these issues. Ambassador C. Boyden 
Gray's appointment lends significant weight to this initiative by 
virtue of his close relationship with President Bush. United States 
backing for the BTC and SCP pipelines has been a strategic initiative 
embraced by multiple administrations and undergirded by bipartisan 
support. The Bush administration must make substantial progress on 
these projects during its last 7 months, and the next administration 
must hit the ground running on this issue.
    I thank the chairman for this hearing and join him in welcoming our 
distinguished witnesses.

    The Chairman. Well, Leon, as far as I'm concerned, you're 
still a ``Dr.'' We'll call you ``Professor.''
    Professor----
    Mr. Fuerth. ``Professor'' will do.
    The Chairman [continuing]. The floor is yours.
    Mr. Fuerth. Thank you.
    I'm going to try to keep this as close to 7 minutes as I 
possibly can, but I----
    The Chairman. We've kept you waiting. Don't worry about 
keeping us.
    Mr. Fuerth. It's just that 8 years of being a professor at 
GW has corrupted me; I'm used to a captive audience for 2 hours 
at a stretch.
    You've asked me to provide background on how the Clinton-
Gore administration recognized the significance of Caspian 
energy and how it organized itself to deal with the subject. 
But, I also understand that your interest in this subject is 
not simply historical, but is forward-looking. That is, you are 
searching that experience to see whether there is something in 
it that can apply to things that are still ahead of us as a 
country.
    The Chairman. That's correct.
    Mr. Fuerth. Well, my narrative on this subject actually has 
to begin 2 years before the Clinton-Gore administration took 
office, in the midst of the collapse of the Soviet Empire, 
because that collapse destroyed Russia's control of the Caspian 
region and created circumstances where new rules of the game 
could be written, and, in fact, had to be written, since none 
existed after the collapse of that order of business there.
    So, when the Clinton-Gore administration took office, we 
were doing so in the midst of the wreckage of an old world 
order; in fact, it felt as if pieces of that world order were 
still falling around our heads. And we felt that our 
predecessors in the Bush administration had handled this 
collapse with considerable skill, but it was up to us to figure 
out what next, on a field where most of the old ideas and rules 
of thumb had disappeared. It was a particularly critical time. 
We felt that the Russian Federation was at the edge of a free-
fall and that, for various reasons, you could not exclude the 
possibility of a complete societal collapse in a country which 
still controlled the world's biggest nuclear arsenal.
    So, at the very most senior levels of the Clinton-Gore 
administration, we had to confront this, where we also felt 
that there was a huge opportunity in the midst of these 
difficulties, because the Russian Government was in the hands 
of reformers who seriously wished to create a society based on 
the rule of law and on market economies. They may have had 
other motivations, but we dealt with them often enough and 
under conditions of duress, such that we concluded that that 
really was their dream.
    We understand that--well, we understood that there was only 
a limited amount that we could do to help this, but we also 
felt that this was a millennial opportunity to reconstruct the 
world political system on a foundation that included a more 
positive United States-Russian relationship.
    So, that is why the United States accepted President 
Yeltsin's proposal, which he made in April 1993 in the 
Vancouver summit, that both sides should establish a very 
senior group to help convert broad declarations of intent into 
actual change on the ground. Now, this was the point of origin 
of the United States-Russia Binational Commission, otherwise 
known as Gore-Chernomyrdin, after the two individuals who were 
responsible for it.
    That Commission began its operations in September 1993, and 
its first mutually agreed goals included cooperation in 
spaceflight and energy. There were no precedents for the level 
of collaboration that we both had in mind in this field. They 
were going to intrude almost equally--in equal measure upon 
areas of policy that both we and the Russians would previously 
never have opened up to each other to that extent.
    The Russians accepted our interest in their energy 
production, because they were in a bad way. Their energy fields 
were no longer producing, and, in fact, were producing, but 
were--at a declining rate. And that was because they had failed 
to invest properly in modernization and in good management. 
They needed foreign investment, they needed foreign technology, 
if there was going to be any hope of avoiding a situation where 
Russia was going to turn into a net importer of energy from the 
rest of the world. In fact, the only thing that prevented that 
from happening was the general condition of the Russian 
economy, which was so bad that their requirements for energy 
were, at least for that period of time, greatly reduced. If 
they were operating at a normal level, they would have to have 
been importing already.
    Over time, this commission expanded to include committees 
that covered almost the whole spectrum of societal life on the 
Russian side. When these commissions met in a given room, you 
had almost two-thirds of the U.S. Cabinet and about the same 
number of the Russian ministers present. And the success of 
this operation depended--if you're looking for clues to the 
future, it depended upon going way out of our way on both sides 
to build this on the basis of parity of respect and to look for 
ways to handle inevitable strong differences in such a way that 
both sides would come out feeling that their core interests had 
been protected in the final bargain.
    Well, the second expansion of NATO, in July 1997, is a 
prime example of that kind of challenge, and Caspian energy was 
another. Both of these cases involved strong objective and 
psychological challenges to core Russian conceptions of 
territoriality and security. The expansion of NATO meant that 
the loss of Eastern Europe was permanent. The presence of the 
United States asserting that it had commercial interests and 
that its enterprises had commercial rights in the Caspian 
underscored for the Russians the fact that they had lost an 
empire that had been assembled, not in the Soviet time, but 
under the tsars, and it was not an easy thing for them to 
absorb psychologically, not to mention commercially and 
politically.
    Now, the Caspian chapter actually began in the winter of 
1995, when a colleague of mine from the National Security 
Council came to see me and said that she felt that the U.S. 
Government was not yet alert enough to the energy potential of 
the region, and that there was not yet a sufficiently good 
policy in place for dealing with it, and that in the absence of 
such a policy, there was a growing risk that Russia and Iran 
would make themselves the gatekeepers to the resources of the 
Caspian region, which was still in the process of being 
documented, but what we knew of them suggested that they were 
really quite vast. And if that were to happen, Russia and Iran 
would acquire tremendous geostrategic leverage, including the 
ability to strangle Turkey's economic growth. So, I had the 
latitude, in the way things were run those days, to check into 
assertions like this, and, for that purpose, I was able to draw 
upon the expertise of every relevant part of the U.S. 
Government, including the intelligence agencies.
    It's interesting to remember--for me to remember--that, at 
that point, you couldn't find people who had this specialty in 
the U.S. system. In the intelligence community, for example, it 
was necessary to kluge together groups of analysts who, among 
them, covered the necessary range. After months of waiting, the 
first report I got back from them on, let's say, the way in 
which oil and gas might leave the region, began from the 
Russian border, but excluded China, and it was necessary to 
send the intelligence people back with a reminder that the 
world energy system was a unity, and that for us to understand 
it at the policy level, they would have to go back and present 
us with something closer to an actual working model of what it 
would be.
    Now, in the course of these discussions, with working 
people from all over the executive branch, the elements of a 
policy took shape. And I can repeat them to you here.
    The United States would favor multiple pipelines to carry 
oil and gas out of the Caspian into world markets. We would 
welcome a Russian role in this system, providing it was 
organized along commercial patterns rather than the old state-
driven patterns. We would oppose Iranian involvement in this 
process until and unless Iran took steps to meet us on certain 
issues, especially the nuclear issue. In support of these 
policies, the United States Government would follow the 
commercial logic of private-sector enterprises and be prepared 
to apply U.S. diplomatic influence in the region to help 
consolidate support of governments that control the rights-of-
way.
    In doing this, we had to be careful not to be drawn in to 
the particular and specific plans of any part of the U.S. 
private sector, but in order to understand how they viewed the 
decisions in front of them, it was necessary to talk.
    The United States Government would, therefore, try to bring 
to bear the resources of the Export-Import Bank, OPIC, and the 
Trade Development Agency. But, again, we would have to do this 
in ways that respected the fact that these are independent 
agencies and are obliged under the law to make their own 
decisions, after due diligence, on any kind of lending to any 
kind of private venture.
    The stated basic objectives of this proposed policy were: 
Prevent Russia and Iran from successfully imposing a dual-key 
lock on exploration and transport of oil and gas reserves from 
the Caspian; buttress the independence of the newly emerged 
states in the Caucus-Caspian region; protect the economic and 
political stability of Turkey; contribute to the long-term 
stability of the global energy system; and a coequal priority 
was to find a way to do this without fracturing the larger 
United States-Russian relationship that we were in the process 
of trying to build.
    It remained as a next step to convert this sketch of a 
policy into an official statement of American policy. And a way 
to do that was to take it through the formal decisionmaking 
process, which meant a meeting of the Deputies Committee to 
present it, followed by a meeting of the Principals Committee 
to present it, followed by a decision taken at that meeting, 
backed by the President, that this is the road we were going to 
follow, followed by announcements to concerned governments that 
the United States had a policy and it was thus and so.
    Now, the first accomplishment of this policy and the 
diplomacy that was related to it was to bring about an 
agreement in September 1995 on the construction of a relatively 
low-capacity pipeline to move oil from Baku to the Port of 
Supsa, in Georgia, and from there the oil would be loaded onto 
barges and then ultimately shipped to markets by way of the 
Bosporus.
    This agreement created all the basic precedents that were 
needed to reach agreement later on a full-scale pipeline for 
oil to run from Baku to the Turkish port of Ceyhan. And this 
was announced at a regionwide meeting in Istanbul in June 1998.
    The management of this policy had to be unusual, because 
the policy itself was unusual. And I want to stress, when you 
think about the future, that the design of a policy has to have 
an echo in the design of the system that you create to manage 
it, which is often not the case.
    Caspian policy could not properly be managed from any one 
part of the executive branch or in any single directorate of 
the National Security Council or in the National Economic 
Council. Every time we tried to figure out a conventional 
placement of this policy, we found that some critical element 
of it would likely be distorted by where we were going to put 
it. So, instead, we decided to convert the improvised mechanism 
that we were using into a sanctioned ad hoc arrangement. And 
what we had was essentially a very large rump group of people, 
sent by every interested executive-branch agency, meeting in 
the Old Executive Office Building about once a month or as 
often as needed, chaired jointly by myself and by a national 
security director chair, where the diplomacy was in the hands 
of two successive ambassadorial-rank individuals from the State 
Department, and where the lead agency would be the Department 
of Energy. It was improvised, but it was effective. It gave us 
good situational knowledge of what was happening. We 
understood, in a timely way, where the blockages were, and we 
could move our assets to try to deal with them.
    One of those assets was Vice President Gore, who was 
chairing binational commissions with Kazakhstan, as well as 
with Russia, and who already had gotten to know the heads of 
government of every state in the region. And so, when the 
system jammed and could not go forward, the last recourse would 
to--would be for the system to come and ask the Vice President 
to use those contacts to try to line up the various parts of 
the chain so that they would come into agreement with each 
other and make the pipeline possible.
    It had many ways to fail as a policy. There could be no 
guarantee that concerned governments would agree to cooperate. 
They didn't have the tradition of cooperation with each other. 
The idea of compromise was somewhat alien to a winner-take-all 
approach to bargaining on their part.
    It wasn't sure that U.S. energy companies were going to 
wind up picking any routes at all, because they had their 
reasons for doubts, or that if they picked routes, it wasn't 
sure that these would actually correspond to what we thought 
were strategically valuable approaches. And it wasn't sure that 
the lending agencies run out of the U.S. Government would think 
that these were good investments either. And in no case were we 
in a position to simply impose our will. It was a question of 
herding cats, but we succeeded, partly because, I think, the 
underlying idea was correct and had elements that were 
attractive to each one of the players.
    And so, we--the result of our success is the existence of 
the Baku-Tblisi-Ceyhan Oil Pipeline, and the fact that this was 
able to come into existence without a confrontation between 
ourselves and the Russian Federation. And it took some--and it 
took some doing to make sure that that didn't happen.
    Now, what does this offer, in terms of considerations for 
the future? As I mentioned before, there is to every policy an 
organizational component, and often we ignore the 
organizational component and treat it after--as an 
afterthought, but it--how we pick the organization may 
determine greatly whether we will succeed in our diplomacy as 
we move forward on a policy.
    The Clinton-Gore administration was open to new thinking 
across bureaucratic limits. It was open to bureaucratic 
improvisation in ways that strengthened the underlying 
interagency machinery. It was inclusive and transparent to its 
participants. And I speak as one who operated at the top of the 
system, and who would have immediately recognized any other 
mode of operation, as a detriment to my own responsibilities to 
the Vice President.
    Decisions were developed by open processes, and, once 
established, policy pretty reliably guided practice. And where 
practice revealed deficiencies in policy, there were easy ways, 
at least expeditious ways, to develop modifications of the 
policy to support the change we needed.
    We used the intelligence system continuously and purposely. 
Intelligence personnel did not become advocates for policy, but 
they were invited guests at every discussion of where the 
United States policymakers were trying to go, and so, they 
understood from the beginning what it was that we most needed 
to know from them in order to help us figure out what to do and 
how to do it.
    We did our best to make sure that the process was buffered 
against political end runs from interests outside. We were 
ready to solicit information and insight from private 
corporations, but we did not give them any reason to think that 
we would fine-tune our approach to match their particular 
vision of their commercial interests.
    We developed--and this is very important, I think--
comprehensive, all-points relationships with the other 
governments concerned so that energy was not the only thing we 
were coming to talk to them about, and not the only reason they 
had to listen to us.
    We developed and used high-level contacts for the most 
stubborn and urgent of our bilateral issues, but these contacts 
were used sparingly, only when no other approach would work.
    Most importantly--and this is practically a separate 
subject--we were consciously redefining the scope of national 
security in order to include major economic issues, and we 
redesigned the policymaking machinery to better express 
priorities and tradeoffs between traditional and new 
conceptualizations of national security. I think one of the 
reasons why my NSC colleague had to come to see me to say that 
we didn't have a policy was that, at the very beginning, the 
idea of Caspian energy did not appeal to her other colleagues 
as a national security matter, simply because it was out of the 
ordinary. These are transitions in thinking that have to be 
made carefully, and they have to be made energetically and in 
time.
    Today, I think we face new questions about the proper scope 
of national security, and I think those are going to be just as 
important to help the country find its opportunities in the 
future.
    I heard the latter part of Dr. Brzezinski's presentation, 
and I share his view that the United States is not faring 
particularly well, in terms of efforts to build energy networks 
that are outside of Gazprom's control. I think they are moving 
faster and maneuvering better than we are because they have 
support from the very most senior levels of government and the 
continuous attention of the very most senior elements of 
government.
    And I have the impression, although I am now out of this 
business--but, I have the impression, from just following it, 
that the U.S. Government has lost its focus on this subject--I 
mean, because other matters consume its attention, and that's 
understandable. But, political freedom is still what we're all 
about, and, since Colonial times, our leaders have understood 
that political independence does not coexist with economic 
servitude. So, it's getting to be time to pick up our socks and 
pay attention to an important part of our economic destiny, 
which is located in such subjects as access to the energy of 
the Caspian.
    [The prepared statement of Mr. Fuerth follows:]

   Prepared Statement of Leon Fuerth, Research Professor, the Elliot 
  School of International Affairs, the George Washington University, 
                             Washington, DC

    The committee has asked me to provide background on how the 
Clinton-Gore administration recognized the significance of Caspian 
energy, and how it then organized itself to deal with this subject. As 
I understand it, however, the committee's interest is prospective 
rather than historical. It wants to know what elements of this 
experience may be valid, as the United State turns to face the 
accelerating and multiple strategic challenges arising from energy. 
This testimony will therefore be structured as a historical account, 
interspersed with markers to indicate what may be lessons of continuing 
importance, and ending with a brief set of recommendations.
    Caspian energy policy was formed during the second Clinton-Gore 
administration, but it cannot be understood outside the context of 
events and innovations of the first 4 years. Those earlier developments 
conditioned how we came to recognize the importance of Caspian energy, 
how we formed a policy to deal with it, and how we organized internally 
to manage that policy and to conduct a diplomacy constructed upon it.
    The narrative actually begins 2 years before the Clinton-Gore 
administration began its existence, as a consequence of the implosion 
of the Soviet empire, which destroyed Russia's control of the Caspian 
region.
    The Clinton-Gore administration took office as the wreckage of the 
old world order was still settling. Our predecessors had handled the 
collapse of the Soviet Union and the Warsaw Pact with great skill, but 
it was up to us to deal with the aftermath. The Russian Federation was 
on the edge of free-fall. Its economy was devastated, and its new 
political institutions were extremely fragile. There were early signs 
of hyperinflation. Public suffering was considerable. There was deep 
moral dislocation. The military was broken. The Communist Party 
apparatus was the only nationally organized political force in the 
country, and it was intent on recapturing power. Other political forces 
representing extreme nationalism hovered at the edges. One could not 
exclude a complete societal collapse in a state which still possessed 
the largest nuclear arsenal on the planet.
    We--meaning the senior tier of national security officials in the 
new administration--also believed that there was a huge opportunity in 
these circumstances. The government of the Russian Federation was in 
the hands of reformers, whose agenda was to create a society based on 
the rule of law and driven by market economics. We recognized that the 
United States was the only government able to marshal a positive 
international response, on a scale anywhere near what would be needed. 
We understood that our chances of success were not particularly high, 
but we also believed that what was at stake was a millennial chance to 
create a post-cold-war world organized around a collaborative United 
States-Russian relationship.
    President Boris Yeltsin had serious personal and political 
weaknesses, and we recognized them. But we also saw in him and in his 
government a serious interest in moving beyond the Soviet experience, 
domestically and internationally. After a period of deliberation at the 
outset of the new administration, the decision was made for the United 
States to present itself to the Russians as a potential partner in what 
we hoped would be the birth of a new society. That kind of effort 
demanded not just moral but organizational and material support. It 
carried substantial political risks. But the risks of inaction were 
assessed as much greater.
    That is why the United States accepted President Yeltsin's 
suggestion, made at the April 1993 summit in Vancouver, that we needed 
a new form of bilateral organization to operate at the highest 
political levels. This was the point of origin of the United States-
Russia Bi-national Commission, aka the Gore-Chernomyrdin Commission. It 
was also the point of origin of the Russia Policy Group under the 
leadership of (then-Ambassador, and later Deputy Secretary of State, 
Strobe Talbot. The objective of the Commission was to make sure that 
high-level agreements would actually be converted into material change 
on the ground. The objective of the Policy Group was to create a venue 
for coordination that would embrace every major stakeholder in the 
executive branch, and supercharge the NSC interagency process. 
Together, the Commission and the panel were designed to assure constant 
orchestration and followthrough, working across traditional 
bureaucratic boundaries in both governments.
    The Bi-national Panel began its operations in September 1993. Its 
first mutually agreed goals were to develop new forms of cooperation in 
two important areas: Space flight and energy. There were no precedents 
for the level of collaboration we had in mind. They would intrude 
almost in equal measure upon areas of policy that both we and the 
Russians would previously never have opened up to each other. The 
Russians accepted joint work in space in the hopes of preventing the 
dissolution of their space industries. We embraced this work, partly to 
augment U.S. capabilities, and partly because we feared that Russian 
technology would otherwise be up for sale to the highest bidder: 
Notably, Iran. The Russians accepted cooperation in energy because the 
output of their oil and gas fields was plummeting, and could only be 
restored with infusions of outside capital and technical skill. We 
viewed the potential collapse of Russian energy production as a threat 
to the political stability of the Federation, and a threat to the 
stability of the global energy market. We also believed that Russian 
extraction procedures were technologically backward, and were causing 
avoidable environmental damage locally in the form of massive spills, 
and globally through the emission of greenhouse gases.
    Over time, the Commission expanded to include committees in defense 
conversion; energy; environment; health; science and technology; along 
with various task forces on issues ranging from tax law to safe storage 
of plutonium from Soviet warheads. There was also a side agenda in 
which the Commission's two principals acted to clear the way for what 
would become a series of summit meetings at the level of Presidents. 
The story of how these processes worked is as much a matter of attitude 
as of substance. Success depended upon going out of the way to build 
relationships based on parity of respect, and to look for ways to 
handle inevitable differences in a manner which would support basic 
American and Russian interests, yet not rupture underlying forms of 
cooperation.
    The expansion of NATO is a prime example of such a challenge. 
Caspian energy was another. Both cases involved strong objective and 
psychological challenges to core Russian conceptions of territoriality 
and security. The expansion of NATO marked the permanent liquidation of 
the Soviet empire in Eastern Europe; and the assertion of American 
economic and strategic interests in the development of Caspian energy, 
drove home to Russian leaders their loss of dominion over a region that 
had been an integral part of the Soviet Union. Both processes 
represented objectives that the Clinton-Gore administration regarded as 
vital to the design of a stable post-Soviet world, yet each also put at 
risk the kind of United States-Russian relationship that would be 
central if the design were to become a reality.
    The difference is that the future role of NATO in Central and 
Eastern Europe was recognized as a crucial issue from the beginning of 
the administration, and was dealt with by well-established processes 
within the national security apparatus: Whereas the question of Caspian 
energy was not recognized for several years, and had to be addressed by 
an improvised system for which there was no precedent. The fact that we 
were able to succeed owed much to the Gore-Chernomyrdin experiment and 
to the consultative procedures that had evolved to support it. It also 
depended upon extensive operational experience within the U.S. 
Government, for handling policy and organizational issues generated not 
only by Gore-Chernomyrdin, but by a series of other binational 
commissions: United States-Egypt (chaired by Gore and President 
Mubarak), established in September 1994; United States-Kazakstan 
(chaired by Gore and President Nazerbaev ) established in November 
1994; United States-South Africa (chaired by Gore and then-Deputy 
President Mbeki), established in March 1995; and United States-Ukraine 
(chaired by Gore and President Kuchma), established in September 1996.
    The Caspian chapter began in the winter of 1995, when a National 
Security Council office director named Sheila Heslin came to see me to 
say that she believed that the U.S. Government was not alert to the 
energy potential of the region, and that there was no policy for 
dealing with it. In the absence of such a policy, there was a growing 
risk that Russia and Iran would succeed in making themselves the 
gatekeepers to what already was established to be an immense new 
reserve of oil and gas. Both governments were already developing 
juridical claims by which they would, in effect, assert dual rights to 
seabed drilling, and both were moving toward an arrangement whereby oil 
and gas would exit the region either by way of GAZPROM's pipeline 
system transiting Russia to Europe, or by way of a north-south pipeline 
that would run south through Iran, to exit that country by way of 
coastal terminals. Were this plan to succeed, Russia and Iran would 
acquire tremendous geostrategic leverage, including the ability to 
strangle Turkey's economic growth.
    I had the latitude to explore these assertions, for which purpose I 
drew upon the knowledge of an ad hoc interagency group that included 
all pertinent agencies, including the CIA. It was not unusual for the 
Office of the Vice President to function in this manner, as the 
precedents for it were already established because of the binational 
commissions. The Vice President, moreover, had by this time established 
personal links to every President in the region, and was in a position 
to draw upon these connections to help establish a new policy designed 
for regionwide application. In this capacity, he provided a political 
link trusted by the bureaucracy to operate accurately and effectively 
within the bounds of national policy, as established by the President. 
His engagement made U.S. operations more continuous than would 
otherwise have been possible, given that Presidents are intermittently 
available.
    At a certain moment in my exploratory discussions the basic 
elements of a potential U.S. strategy took form:

   The United States would favor multiple pipelines to carry 
        oil and gas out of the Caspian into world markets.
   United States policy would welcome a Russian role in this 
        system, to be organized along normal commercial patterns.
   The United States would oppose Iranian involvement in this 
        process, until and unless Iran took convincing steps to repair 
        its relationship with the United States--notably, to meet our 
        concerns about their nuclear program and intentions.
   In support of these policies, the United States would follow 
        the commercial logic of private sector enterprises which were 
        then considering various pipeline concepts. We would be 
        prepared to apply U.S. diplomatic influence in the region to 
        help consolidate support of governments controlling rights of 
        way.
   The United States Government would seek to bring to bear the 
        resources of the Export-Import Bank, OPIC, and the Trade 
        Administration Agency (TDA), but would take care to do this 
        through consultation, and not by means that would abridge their 
        legal independence.
   The stated basic objectives of the policy were to: Prevent 
        Russia and Iran from successfully imposing a dual-key lock on 
        exploration and transport of oil and gas reserves from the 
        Caspian; buttress the independence of the newly emerged states 
        in the Caucasus/Caspian region; protect the economic/political 
        stability of Turkey; and to contribute to the long-term 
        stability of the global energy system. A coequal priority would 
        be to find ways to do this without fracturing the larger United 
        States-Russian relationship, by making it clear that the 
        objective was not to exclude Russian commercial activities.

    It remained to convert this general framework into official policy, 
and to construct a more formal process for managing its many elements 
in government. Conversion to formal policy was a relatively 
straightforward process, involving a blending of well-established 
informal and formal systems. There already existed multiple informal 
levels of communication among Cabinet-level officers and deputies. 
These informal systems did not make policy, but simply provided a way 
to identify new issues and to initiate early thinking. The next step 
was to schedule a discussion of Caspian energy policy at a meeting of 
the Deputies Committee; and having done that to move it--with the 
imprimatur of the deputies--to the first available Principles Committee 
meeting.
    The Principles Committee rapidly endorsed the need for a policy and 
supported the proposal I have outlined above. By coincidence, then--
Secretary of Energy Pena was scheduled to have a series of routine 
meetings with leaders in the region. We decided to capitalize on this 
by making it the occasion to unveil U.S. policy and to seek the 
endorsement of these leaders for it. Their reactions were very 
supportive. The Vice President opened a dialog with the Russian 
Government in the margins of a Gore-Chernomyrdin meeting. 
Chernomyrdin's response was polite and not confrontational, but showed 
us that Russian leaders continued to feel a proprietary interest in 
Caspian energy, despite their loss of control over the region.
    The first accomplishment of this policy and its related diplomacy 
was to bring about agreement, in September 1995, on construction of a 
relatively low-capacity pipeline for the transport of oil from Baku to 
the port of Supsa, in Georgia. From there, the oil would be loaded onto 
barges and ultimately shipped to markets via the Bosporus. Although 
small in scale, this agreement created all the basic precedents needed 
to reach agreement on a full-scale pipeline for oil, to run from Baku 
to the Turkish port of Ceyhan (announced at a regionwide meeting in 
Istanbul, in June 1998).
    The Caspian policy could not properly be managed from--within any 
one executive branch agency, or in any single directorate of the 
National Security Council, or in the National Economic Council. 
Conventional placement of the policy always seemed to be at serious 
cost to one or more of its objectives. Instead, we decided to convert 
the improvised mechanism used during the policy's formation, into a 
hybrid management system to coordinate its execution.
    The plenary group of this body was large enough to permit all 
interested agencies to engage. It met more or less monthly, but in any 
event, as needed in the Old Executive Office Building. It was cochaired 
by myself and by a senior NSC department head. External diplomatic 
actions were coordinated by the Department of State through an 
individual of ambassadorial rank: Initially Dick Morningstar, and then 
John Wolf.
    The senior Cabinet lead was held by the Secretary of Energy: First 
Frederico Pena, and then Bill Richardson. The Vice President could be 
engaged at the request of the group, through me. The President could be 
engaged at the request of the group, through the National Security 
Adviser. The system fed smoothly into the formal policy system as 
needed, and it fed into the formal interagency on a constant basis. It 
generated very good situational awareness. There were no rogue actors.
    The Caspian energy policy had many ways to fail. There could be no 
guarantee that concerned governments would find it in their interests 
to cooperate, that U.S. energy companies would pick routes for economic 
reasons that would overlap the strategic interests of the U.S. 
Government, or that U.S. lending agencies that had legal independence 
in lending decisions, would be convinced of the soundness of any 
resulting proposals. But the policy did succeed, and the Baku-Tbilisi-
Ceyhan oil pipeline is in operation today as a consequence. We also 
succeeded in bringing this project to fruition without a confrontation 
with the Russian Federation.
    What lessons, if any, does this history offer for the future? As 
you know, since leaving government in 2000, I have been a research 
professor at the George Washington University. My subject has been an 
effort to find ways for democratic forms of governance, such as ours, 
to handle the increasing pace of change that characterizes the modern 
world.
    I have come to understand that the United States is having to 
confront policy challenges that are not merely complicated but complex 
in the theoretical meaning of that term: They involve the interaction 
of systems of events within other systems of events; they resist 
permanent resolution because solutions to old problems mutate into new 
challenges; they do not display linear or predictable relationships 
between cause and effect, so that seemingly minor changes of input 
produce abrupt, and even discontinuous changes of output.
    I have also come to believe that the best approach our Government 
can use in its efforts to manage complex issues will be based on 
networked forms of organization. Networks handle complexity by 
dispersing authority to act in a structure where the distance between 
``the field'' and ``headquarters'' has been shortened by eliminating 
middle layers of management, and by substituting sophisticated 
information systems. These systems maintain coherence by using feed-
back channels to measure performance against expectations, and to 
generate corrective responses based on learning.
    The Caspian energy issue was a complexity phenomenon, although we 
certainly did not recognize it as such at the time. The methods that we 
improvised to run our policy, like the systems that we developed to run 
the binational commissions, were, in fact, examples of networked 
organization. In hindsight, I see that my colleagues and I were dealing 
with complexity, without realizing the full implications of that fact, 
and we were experimenting with networked organization without 
understanding the theory. We were able to do both of these things 
because the administration offered us the latitude to ask unorthodox 
questions and to put into place equally unorthodox responses.
    The administration was open to new thinking across normal 
bureaucratic limits. It was open to bureaucratic improvisation in ways 
that strengthened the underlying interagency machinery. It was 
inclusive and unusually transparent to its participants. Decisions were 
developed by open processes. Once established, policy reliably guided 
practice. Where practice suggested deficiencies in existing policy, 
changes could be made rapidly within the system rather than outside it. 
The intelligence system was employed continuously and purposefully. 
Intelligence personnel did not advocate policy, but were present as it 
was debated and knew what its information requirements were.
    We made sure the process was buffered against political end runs, 
or even the appearance of political influence. We were ready to solicit 
information and insight from the private sector, but we did not fine-
tune our policies to match their commercial interests. We developed 
comprehensive, all-points relationship with other governments, such 
that energy could be approached in terms of even broader concerns. We 
developed and used high-level contacts for the most stubborn or urgent 
of our bilateral problems, but used these relationships sparingly and 
only if normal government-to-government contacts were stalemated. Most 
importantly, we were consciously redefining the scope of national 
security to include major economic issues, and we redesigned the 
policymaking machinery to better express priorities and tradeoffs 
between traditional and new conceptualizations of national security.
    I believe that these are attitudes and concepts lessons that will 
be helpful as we deal with energy issues of exponentially increasing 
difficulty. Over the last 8 years, the United States has fared less 
well in terms of routes for the transport of gas out of the Caspian. 
Early on, it became apparent that Gazprom intended to make a stand on 
winning this prize, and that to accomplish this, the Russian Federation 
was prepared to fully mobilize its resources. The United States has not 
done likewise, and the results are evident.
    There is of course, the South Caucasus Pipeline, which connects gas 
from Azerbaijan's fields in the Caspian to Turkey. But, in general, my 
impression is that the United States is not doing well in terms of 
Caspian gas. Under Putin, the Russian state has reestablished dominance 
over the decisionmaking of its oil and gas enterprises, and has 
effectively merged with Gazprom. We have already seen efforts to use 
that power for blunt political objectives in Eastern Europe. The 
European Union--after ignoring its energy dependency on Russia for a 
generation, is alert at last, but is not responding very effectively. 
The so-called Nabucco gas pipeline--to move gas into Europe through 
Austria, using routes through Bulgaria and Romania, is apparently being 
overtaken by Russian efforts to block any access except by way of the 
Russian pipeline system.
    As best I can determine, the U.S. Government has lost focus. Other 
matters consume the attention of our highest officials, and that is 
understandable. But political freedom is still what we are all about, 
and since colonial times, American statesmen have understood that 
political independence cannot coexist with economic servitude. Whoever 
wins the next election for President, will need to broaden the focus of 
national security, and proceed accordingly.

    The Chairman. Thank you very much.
    Ms. Baran.

STATEMENT OF ZEYNO BARAN, DIRECTOR, CENTER FOR EURASIAN POLICY, 
                HUDSON INSTITUTE, WASHINGTON, DC

    Ms. Baran. Thank you, Mr. Chairman, Senator Lugar.
    I would like to also summarize my statement, and I'll try 
to stick to my 7 minutes.
    I share Dr. Brzezinski's geopolitical framework, so I'll 
skip to my second part, and I will build on Professor Fuerth's 
description of how policy evolved.
    There's already a great basis that policy can be built on--
in fact, is built on--it just needs to be elevated to a higher 
level. So, I think what we really need more than anything else 
is top-level engagement at the Presidential level so that the 
next phase of the Caspian-Central Asian-European energy 
corridor can be built.
    We've already seen what the Russian increased influence on 
European foreign policy through its use of energy is leading to 
divide-and-conquer strategy, and how that was used at the NATO 
summit when Georgia and Ukraine were not offered MAP.
    Of course, the main difference from the 1990s, where there 
was great success, is that we have a much stronger and united 
Kremlin currently occupied by a man who used to be the head of 
Gazprom, the state gas monopoly, and the new Gazprom chairman 
is the former Prime Minister. Former President Putin has 
personally visited each of the relevant European and Eurasian 
countries, and met repeatedly with their top leaderships in 
order to lure them to join his energy projects.
    Clearly, it is not realistic to expect the U.S. President 
to micromanage these issues, but it is important to make clear 
our strong and bipartisan commitment to the Caspian-Europe 
energy corridor. There is already great work done at the deputy 
assistant secretary level, and now, thanks to Senator Lugar's 
initiative, once again we have a special envoy for Eurasian 
energy. But, I think it's also time for reinforcement of all 
the work that has gone into working with European allies, as 
well as Azerbaijan, Georgia and Central Asian allies, from the 
Secretary of State's and the President's level. I agree with 
you, Senator Lugar, I think a visit, by the top leadership to 
the region would be important. But, I would add, in addition to 
the President and possibly Secretary of State, a Senate 
delegation, maybe chaired by you two, would go a long way.
    Now, what are some of the projects, and what is the vision 
that needs to be backed? I won't talk too much about oil. I 
believe that was discussed earlier. Also because gas is much 
more geopolitically important when we talk about Russia's 
influence. And here, the Nabucco Pipeline is critically 
important for Caspian gas reaching European markets without 
Russian control. This pipeline will start in Turkey and go 
through Bulgaria, Romania, and Hungary, terminating in Austria 
at that country's Baumgarten gas storage and distribution hub.
    Russian leadership does not want Nabucco to break their 
monopoly, and it is systematically trying to undermine it. At 
first, the Kremlin wanted Gazprom to be included as partner in 
Nabucco so that Russian gas would be transported via this 
pipeline. Of course, it was rejected, since this move would 
have annulled the raison d'etre of these projects.
    Putin was eager for a second pipeline connection, to be 
built from Russia to Turkey, called Blue Stream II in order to 
reach the Turkish gas market first and keep Caspian gas out. 
Turkey did not want to undermine the Central Asian-European gas 
corridor and said no. When Russia could not derail Nabucco in 
Turkey, it simply moved to bypass this country and came up with 
a competing project, called South Stream Gas Project to send 
gas to Bulgaria directly and from there to Greece. South Stream 
targets the same markets and utilizes almost identical routes 
to Nabucco. In fact, three of the five countries along 
Nabucco's route are also part of South Stream's intended route. 
You can see the route on the map that I've distributed.
    Sequencing is key. If South Stream is built first, it will 
pull Turkmen and Azerbaijan gas to its direction and leaving 
little reason for Nabucco to be built for Caspian gas. From an 
economic perspective, it is utterly impossible to build a 
pipeline, over $10 billion--Nabucco--unless investors are 
confident that the market on the consumer side will be 
sufficiently large.
    The important difference between Nabucco and South Stream 
is ownership. Nabucco will be privately financed, and 
therefore, needs to be commercially viable; whereas, South 
Stream is backed by state-owned Gazprom, which is perfectly 
willing to finance projects that do not make commercial sense, 
so long as they support the strategic goals of Moscow. Unlike 
Western companies, Gazprom is also willing to use pipelines at 
minimum capacity. It loses money in the short term, but in the 
long term, thanks to having killed all competition, it will end 
up with a web of pipelines in its control.
    Gazprom may actually be unable to meet its supply 
contracts, according to the International Energy Agency, as 
soon as 2010. But, from Gazprom's perspective, this surplus 
capacity it may have with all of its pipelines will have no 
negative effect. If all of Gazprom's pipelines are constructed 
in the proposed timeframe, then Nabucco will most likely not be 
constructed, and Russia's dominant market position will be 
enhanced; and so, European consumers will be left competing 
against each other for scarce Russian resources, driving up 
prices and granting Russia ever-greater leverage. Energy prices 
would escalate and Moscow would be able to extract political 
concessions from consumer countries in exchange for greater gas 
supplies.
    If South Stream is constructed, Gazprom will actually enjoy 
this surplus of export capacity, and it could use this capacity 
to transit other gas. What Moscow might be anticipating is the 
formation of a cartel-type organization for natural gas, which 
will be led by Russia, and coordinate supply going to Europe. 
Reportedly, there is a plan in the works to create an 
international platform for members of such an organization to 
determine a common gas pricing formula and to discuss new gas 
pipeline routes and swap arrangements. They would then be able 
to divide up markets and gain monopoly control over prices.
    Now, a lot of it is about European energy security 
strategy, but we know that EU is not able to come together. 
Already in 2007, there is an EU special coordinator appointed 
for this position, but this person has not yet visited 
Azerbaijan or Turkmenistan. As of May, this person began 
serving as the mayor of The Hague and spends only minimum 
amount of time on this project. The EU cannot be taken 
seriously in its commitment to Nabucco, at least in obtaining 
Caspian gas for it, if they leave the coordination of this 
project to an occasional presence while the whole Kremlin 
machinery is working to undermine it.
    Russia and Russian influence groups argue that there's not 
enough gas in Azerbaijan, Kazakhstan, or Turkmenistan to make 
Nabucco viable. This is the same argument used to sow doubt in 
the investors' and countries' commitments to BTC, the Baku-
Tbilisi-Ceyhan pipeline. Then we also heard there was not 
enough oil in Azerbaijan, the pipeline was not commercial, it 
was merely an American political project.
    Of course, if there was, indeed, no large gas volumes in 
these countries, President Medvedev would not have chosen 
Kazakhstan as his first foreign visit and would not be courting 
his counterparts in Azerbaijan and Turkmenistan, which he plans 
to visit in early July.
    In addition to maintaining its monopoly over Kazakh and 
Turkmen gas exports, the Kremlin hopes also to begin exporting 
Azerbaijani gas via its network to Western markets. All three 
nations are able to provide more than enough gas for Nabucco 
and several other pipeline projects, provided action is taken 
now. Each of the three have shown that they want to send large 
volumes of gas and oil westward, but they are increasingly 
under Russian pressure. They've managed to resist, so far, but 
now they need to see political will from the West. And 
ultimately, if the U.S. would not risk the ire of Russia, how 
can they be expected to do so?
    Now, specifically on the countries, Azerbaijan, as I said, 
has more than enough to supply the first phase of Nabucco 
Project, but to do so, the project in the Shan Deniz field 
needs to be expedited, and that will only happen if the 
political risk is mitigated, which, again, requires U.S. 
leadership.
    Turkmenistan is believed to possess some of the largest gas 
fields in the world. As far back as the 1990s, Turkmenistan 
committed 30 bcm of gas westward. This gas will go first to 
Turkey and then to Europe. Current estimates indicate that 
there is a lot more gas available in Turkmenistan, but unless 
we move now, Russian and Chinese companies will continue to 
increase their stakes and send their gas in their direction. 
Gazprom has already been able to reach some long-term and 
large-volume contracts. This is the time to pull the Turkmen 
close.
    I think it's also very important to send a clear signal to 
the Turkmen that, regardless of who the next President is, the 
U.S. will remain committed to large quantities of gas reaching 
European markets via the proposed corridor. This means no 
longer sending confusing messages, such as being content with 
Turkmen gas going to China.
    Azerbaijan and Turkmenistan, as we heard from Dr. 
Brzezinski, have had frozen relations for many years, but they 
have now improved their relations, because they understand the 
importance of the partnership. But, despite the good will, 
there will be issues that will prove difficult for them to 
resolve on their own, and we need, again, U.S. involvement.
    Then, Kazakhstan, of course, has significant gas that can 
be exported, but I don't think that country will be able to do 
so unless there is sufficient progress with the other two.
    The United States needs to work closely with Turkey as 
well, which has been very critical country for the European-
Caspian Corridor vision. Ankara has not seen a clear and 
determined U.S. commitment to Nabucco. This has resulted in 
unnecessary stalling in reaching the necessary agreements. What 
is needed at this point is the reestablishment of a 
consultative mechanism between the diplomats on both sides. The 
Turkish Foreign Ministry views pipeline projects from a 
strategic perspective, which is precisely what is needed, and 
which is why United States-Caspian envoys have been based at 
the State Department. Such a mechanism needs to be formed and 
begin working immediately, but that alone will not be 
sufficient. Turkey needs to remain committed to the southern-
corridor vision. Instead, if it thinks of itself as just a 
transit country for gas reaching Europe, then there is no 
reason for it to say no to Russian or Iranian gas transiting 
its territory, especially given that many European countries 
are proposing this.
    It's also important to recognize Turkey's fast-growing 
energy demand and the difficulty for its leadership to continue 
to say no to alternative gas from Iran and Russia. As I said, 
by rejecting Blue Stream II, so far it has only been bypassed 
and hasn't increased its gas. There is a way for the U.S. to 
help those in Ankara to share the same vision for Nabucco and 
the gas race. It is also necessary to hold a trilateral working 
group with Turkey, United States, and Iraq, to ensure Iraqi gas 
production and commitment to this pipeline, as well.
    Iraqi gas is important to maintain and build increased 
momentum for Nabucco. Fully recognizing Iraqi gas's importance, 
Gazprom has also recently intensified its actions to sign a 
deal of its own.
    Finally, it is important to hold a strategic discussion 
with European allies on the long-term implications on Russian 
gas politics. But, in the short term, it's important to impress 
upon key European allies that the Caspian, indeed, is a 
realistic option, provided that they do not lose focus.
    Thank you.
    [The prepared statement of Ms. Baran follows:]

 Prepared Statement of Zeyno Baran, Senior Fellow and Director, Center 
         for Eurasian Policy, Hudson Institute, Washington, DC

    Mr. Chairman, Senator Lugar, and distinguished members of the 
committee, thank you for the opportunity to appear before you today. As 
diversification away from Russian and Russian-controlled energy 
transportation across Europe and Eurasia is critically important for 
America's national security interests, I am honored to be able to share 
my views with you on this critical topic.
    Top-level U.S. engagement is essential for the establishment of the 
Central Asia-Europe Energy Corridor. At risk is the future of the vast 
space Russia considers as its backyard: The Eurasian, Black Sea, and 
Baltic Sea regions. European Union solidarity and transatlantic unity 
are also in danger.

                   RUSSIAN CHALLENGE TO THE ALLIANCE

    The most recent example of Russia's increasing influence on 
European foreign policy and its ``divide and conquer'' strategy was 
NATO members' inability to reach a consensus on offering a Membership 
Action Plan (MAP) to Georgia and Ukraine. Most from Northern, Eastern, 
and Central Europe agreed with the American position that the two 
countries should receive MAP, whereas many West Europeans sided with 
Germany, which opposed MAP extension largely due to their desire not to 
anger Russia. In the end, a non-NATO member Russia was able to de facto 
veto the American proposal--the first time this has happened in NATO's 
history.\1\
---------------------------------------------------------------------------
    \1\ Both Senator Barack Obama and Senator John McCain have 
expressed strong support for extending MAP to Georgia and Ukraine.
---------------------------------------------------------------------------
    While Georgia and Ukraine have been promised ``eventual'' NATO 
membership, an emboldened Moscow has since intensified its efforts to 
undermine Georgia's territorial integrity by its aggressive actions in 
separatist Abkhazia. The Russian Government has also begun to challenge 
Ukraine's integrity by claiming sovereignty over Crimea.
    The split within NATO on issues related to Georgia and Ukraine 
mirrors the rift that has formed on the issue of Europe's energy 
diversification. The European countries that have long-term energy 
partnerships with Russia are often reluctant to take foreign policy 
stances that may irritate Moscow. It is up to the United States to 
support strongly the diversification of Europe's energy supply away 
from Russia. America's European allies need to take strategic foreign 
policy decisions without fear of a potential Russian backlash.\2\
---------------------------------------------------------------------------
    \2\ Germany already imports 40 percent of its gas from Russia, more 
than any other West European country; by 2020 this figure is expected 
to reach over 60 percent
---------------------------------------------------------------------------
    We know that the Russian leadership wants to establish their 
country as an illiberal ``sovereign democracy.'' Moscow enjoys playing 
by different rules than the West, particularly the United States. 
Former President and current Prime Minister Vladimir Putin clearly 
stated this vision for Russia during his speech in Munich in February 
2007. European and American failure to acknowledge the Kremlin's use of 
energy as its primary tool in achieving this vision has resulted in 
ineffective policies, which, above all, damage Russia's chances to 
evolve in a liberal direction.
    Since Russia cut off gas supplies to Ukraine on January 1, 2006--
the same day it took over the presidency of the Group of Eight (G-8)--
there has been increased awareness in Europe of their dependence on 
Russian gas supplies. There is talk about formulating a united external 
energy policy within the European Union to diversify supply sources and 
routes, but the 27 countries have been unable to reach consensus 
because of conflicting priorities.
    The EU has so far failed to come together as a single voice partly 
because the issue has not been framed correctly. The unity they need is 
in negotiations with Russia, and specifically its giant gas monopoly 
Gazprom, which serves as the Kremlin's leading foreign policy arm. 
There is simply no other country that poses the same political and 
economic challenge to the EU.

                   WANTED: U.S. STRATEGIC ENGAGEMENT

    European energy security and supply diversification as a concept is 
important, but this is not an area where direct U.S. involvement is 
necessary or appropriate. U.S. leadership is needed, however, to enable 
Caspian producers (mainly Azerbaijan, Kazakhstan, and Turkmenistan) 
non-Russian controlled export options to Western markets. Europe's 
independent access to Caspian hydrocarbons would prevent further 
Russian control over their energy infrastructure, and thereby their 
foreign policy.
    There is an excellent precedent: The Baku-Tbilisi-Ceyhan (BTC) and 
Baku-Tbilisi-Erzurum (BTE) pipeline projects. Even though the 
governments of Azerbaijan, Georgia, and Turkey backed these projects, 
it was the United States Government's unequivocal support that allowed 
these countries to proceed without fear of Russian repercussions. 
Similarly, American leadership gave companies the confidence to invest 
in a major project like BTC or BTE that might have faltered in light of 
strong opposition from Moscow. In fact, even though the consortia for 
the BTC and BTE pipelines consisted mostly of European companies, 
European governments relied on U.S. diplomacy to shield their companies 
from Russia.
    Thanks to these two pipeline projects, Azerbaijan and Georgia are 
now free to develop their future policy without undue foreign pressure. 
Extending the energy corridor further east to Turkmenistan, Kazakhstan, 
and Uzbekistan would provide these Central Asian countries with such 
freedom as well. Surrounded by Russia, China, and Iran, all three have 
made clear their desire for a direct Western outlet in order to 
maximize their negotiation power and also to solidify their 
independence from Russian influence. As long as almost all their 
revenues come from Russia, they cannot feel completely independent.
    Unlike in the 1990s, we have a strong and united Kremlin, currently 
occupied by a man who used to be the head of Gazprom. In some ways the 
switch from Gazprom to the Kremlin was not a major change for Medvedev 
because the policies of Gazprom and the Russian Government have been 
inexorably intertwined. Gazprom is the state's largest source of 
revenue and the engine that has driven Russia's economic recovery. The 
company is primarily state-owned and many of Gazprom's corporate 
leadership currently hold--or previously held--high-ranking positions 
in the Russian Government. In addition to the President himself, there 
is his assistant Konstantin Chuychenko, executive director of 
RosUkrEnergo and head of Gazprom's legal department; and the new 
Gazprom chairman, former Prime Minister Viktor Zubkov.
    Putin has personally visited each of the relevant European and 
Eurasian countries, and met repeatedly with their top leaderships in 
order to allure them to join his energy projects. The most notable of 
these gas projects is the Nord Stream gas pipeline that will connect 
Russia and Germany. This politically divisive project is headed by 
Gerhard Schroder, who extended $1.2 billion credit guarantee to this 
pipeline just prior to stepping down as German Chancellor.
    Clearly, it is not realistic to expect the U.S. President to 
micromanage these issues. Yet, it is important to make clear our strong 
and bipartisan commitment to the Caspian-Europe energy corridor. There 
is already great work done at the deputy assistant secretary level, and 
now, thanks to Senator Lugar's initiative, there is once again a 
Special Envoy for Eurasian Energy.\3\ Now is the time for reinforcement 
from the Secretary of State and the President.
---------------------------------------------------------------------------
    \3\ President Bill Clinton created this position in 1998, and 
appointed Richard Morningstar as ``Special Advisor to the U.S. 
President and Secretary of State for Caspian Energy and Diplomacy.'' 
Following the signing of key agreements for the BTC and BTE pipeline 
projects, this position gradually was abolished and key 
responsibilities transferred to the European and Eurasian Bureau at the 
State Department. Morningstar served as U.S. Ambassador to the EU 
following his assignment; newly appointed Special Envoy Boyden Gray is 
currently serving in this position concurrently with his role as U.S. 
Ambassador to the EU.
---------------------------------------------------------------------------
            BRINGING NON-OPEC CASPIAN OIL TO WESTERN MARKETS

    On oil, there is the BTC, as well as the Baku-Supsa pipeline ending 
in Georgia's Black Sea coast to transport Caspian (mainly Azerbaijani) 
oil to Western markets via non-Russian controlled routes. Baku-
Novorossiysk and CPC pipelines also bring Caspian oil westward, but 
with Russian involvement. Russia has used its shareholder position in 
CPC to delay the expansion of this pipeline bringing Kazakh oil to the 
Black Sea, thereby hindering production.
    Moreover, Moscow has conditioned the expansion to the commitment of 
necessary volumes of oil for its planned Burgas-Alexandroupolis (B-A) 
oil pipeline. The B-A pipeline will transport oil from the Black Sea 
via Bulgaria and Greece. In principle, the U.S. should be supportive of 
such a pipeline, but Russia has 51-percent ownership. This may not be 
the best route for Kazakhstan or for private companies who may not want 
to submit to further control by the Russian Government. The U.S. should 
inquire further about the ownership and structure of this pipeline, 
which would be the first Russian-managed oil pipeline in the EU.
    Diversification from Russian control in the Western direction is a 
key reason for Kazakhstan to commit its oil to BTC. The Kazakh-Azeri 
connection is critically important to enlarge the East-West energy 
corridor and to reliably bring significant amount of new, non-OPEC oil 
to world markets.
    Additional Kazakh oil will go westward to Georgian Black Sea ports 
(Kulevi and Supsa). Some will reach markets via tankers crossing the 
Turkish Straits and some via straits bypass routes. A portion of that 
oil, along with Azerbaijani oil, should be sent to European markets via 
the existing oil pipeline starting in Ukraine's Black Sea port, Odesa, 
and continuing onward to Brody. Odesa-Brody was actually built for that 
purpose but failed to secure supply commitments from oil producers. As 
such, it has been operating in reverse direction ever since, 
transporting Russian crude from Brody to Odesa. In May, at the Kyiv 
conference, Azerbaijan, Georgia, Ukraine, Poland, and Lithuania not 
only reached consensus to switching Odesa-Brody back to its intended 
direction, but also to support extending the pipeline to the Polish 
city of Plock. From there, it would connect to the existing Polish 
network, enabling oil to continue to the Baltic Sea oil terminal of 
Gdansk.
    The U.S. needs to ensure that Azerbaijan, Kazakhstan, and private 
oil companies would not once again be subverted as this project would 
connect Ukraine to the East-West corridor and strengthen its pro-
Western orientation. Now that Ukraine has been officially promised NATO 
membership, it should be firmly anchored in the broad Caspian-Europe 
energy corridor.

              GEOPOLITICS OF GAS: NABUCCO VS. SOUTH STREAM

    On gas, the challenge is bigger due to the nature of natural gas as 
a tradable commodity--there is no global market, and the construction 
of costly pipelines effectively locks consumers into a prolonged 
contract with producers. This means that Moscow can more easily 
manipulate dependence into political and economic leverage. Natural gas 
is vital to the economies of many European nations--and the fuel's 
primacy is growing. The prospect of being forced to pay a higher price 
for that gas, or even having the supply of that gas curtailed, can 
exert a powerful influence on a country's domestic and foreign 
policies.
    Thanks to U.S. support for Caspian-Europe direct gas connection, 
BTE has already been built, and its extension to Greece began operation 
in November 2007. The Turkey-Greece pipeline has enabled gas from 
Azerbaijan to flow all the way to the EU free from Russian control. 
Construction will soon begin on an extension of the Turkey-Greece 
connection to Italy, named the TGI pipeline.
    Meanwhile, the Nabucco pipeline has become a litmus test for the 
ability of the EU and the U.S. to complete a project that is a stated 
priority. Nabucco (named after Giuseppe Verdi's opera) is intended to 
have a capacity of 31 billion cubic meters that will enter Europe 
through Turkey. The pipeline will traverse Bulgaria, Romania, and 
Hungary, terminating in Austria at that country's Baumgarten gas 
storage and distribution hub. It was originally introduced by Austria 
to bring mostly Iranian gas to European markets; now it is backed by 
the U.S. to transport Caspian and Iraqi gas to European markets. I will 
briefly discuss Iraqi gas later. Iranian gas for Nabucco is still 
occasionally discussed, especially by Austria, but until relations with 
Iran settle down, it is all but pointless to even discuss this option.
    After recognizing that Nabucco and TGI would break their monopoly 
of transporting Caspian gas to Europe, the Russian leadership took 
several steps to undermine them. At first, the Kremlin wanted Gazprom 
to be included as a partner to have Russian gas transported via these 
pipelines. However, it faced opposition since the move would have 
annulled the raison d'etre of these projects. Putin was also eager for 
a second gas pipeline connection to be built from Russia to Turkey, 
called Blue Stream II, in order to reach the Turkish market first and 
keep Caspian gas out.
    In other words, there was a race for the Turkish market. Having 
learned from its experience with Blue Stream I, which I will explain 
shortly, Turkey did not want to--once again--undermine the Central 
Asia-Europe gas vision by reaching another major agreement with Russia. 
Turkey thus made clear its continued commitment to the work with the 
U.S., EU, and its Central Asian partners.
    When it became clear that Nabucco could not be derailed in Turkey, 
Russia moved to bypass it by piping into Bulgaria directly, and from 
there Greece. So, in June 2007, Gazprom came up with a massive subsea 
pipeline project, the South Stream pipeline. Although the details of 
this venture are yet to be solidified, it is clear that South Stream, 
with a planned capacity of 30 bcm, will be one of the world's largest 
and most expensive pipelines ever built. Estimates of cost vary, but 
most analysts predict it would cost twice as much as Nabucco.
    The signing of the South Stream pipeline project took place in 
Moscow between Greek Prime Minister Kostas Karamanlis and outgoing 
Russian President Vladimir Putin on April 29. Former Italian Prime 
Minister Romano Prodi was offered the chairmanship of the project by 
Gazprom CEO Alexei Miller and Eni head Paolo Scaroni, mirroring former 
German chancellor Gerhard Schroder's appointment to direct Gazprom's 
Nord Stream pipeline. Prodi was previously head of the European 
Commission, and his support would be essential for the pipeline's 
success, given that there is growing unease in Brussels and Washington 
about Gazprom's expansion into Europe. So far, he has declined to take 
the position.
    South Stream targets the same markets and utilizes almost identical 
routes to Nabucco. In fact, three of the five countries along Nabucco's 
route are also part of South Stream's intended route. The pipeline 
would cross the Black Sea to Varna, Bulgaria. From there, South Stream 
will split into two smaller spurs: One heading West through Greece, 
beneath the Ionian Sea and into southern Italy; and the second heading 
north through Serbia and Hungary, terminating at Austria's Baumgarten 
storage facility. There may also be additional lines constructed to 
northern Italy via Austria and/or Slovenia.
    Baumgarten is critically important in Russian strategy as it will 
make Austria its partner in serving as the clearinghouse for gas coming 
to Europe. Austria is involved in both Nabucco and South Stream, and 
both pipelines will bring gas to Baumgarten. In January, Austria's 
partially state-owned energy company OMV signed a deal giving Gazprom 
50 percent ownership in Baumgarten. As we know by now from other such 
partnerships Gazprom has formed over the years, the 50 percent would 
not mean equal partnership--Gazprom, and thus the Russian state, would 
in reality have a much bigger say. Furthermore, Gazprom just last week 
announced that an intergovernmental agreement will soon be signed to 
appoint OMV as South Stream coordinator for Austria. The growing OMV-
Gazprom partnership is important, especially in light of OMV's desire 
to take over Hungarian MOL, which is the only privately owned company 
in the Nabucco consortium.\4\
---------------------------------------------------------------------------
    \4\ The pipeline consortium is equally owned (16.67 percent each) 
by Austria's OMV, Hungary's MOL, Turkey's Botas, Bulgaria's Bulgargaz 
and Romania's Transgaz and Germany's RWE.
---------------------------------------------------------------------------
    Gazprom is making sure it has maximum flexibility in extracting the 
best deal for itself by having several options to get to its key 
markets. For example, even with strong Austrian partnership, Gazprom 
will likely construct a South Stream spur to Slovenia, and thus negate 
the possibility of Austrian leverage over the gas route. If problems 
were to emerge in Austrian-Russian relations, Gazprom could then 
reroute exports to northern Italy via Slovenia.
    No Western company has the kind of partnership with its state as 
Gazprom has with the Kremlin. No Western country or company would build 
pipelines with such political calculations. None would undertake 
commercially unviable projects. We are dealing with a situation where 
normal competitive market principles simply do not work. It is 
imperative the Europeans recognize it and start taking steps 
accordingly; we are invariably dealing with a state-sponsored 
organization that has turned gas pipelines into a geopolitical tool.

                     RACE IS ON: SEQUENCING MATTERS

    For Russia, the main purpose of the South Stream gas pipeline 
project is to prevent Nabucco and TGI lines from transporting Caspian 
gas independent from Russian control to European markets. How? Via two 
interdependent moves: First, by locking up the markets and keeping out 
potential competition--which, as I explained earlier, is not capable of 
competing when Gazprom sets the rules. And second, by assuring long-
term and large-volume gas commitment from Turkmenistan, as well as 
Azerbaijan and Kazakhstan to its pipelines, thereby preventing direct 
Caspian-Europe connection.
    Therefore, sequencing is vital. The fortunes of the two pipelines 
are inversely related; if South Stream is built first, it will pull 
Turkmen and Azerbaijani gas to its direction, leaving little reason for 
Nabucco to be built for Caspian gas.
    From an economic perspective, it is utterly impossible to build a 
pipeline such as Nabucco--which will cost upward of $12.3 billion--
unless investors are confident that the market on the consumer side 
will be sufficiently large. The important difference between Nabucco 
and South Stream is in ownership; Nabucco will be privately financed 
and therefore needs to be commercially viable, whereas South Stream is 
backed by state-owned Gazprom, which is perfectly willing to finance 
projects that do not make commercial sense so long as they support the 
strategic goals of Moscow. Unlike Western companies, Gazprom is also 
willing to use pipelines at minimum capacity--it loses money in the 
short term, but in the long term, thanks to having killed all 
competition, it will end up with a web of pipelines in its control. I 
will discuss potential implications of this shortly.
    Nabucco faces a number of financing hurdles even without South 
Stream's competition. Investors are uncertain of Azerbaijan's ability 
to supply Nabucco and even more uncertain that a trans-Caspian pipeline 
will be constructed to bring in the Turkmen gas that many view as 
necessary for Nabucco to succeed. Still, the largest obstacle for 
Nabucco is South Stream; the potential of South Stream filling a 
portion of Europe's expected short- to mid-term demand will likely be 
enough to scare investors away from Nabucco.
    So it is interesting that all the countries potentially joining 
South Stream speak with one voice, insisting that that Nabucco and the 
Russian pipeline are ``complimentary not contradictory.'' This brings 
to mind the gas race to the Turkish market in the late 1990s.
    Turkey, Turkmenistan, and the United States were eager to construct 
a trans-Caspian pipeline that would carry gas from Central Asia via the 
Caucasus to Turkey. Russia did not want to see its monopoly in Central 
Asia eroded by the construction of additional export routes and 
proposed a pipeline from Novorossiysk beneath the Black Sea to Turkey. 
Supporters of the Russian pipeline, which is now called Blue Stream, 
insisted that current and future Turkish gas demand was large enough to 
support both projects; that the two lines were, in fact, 
``complimentary.'' Those who thought otherwise were reluctant to 
challenge Russia and went along--mainly because they did not think it 
would actually be built. They referred to this project as ``Blue 
Dream'' because of its lack of market viability and the use of never-
before-used technology to construct a pipeline deep underwater. These 
assertions were quickly proven false. As soon as Ankara signed an 
agreement to build Blue Stream, interest in the trans-Caspian project 
dried up. Blue Stream not only prevented Turkey from having direct 
access to Turkmen gas, but increased its dependence on Russian gas to 
over two-thirds of its demand. Since its beginning, Blue Stream has 
operated at less than half of its 16 bcm capacity and provided the most 
expensive gas to Turkish consumers. Blue Stream is the product of the 
Gazprom-Eni strategic partnership that is now promoting South Stream.

                      OTHER RISKS OF SOUTH STREAM

    Gazprom may not have enough gas to fill Nord Stream, South Stream, 
and its two preexisting pipeline networks through Ukraine and Belarus. 
The International Energy Agency has already warned that Gazprom may be 
unable to meet its supply contracts by 2010. Yet from Gazprom's 
perspective, this surplus capacity will have no negative effects. If 
both Nord Stream and South Stream are constructed in the proposed 
timeframe, Nabucco will likely disappear. Russia's dominant market 
position will be enhanced. Thus, European consumers will be left 
competing against each other for scarce Russian resources, driving up 
prices and granting Russia ever-greater leverage. Energy prices would 
escalate and Moscow would be able to extract political concessions from 
consumer countries in exchange for greater gas supplies. This leverage 
is typically not exercised through dramatic supply cutoffs, but instead 
through subtle and protracted pressure.\5\
---------------------------------------------------------------------------
    \5\ However, supply cutoffs have been employed by Russia against 
smaller Eastern European countries like Latvia (2003) and Lithuania 
(2006).
---------------------------------------------------------------------------
    If South Stream (and its sister Nord Stream) is constructed, 
Gazprom will actually enjoy a surplus of export capacity while Europe 
will face a deficit of supply options. This is potentially very 
troubling. Having a strong monopoly on transit routes into Europe, even 
if underutilized, still gives Russia significant influence vis-a-vis 
its ability to grant other producers access to these routes. Moscow may 
be anticipating the formation of a cartel-type organization for natural 
gas--with Russia assuming the leadership role--that will coordinate 
European supply. Reportedly, there is a plan in the works to create an 
international platform for members to determine a common gas pricing 
formula and to discuss new gas pipeline routes and swap arrangements. 
They would then be able to divide up markets and gain monopoly control 
over prices.
    South Stream also poses a very real threat to Ukraine, as it would 
give Moscow the option to decouple the country from its gas supply 
exports to the EU. This would leave Ukraine exceedingly vulnerable to 
Russian political pressure. Ukraine's position as the transit route for 
around 80 percent of Russia's gas exports to Europe currently gives it 
a degree of leverage over Moscow. Were these supplies rerouted via 
South Stream, Ukraine would lose this leverage. It is no secret that 
Moscow does not want to see Ukraine align itself with the West, and has 
strongly opposed the country's efforts to do so. Ukraine is in a 
precarious position between East and West. There are many in its 
government that wish to abandon Ukraine's current political orientation 
and turn toward Russia--and to its corresponding political and social 
values. Whether or not Ukraine continues its progress toward Western 
values has much to do with its energy security, with South Stream as 
the cornerstone of the issue.

                        WHAT SHOULD THE U.S. DO?

    The most important next step is to make credible, unequivocal, and 
bipartisan commitment to the Caspian-Europe energy corridor. First, the 
President needs to reinforce this vision by traveling to the region, 
namely Azerbaijan, Kazakhstan, and Turkmenistan. Second, the Secretary 
of State needs to be directly engaged. Third, a bipartisan 
congressional delegation needs to show its commitment as well. A Senate 
delegation led by Senator Lugar, who is highly regarded in the Caspian 
region, would have the best chance to make a positive impact.
    If the U.S. wants non-Russian pipelines such as Nabucco and TGI to 
become pipelines for Caspian gas transport to Europe, then Washington 
needs to provide political support to encourage exploration and 
development. It is important to recognize that U.S. vision for these 
two pipelines, especially Nabucco, is not the same as that of 
Brussels--hence the lack of political backing from the EU. In September 
2007 the European Commission appointed former Dutch Foreign Minister 
Jozias Van Aartsen as ``EU Coordinator for the Caspian Sea-Middle East-
European Union Gas Route,'' including Nabucco, which it considers a 
``priority project.'' Yet Van Aartsen has not yet visited Azerbaijan or 
Turkmenistan. As of May, he began serving as mayor of The Hague and 
spends only minimal time on this project. The EU cannot be taken 
seriously in its commitment to Nabucco (at least not in obtaining 
Caspian gas for it) if they leave the coordination of this project to 
an occasional presence because the whole Kremlin machinery is working 
to undermine it.
    Now is not the time for hesitation but for immediate action. Russia 
and Russian-influenced groups argue there is not enough gas in 
Azerbaijan, Kazakhstan, or Turkmenistan to make Nabucco viable. This is 
the same argument used to sow doubt in the investors' and countries' 
commitment to BTC: There was not enough oil in Azerbaijan, it was not 
commercial, and it was merely an American political project.
    Of course, if there were indeed no large gas volumes in these 
countries, Medvedev would not have chosen Kazakhstan as his first 
foreign visit and would not be courting his counterparts in Azerbaijan 
and Turkmenistan, which he plans to visit in early July. In addition to 
maintaining its monopoly over Kazakh and Turkmen gas export, he hopes 
to also begin exporting Azeri gas as well.
    All three nations are able to provide more than enough gas for 
Nabucco and several other projects--provided action is taken now. Each 
nation has shown they want to send large volumes of energy resources 
westward, but they are increasingly under Russian pressure. They 
managed to resist thus far, but now they need to see political will 
from the West. If the U.S. would not risk the ire of Russia, how can 
they be expected to do so?
    Azerbaijan has already shown its strategic vision by promising gas 
to Nabucco. In November 2007, the Azerbaijani Government and the 
Western producers operating in its Shah Deniz offshore gas fields 
announced that there were significantly more reserves than initially 
thought--more than enough to supply the first phase of the Nabucco 
project. More recently, at the Caspian Oil and Gas--2008 [conference] 
in early June, Azerbaijan's Minister of Industry and Energy Natiq 
Aliyev announced that the reserves exceed 1.2 trillion cubic meters, 
and production could soon reach 30 bcm. Some of this gas will be 
consumed in Azerbaijan, Georgia, and Turkey; about 15 bcm could be sent 
to EU markets. For that, the stage-2 of the Shah Deniz field 
development needs to be expedited. And that will only take place if the 
political risk is mitigated--which only U.S. action can do. There are 
other very promising fields in Azerbaijan, development of which will 
also depend on the success with Nabucco development and the pace of 
reduction of transportation risks to EU markets.
    Turkmenistan is believed to possess some of the largest gas fields 
in the world. In 1999 it committed 30 bcm gas westward--16 bcm for 
Turkey and 14 for Europe. Now that current estimates range from 22 to 
30 trillion cubic metres, that amount can easily be increased. In fact, 
gas from Turkmenistan will flow West directly only if the amount is 
large enough--otherwise Western producers may not invest the billions 
necessary. Instead, Russian and Chinese companies will continue to 
increase their stakes and send gas their way.
    It has been U.S. policy since late 1990s not to engage Turkmenistan 
until its human rights record improves. For many years the mantra was 
to wait out the authoritarian President Saparmurat Niyazov and then 
start working on the gas project. During this time, Niyazov wanted to 
move away from the grip of the Kremlin (and its foreign policy 
instrument Gazprom), but was unable to do so given the West's 
reluctance to work with him. Yet he was nonetheless able to take 
advantage of Vice President Dick Cheney's trip to Kazakhstan in May 
2006, during which Cheney advocated a trans-Caspian gas pipeline which 
would allow the two countries to receive a much higher price for their 
gas compared to what Gazprom was paying them. Armed with the prospect 
of diversification, Niyazov was able to negotiate on more favorable 
terms, and agreed only to a 3-year deal, rather than a much longer term 
commitment that would harm the prospects of a trans-Caspian gas 
pipeline.
    After Niyazov died in December 2006, U.S. policy shifted to wait 
and see if the new President would be more democratic. This policy not 
only cost the U.S. valuable time and access to gas fields as the 
Russians moved in, but is also totally inconsistent with how Washington 
works with other countries with less than stellar democratic 
credentials on issues of mutual interest, such as Russia, Saudi Arabia, 
and China. Moreover, not engaging actually made democratic evolution 
less possible as increased engagement with Russia and China has 
provided Turkmenistan (and other Central Asian countries) with an 
alternative model: Economic liberality coupled with political 
repression.
    Once gas deals are reached and infrastructure is established, it is 
difficult to change course. Gazprom has already reached some long-term 
and large-volume deals. This is time to pull the Turkmen closer--just 
as the Russians and Chinese are doing. Washington needs to send a clear 
message that the U.S.--regardless of who is the next President--is 
committed to large quantities of gas reaching European markets via the 
proposed corridor. That means no longer sending confusing messages, 
such as being content with Turkmen gas going to China.
    Azerbaijan and Turkmenistan had frozen relations for many years; 
now the two Presidents recognize the importance of their partnership in 
realizing the Europe-Caspian vision. Despite the goodwill, there are 
issues that will prove difficult for them to resolve on their own; the 
U.S. needs to be willing and able to serve as an honest broker and 
offer assistance if and when needed. Kazakhstan also has significant 
gas that can be exported, but it will not be able to do so unless there 
is sufficient progress with the other two.
    In addition to these three nations, the U.S. also needs to work 
closer with Turkey, which is critically important for the Europe-
Caspian corridor vision. There was excellent cooperation in the 
realization of the BTC and BTE pipelines, the first phase of this 
corridor. In fact, the two sides could have used each other's talking 
points. Relations suffered due to the Iraq war, but are once again on 
an upswing. Turkish Foreign Minister Ali Babacan was in Washington last 
week, and energy was an important item on the agenda. Yet Ankara has 
not seen a clear and determined U.S. commitment to Nabucco; this has 
resulted in unnecessary stalling in reaching the necessary agreements. 
What is needed at this point is the reestablishment of a consultative 
mechanism between diplomats on both sides. The Turkish Foreign Ministry 
views pipeline projects from a strategic perspective, which is 
precisely what is needed--and which is why U.S. Caspian envoys have 
been based at the State Department.
    Such a mechanism needs to be formed and begin working immediately. 
But that alone is not sufficient. Turkey needs to remain committed to 
the Southern corridor vision; if it instead thinks of itself just as a 
transit country for gas to Europe, then there is no reason for it to 
say no to Russian or Iranian gas transiting its territory either--
especially since many EU countries propose this.
    The U.S. needs to recognize Turkey's fast-growing energy demand and 
the difficulty for its leadership to say no to Iranian gas or to Blue 
Stream II. Rejecting Blue Stream II so far has only led to it being 
bypassed. The best way for the U.S. to help those in Ankara who share 
the same vision for Nabucco and the gas race is to hold a trilateral 
working group of the U.S., Turkey, and Iraq to ensure timely Iraqi gas 
production and commitment to this pipeline as well as to Turkey's 
domestic market.
    Iraqi gas is important to maintain and build increased momentum for 
Nabucco. The first phase of Nabucco is designed to run from Ankara to 
Baumgarten. The first phase is expected to become operational in 2013, 
with an initial capacity of up to 8 bcm a year. The second phase would 
be completed a year later to increase capacity to 31 bcm. Turkmen gas 
will be ready for the second phase; investors will want to see not only 
an Azerbaijani commitment but also an Iraqi commitment in order to be 
confident that supply will be there when the pipeline is ready. In 
April, the EU announced that starting 2009 it would begin receiving 
Iraqi gas--mainly from the Akkas field in the Anbar province. Fully 
recognizing the importance of this gas, Gazprom has recently 
intensified its actions to sign a deal of its own.
    United States-Turkey-Iraqi cooperation on gas is also critically 
important for broader regional stability and cooperation. The EU has 
suggested that Akkas gas could reach Turkey via the Arab Gas Pipeline 
through Syria. But Turkey wants a direct route, and believes keeping 
Syria out of this project would also be in line with U.S. policy. It is 
not clear what U.S. policy is on Syrian transit; it would be important 
to clarify this in order not to send confusing signals to Ankara.
    Another important country for the corridor is Ukraine. Its future 
is closely linked to integration with European markets for both oil and 
gas. The answer to corruption in Ukraine energy sector is not to leave 
them out but to use mechanisms to bring it under manageable control: 
Transit pipe can be separated; borders can be metered; full 
transparency can be achieved--even when an American company is 
involved.
    One project that is gaining increasing momentum, and would benefit 
from U.S. support, is White Stream. White Stream would bring Caspian 
gas to Georgian Black Sea coast. From there, gas would flow via a 
pipeline with an initial yearly capacity of 8 bcm along the seabed to 
Romania (either though Ukraine or directly) where it would then connect 
with existing infrastructure. It may also connect with the Ukrainian 
transit system leading to Poland and Slovakia. Alternatively, gas could 
be liquefied and transported via LNG tanker across the Black Sea. 
Further studies are required to determine which method--pipeline or 
LNG--is more feasible. The U.S. Trade and Development Agency (TDA) has 
already commissioned a study to assess the commercial viability of this 
option, while European Commission is cofunding the feasibility study of 
deep water pipeline version of White Stream through Trans European 
Network scheme.
    White Stream is useful not only because it represents a means for 
Europe to diversify its energy supply, but also by encouraging further 
upstream investment in the Caspian. As the Caspian region with its vast 
recourses should become an important source of diversification for 
Europe's increasing supply needs (much in excess Nabucco can handle), 
establishment of another transportation route in the same corridor with 
Nabucco would contribute significantly toward needed reduction of the 
transportation risks. And this in turn would encourage large scale 
exploration production investments in Caspian gas, thereby stimulating 
progress on Nabucco and the trans-Caspian gas pipeline.
    Finally, Washington needs to hold a strategic discussion with the 
EU on the long-term implications on Russian gas politics. But in the 
short term, it needs to impress upon key European allies that the 
Caspian indeed is a realistic option--provided that they do not lose 
focus.

    The Chairman. Thank you very much.
    Mr. Kupchinsky.

 STATEMENT OF ROMAN KUPCHINSKY, PARTNER, AZEAST GROUP, MAHWAH, 
                               NJ

    Mr. Kupchinsky. Mr. Chairman, today I'd like to address the 
question of criminality and the lack of transparency in the 
Russian energy sector.
    As a former editor of Radio Free Europe's publication, 
``Organized Crime and Corruption,'' I came across numerous 
opaque schemes in the Russian energy business, schemes which 
lowered Russia's business reputation to the point where many 
Western companies are now loathe to trust the Russian partners, 
and deal with them only out of necessity.
    A great deal of evidence suggests that Russian organized 
crime has been involved in the Russian energy business with the 
full knowledge and quiet approval of the Russian leadership, 
both past and present. Gazprom, though Russia's state-owned gas 
monopoly, has--with the active support of the Kremlin, has set 
up 50 or so middlemen companies located throughout Europe. 
Among them are the Centrex group of companies, the Gazprom 
Germania network, none of which--none of these companies add 
any value to the price of Russian gas being sold on European 
markets, yet they earn enormous amounts of money, money which 
seems to disappear, simply vanish through shell companies in 
Cyprus and in Lichtenstein.
    Last year, the CEO of Germany's largest gas company, E.ON 
Ruhrgas, Burghard Bergmann, was the only Westerner on the board 
of Gazprom, told the chairman of the board, told--who is now 
president--Dmitry Medvedev, that Gazprom Germania and a Swiss-
based middleman, RosUkrEnergo, should be disbanded, that they 
served no purpose, as far as he can see. Bergmann also wrote, 
complained that Russian state-backed gas schemes of Hungary 
were opaque and tarnished Russia's reputation. The Gazprom 
board ignored all his requests. Part of the reason for that 
being that Russia does not have a Foreign Corrupt Practices 
Act. The Kremlin and Russian law enforcement agencies tend to 
close their eyes on how Russian energy companies--be it the 
private company Lukoil or the state-owned oil company Rosneft, 
or Gazprom--how they conduct business both inside and outside 
of Russia.
    One gas trading company, a new company, called 
RosUkrEnergo, based in Switzerland, is 50 percent owned by 
Gazprom and 50 percent by two Ukrainian--private Ukrainian 
businessmen who hid their identities for years and who are 
alleged to be linked to Russian organized crime. This is a 
classic study of how the Kremlin and Gazprom could conspire to 
protect what many believe to be a criminal enterprise.
    Russian President--former Russian President Vladimir Putin, 
was directly involved in creating this company, along with 
former Ukrainian President Leonid Kuchma, in July 2004. And 
Putin has publicly defended this company on a number of 
occasions by saying, ``Believe me, we don't know the identities 
of the Ukrainian owners of RosUkrEnergo.'' Now, President 
Putin's statement raises an important question. Is it common 
practice for Gazprom, the world's largest gas company, to sign 
multibillion-dollar contracts with individuals whose names they 
do not know, as what their president says? How can Gazprom 
conduct due diligence, not knowing who their partners are?
    To make matters worse, Gazprom denied--strongly denied 
allegations in the world press that their partners in 
RosUkrEnergo, whose names they claim not to have known, were in 
league with Russian organized crime figures. Later, when the 
public evidence became overwhelming, Gazprom and Putin accused 
the Ukrainian Government of forcing the Russian side to accept 
this Swiss-registered company into the agreements signed in 
Ukraine in January 2006.
    Now, I don't know, I've never seen any other examples of 
Ukrainians forcing Russia to do anything, so this is a--this is 
a first time in history, according to what they are saying.
    In order to maintain this middleman company in the gas 
contract with Ukraine, Gazprom shut off gas deliveries to 
Ukraine and to Europe until their terms were met. The then-
Ukrainian Prime Minister Yuriy Yekhanurov stated that one of 
Gazprom's main demands during those negotiations in the winter 
of 2006, in January, was that this company, this murky Swiss-
based company, that it be included in the contract. They went 
out of their way to stop the gas just so this company would be 
included in this thing. Why?
    Some American experts downplay the lack of transparency and 
the dubious methods used by Russian state-owned companies, 
saying, ``Well, look, companies in the U.S. and Europe also do 
crooked things.'' They point to the Enron affair and the recent 
accusations of wide-scale bribery by the German company, 
Siemens. Their argument is that American Russophobes are 
holding Russia to a higher standard.
    The difference, however, is that in the United States and 
Germany--the United States and Germany arrest and prosecute 
criminal behavior, while in Russia the crooks not only go scot-
free, they are awarded state medals for their actions, while 
individuals like Mikhail Khodorkovsky, who opted to run a clean 
shop and refused to bow to Putin, wound up in prison. And a few 
days ago, Robert Dudley, the CEO of BP-TNK, the joint British-
Russian oil company, was questioned for--was questioned by the 
Russian police for 5 hours. This is part of a brazen attempt by 
Gazprom to take over the assets of BP-0TNK.
    As you know, Gazprom is seeking to list on the New York 
Stock Exchange. This is something Congress should support, in 
principle. It makes economic sense to have the world's largest 
gas company listed on the New York Stock Exchange. However, it 
is not enough for the New York Stock Exchange to state that 
everything is on order with Gazprom without a thorough due-
diligence investigation into its operations and its strong-arm 
tactics within Russia. I believe the Department of Justice 
should oversee this investigation in order to ensure its 
accuracy.
    In the long run, Congress must take all appropriate 
measures it can to assure that the U.S. energy--United States-
Russia energy relationship is free of uncertainty and 
questionable practices in order to protect the national 
security of the United States.
    Thank you.
    [The prepared statement of Mr. Kupchinsky follows:]

     Prepared Statement of Roman Kupchinsky, Partner, AZEast Group,
                               Mahwah, NJ

    Mr. Chairman, honorable members of the committee, I ask that my 
full written statement be included in the record.
    Today I want to address the question of criminality and the lack of 
transparency in the Russian energy sector.
    The reason for this is that in the near future the United States 
will become more dependent on LNG (Liquefied Natural Gas) imports from 
Russia. Last year Gazprom executives stated that they intend to supply 
up to 20 percent of the U.S. LNG market by 2015. And while this will 
help America meet its energy needs, the LNG business needs to be fully 
transparent and in compliance with American law.
    Unfortunately, persistent opaqueness in the Russian oil and gas 
sectors along with a number of murky schemes created by Gazprom, the 
Russian state-owned gas monopoly, has lowered Russia's business 
reputation to the point where many Western companies are loath to trust 
their Russian partners, and are forced to deal with them mostly out of 
necessity.
    There is a great deal of evidence which suggests that Russian 
organized crime has been involved in the Russian energy business--with 
the full knowledge and quiet approval of the Russian leadership--both 
past and present. I will describe some of these schemes in my 
testimony.
    Prior to his election, Dmitry Medvedev, the new President of 
Russia, was the chairman of the Board of Gazprom, which supplies 25 
percent of Europe's natural gas. Was Medvedev aware of Gazprom's 
alleged links to organized crime? Many observers believe that he was 
and chose to remain silent about it.
    I also believe that it is inconceivable for him not to have known 
the facts.
    The nexus of organized crime and government in Russia is not a new 
phenomenon, but today it has taken on an important geopolitical role.
    Russian organized crime, with the tacit support of the Kremlin, is 
playing a significant role in expanding the Kremlin's economic hegemony 
throughout the former U.S.S.R. and the Warsaw Pact countries.
    In Romania the aluminum business was taken over by Russian-owned 
companies using suspect means and there are serious questions about how 
that country's
gold mining industry is being bought up by companies from Central Asia 
who are friendly to the Kremlin and who appear to have a working 
arrangement with some high level Romanian officials.
    In the Baltic States, the Kremlin has deliberately done everything 
in its power to isolate and punish the Lithuanians, Latvians, and 
Estonians for standing up to Russia by spending billions of dollars in 
order to insure that energy supplies destined for Europe circumvent 
these countries via the Nordstream pipeline.
    In Hungary, shady companies with suspected links to organized crime 
and to Gazprom seek to control large segments of the domestic gas 
distribution and power generation business.
    Within the Kremlin there are competing clans who want to maintain 
the flow of cash through little-known middleman companies in the gas 
trade in order to finance various political projects (many of which 
spout stridently anti-American propaganda) as well as provide for their 
own personal needs.
    Gazprom, with the silent support of the Kremlin has set up 50 or so 
middlemen companies, silently linked to Gazprom and scattered 
throughout Europe--such as the Centrex group of companies and the 
Gazprom Germania network--which do not add any value to the price of 
Russian gas being sold on European markets; yet they earn enormous sums 
of money which appears to simply vanish through shell companies in 
Cyprus and in Lichtenstein.
    Last year, the CEO of Germany's largest gas company E-ON Ruhrgas, 
Burghard Bergmann, who is the only Westerner on the Board of Directors 
of Gazprom, told the chairman of the board, Dmitry Medvedev (now the 
President of Russia), that Gazprom Germania and a Swiss-based 
middleman, RosUkrEnergo, should be disbanded. Bergmann also complained 
that Russian state-backed gas schemes in Hungary were opaque and 
tarnished Russia's reputation.
    The Gazprom board rejected Bergmann's request. Part of the reason 
could well be that Russia does not have a Foreign Corrupt Practices 
Act--the Kremlin and Russian law enforcement agencies tend to close 
their eyes on how Russian energy companies--be it the private oil 
company Lukoil or the state-owned oil company Rosneft or Gazprom--
conduct business abroad.
    These energy deals are closely linked to Russian foreign policy.
    ``Pipeline diplomacy'' practiced by the Kremlin is dominated by a 
small group of individuals and what we are in fact witnessing is the 
large-scale privatization of foreign policy by the Russian elite.
    Some American experts downplay the lack of transparency and the 
dubious methods used by Russian state-owned companies to conduct 
business by saying ``Companies in the U.S. and Europe also do crooked 
things'' and point to the Enron affair and recent accusations of wide 
scale bribery by the German company Siemens. The argument is that 
American ``Russophobe's'' are holding Russia to a higher standard.
    The difference however, is that the U.S. and Germany arrests and 
prosecutes criminal behavior while in Russia the crooks not only go 
scot free--they are awarded state medals for their actions, while 
individuals like Mikhail Khordokovsky, who opted to run a clean shop 
and refused to bow to Putin's will, wind up prison.
    One gas trading intermediary company, RosUkrEnergo, based in Zug, 
Switzerland, is owned 50 percent by Gazprom and 50 percent by two 
Ukrainian businessmen who hid their identities for years and who are 
alleged to be linked to Russian organized crime. This is a classic case 
study of how the Kremlin and Gazprom conspired to protect what was 
believed to be a criminal enterprise.
    Russian President Vladimir Putin, was directly involved in creating 
this company along with former Ukrainian President Leonid Kuchma in 
July 2004, and has publically defended RosUkrEnergo on a number of 
occasions saying: ``Believe me; we don't know the identities of the 
hidden Ukrainian owners [of RosUkrEnergo].''
    Putin's statement raises an important issue. Is it common practice 
for Gazprom, the world's largest gas company, to sign multibillion 
dollar contracts with individuals whose names they do not know? How can 
this state-owned company possibly conduct due diligence?
    To make matters worse, Gazprom vehemently denied allegations in the 
world press that its partners, whose names they claimed not to know, 
were in league with Russian organized crime figures. Later when the 
public evidence became overwhelming, Gazprom and Putin accused the 
Ukrainian Government of ``forcing'' the Russian side to accept the 
Swiss-registered company into the Ukrainian-Russian gas contract signed 
in 2006.
    Who can believe that Ukraine can force Russia to do whatever it 
wants.
    To achieve their ends, Gazprom shut off gas supplies to Ukraine in 
January 2006--and to Europe--until their terms were met. The then-
Ukrainian Prime Minister Yuriy Yekhanurov stated that one of Gazprom's 
main demands during the negotiations was that the Swiss-based 
RosUkrEnergo be included in the contract.
    One of the managing directors of RosUkrEnergo was Konstantin 
Chuychenko; 3 weeks ago Russian President Dmitry Medvedev made him a 
key advisor in his new administration.
    Can any of Gazprom's statements be taken at face value?
    What next?
    As you might know, Gazprom is seeking to list on the NYSE. This is 
something Congress should support in principle--it makes economic sense 
to have the world's largest gas company listed on the NYSE.
    At the same time, it is imperative that we do not reward Gazprom 
management, which often acts as a tool for Russian foreign policy, for 
its opaque ways of conducting business.
    It is not enough for the NYSE to state that everything is in order 
with Gazprom's bid to list without a thorough due-diligence 
investigation into its European operations and its strong-arm tactics 
within Russia. I believe the Department of Justice should oversee this 
due diligence investigation in order to insure its accuracy.
    In the long run Congress must take all appropriate measures it can 
to assure the nation that the United States-Russia energy relationship 
is free of uncertainty and questionable practices in order to protect 
the energy security of the United States.

    The Chairman. Thank you very much.
    I've kept you a long time. I have several questions.
    I apologize--Senator Lugar had to leave, because he and 
Senator Kennedy share an annual reception relating to a 
dialogue with Muslim leaders, and Senator Kennedy is obviously 
not able to be there, and Senator Lugar had to open this 
conference. So, I, on his behalf, apologize.
    And, with your permission, he and others may have a few 
questions. I'll not burden you, as they say, a lot of homework 
here, but--let me ask a few relatively straightforward 
questions.
    Ms. Baran, in layman's terms, so average Americans can 
understand it, talk to me about how much gas is needed to fill 
the Nabucco gas pipeline to make it economically feasible. In 
other words, is there enough gas available in the near term 
coming out of the Caspian Basin, to be able to make it 
economically feasible, or is it necessary to have Iranian or 
Iraqi or any other--or Russian--gas in order to make it 
economically feasible?
    Ms. Baran. OK, thank you very much for this question, 
because this is what is the big question, Is there enough gas 
to make Nabucco work? There is enough gas. Of course, it's not 
ready, waiting for the pipeline; it needs to be explored, and 
that gas needs to be committed.
    Nabucco requires, in the first phase, about 8 bcm of gas, 
in layman's term, and that gas exists in Azerbaijan. The 
producers, the BP-Statoil consortium, the Azerbaijani 
government, and, I believe, the U.S. Government's own estimates 
indicated that Azerbaijan alone will be able to start Nabucco's 
first phase. So, it can start going----
    The Chairman. And when you say ``start its first phase,'' 
you mean the construction of the first phase or----
    Ms. Baran. It can fill----
    The Chairman. Fill.
    Ms. Baran [continuing]. While the construction----
    The Chairman. Gotcha.
    Ms. Baran [continuing]. Is going on this--yes, on the 
second part, as well. Because the timing is about 2010-2011, 
and by that time the gas will be ready.
    The Chairman. What is the total cost, if you know, from the 
Caspian to Austria? I mean, that's the route of the pipeline, 
correct?
    Ms. Baran. Correct.
    The Chairman. And, I mean, in terms of total construction 
cost, what is the estimated cost, and what are the sources of 
the capital to actually construct it?
    Ms. Baran. Well, the cost keeps increasing for all the 
pipelines, because of rising steel and oil prices. The pipeline 
is not going to be constructed from start to end; the main 
construction has to be from Turkey to certain parts, so there's 
not an ongoing--one single pipeline that's going to be 
constructed. And----
    The Chairman. That's why I asked the question. Again----
    Ms. Baran. Yeah.
    The Chairman [continuing]. For my colleagues, it's a useful 
thing to know, that--what would be the short-term, medium-term, 
and long-term impact of the beginning of, and to the end of, 
the construction of the pipeline--in order for them to 
understand the political ramifications that are at play here? 
You talked about Turkey. I was recently in Turkey. There is a 
great deal of pressure on Turkey, indirectly from its 
citizenry, saying, basically, ``I don't care where the devil 
you get the gas from, get us some more gas.'' And therefore, it 
becomes difficult for any political leadership. And the 
political leadership now is having its own difficulties, not 
only with the Supreme Court there, but its difficulties in 
terms of the economy.
    So, if you could--and I don't want to drag this out, and I 
apologize for being so, maybe, overly pragmatic about how to 
talk about this--but, talk to us about the phases of the 
construction and the beneficiaries in each of those phases if 
the Nabucco line is underway, being funded, consistent with the 
gas coming online in order to fill it.
    Ms. Baran. Well, first, it's important to mention that 
Nabucco was originally proposed by Austria to transport Iranian 
gas to Europe. When that option was no longer there, the U.S. 
was interested in finding alternative routes to get Caspian gas 
to European markets, Nabucco emerged as a very good pipeline 
project.
    Turkey and many other European countries just want the gas, 
and it doesn't matter to them where it comes from. And that's 
how Russia is able to win this gas race, because whoever gets 
to the market first is going to keep everyone else out. Looking 
at Turkey, we've seen a similar development in the late 1990s. 
Again, there was huge interest, and President Clinton was 
personally involved, in getting gas from Turkmenistan and 
Azerbaijan to Turkey. Like Nabucco and like the Trans-Caspian 
Gas Pipeline that hopefully will be built now, it was going to 
be financed by the private sector, and it was considered to be 
commercially viable and making, potentially, a lot of profit. 
What happened was, when the Russians realized that this 
corridor could happen, and then it would interrupt their 
monopoly control--because what Russia has been doing is, when 
Russia supplies gas to Europe, it's not Russian gas, but it's 
the gas it has been able to buy from Turkmenistan and 
Kazakhstan, and use cheaply internally, and then sell some of 
its own gas much more expensively. So, when Russia understood 
that if Turkmen gas has a way of reaching Turkey without its 
control, it was going to lose its monopoly, and along with it a 
lot of the money, and most important, influence. So, that's 
when the Russian leadership proposed the Blue Stream gas 
pipeline to send gas from Russia to Turkey directly.
    At the time, Europeans and Americans did not want to pick a 
fight with the Russians, and most people did not want to 
understand that it's a race. Like with Nabucco, the rhetoric 
was, ``The two of them are not competitive, they complement 
each other. There's so much gas demand in Turkey that you can 
do both at the same time.'' But that logic, of course, doesn't 
make sense for private investors, and we have seen that it 
didn't make sense because as soon as the agreements were 
reached on Blue Stream pipeline, which is the same partnership 
as South Stream, Gazprom-Eni, then----
    The Chairman. Blue Stream cuts across----
    Ms. Baran. The Black Sea----
    The Chairman [continuing]. The Black Sea----
    Ms. Baran [continuing]. Directly.
    The Chairman [continuing]. In the----
    Ms. Baran. Going to the----
    The Chairman [continuing]. In the most eastern quadrant of 
the--is that correct?
    Ms. Baran. Correct.
    The Chairman. OK.
    Ms. Baran. Yeah. And so, as soon as the agreements were 
reached on Blue Stream, then the consortium, which included GE, 
Bechtel, and Shell, could no longer make a bankable case for 
the Trans-Caspian Gas Pipeline. Yes, the Turkish market will 
eventually be big enough to receive both of the supplies, but 
the timing and sequencing is the important issue here.
    So, with Nabucco now, coming to your question, same 
dynamics are at play. The companies who would build Nabucco 
want to do it, believe it's commercially feasible because, as I 
said, since they don't operate as their country's foreign 
policy arm, they need to, and want to, make money, and they 
think that it will be commercially profitable for them to do 
Nabucco.
    But, the same Central Asian gas might be going via the 
Gazprom system to European markets, then they will not have the 
confidence to put their money down.
    The Chairman. Gotcha.
    Ms. Baran. The U.S. leadership was essential in the early 
1990s to provide the necessary framework and the political 
stability in saying, basically, ``If Russians were to try to 
intimidate you, we are with you''; the east-west energy 
corridor is not an anti-Russian project or vision; it is a way 
to enable those countries direct access to Europe for their own 
gas. What is ultimately at stake is what sovereign, independent 
countries should be able to do with their own energy reserves.
    The Chairman. Leon, if you were heading up the same 
committee within the present administration, what would you be 
talking about doing now? Let's assume the same apparatus 
existed, and all of a sudden, in the last months of this 
administration, there was an epiphany that something should 
change, or in a McCain or an Obama administration, what would 
be the--and I'm being a bit pedantic here--what would be the 
initial suggestions you would make? I realize--I'm not asking 
you to lay out a 4-year plan, but what--how do you kick-start 
the reengagement, if you will--because we've been--you know, 
that--you know, the book about absent or present at the 
creation, we've been absent at the creation here, it seems to 
me. And so, what would be the initial things you'd do to sort 
of get this back, no pun intended, on-stream here?
    Mr. Fuerth. I could picture what I could do in the opening 
period of the next administration. I can't imagine what would 
be doable----
    The Chairman. Well, let's just skip to the next 
administration.
    Mr. Fuerth. Right, let's go--let's go there.
    The Chairman. Let's--it's----
    Mr. Fuerth. One of the interesting things here is that I 
don't think this thing has to have a Democratic or a Republican 
label to be credible.
    The Chairman. Neither do I. That's why I asked the 
question.
    Mr. Fuerth. Right. What is--what it has to have is the 
imprimatur of the President of the United States, based on a 
clear understanding, emanating from there, about where the 
strategic direction and interests of the United States really 
are, and how, step by step, the United States is going to 
pursue them, a message that can be taken by our diplomats and 
envoys to wherever we need it to be taken.
    The second thing that's important is that there has to be 
an organizational system to back that up, because there's no 
shortage of statements for the press or statements for the 
record. What we need is an organization in the United States 
Government which doesn't go to sleep in between summit 
meetings, but which, instead, exists to make sure that the 
connections that are required for success are identified, 
thought through, and the resources for these are found. So, 
that--you know, that, in 2 paragraphs, is what I'd be 
recommending.
    The Chairman. Look, one of the things that was mentioned at 
the outset of both your testimonies was the differences between 
today and 1992 and 1994 and 1996. I would argue--and I don't 
think you disagree, but one of the gigantic differences is that 
the realization, not only on the part of government officials--
Democrats, Republicans, House, Senate, administration people--
not the President, but administration people--and, I might add, 
the average American--that energy has become an important 
strategic question. For example, about 10 months ago a poll 
came out. They asked the American people, What is more in the 
long-term interest, in terms of concern for the United States, 
the war in Iraq or the failure to have an energy policy and 
energy dependence? Seventy-two percent said energy. The 
American people are a heck of a lot smarter than both political 
parties are. I really, truly believe this is a place where the 
public is way ahead of the political leadership in both 
parties.
    And so, I--this is a statement, but also a question, to see 
whether you agree with my statement. I really think there is a 
really palpable appreciation of the security dimension of our 
energy dependence and that of our allies, and a willingness for 
us to take--a desire to take a much more assertive position on 
energy issues as it relates to our national security interests. 
I don't mean war, I mean the kind of engagement you're talking 
about.
    I'm of the view that whether or not John or Barrack are the 
next President, that on this issue there ought to be some 
consensus.
    But, here's my problem, and I'll cease and let you go after 
this point. It seems to me, as long as we are--``bogged down'' 
is the wrong word--as long as we fail to have a coherent 
strategy as to how to leave Iraq without leaving chaos behind, 
and as long as we have a--no strategy to engage Iran, that the 
ability to take advantage of the public consensus, as it 
relates to this and other issues, is pretty well checked. I 
kind of view--I kind of view Iraq as not--I think our 
grandchildren, when asked, ``What is the most significant 
dilemma, internationally, America faced in the first decade of 
the 20th century?'' they will not say Iraq, because, by that 
time, other of the greater issues will have emerged--
generically, energy, Russia, China, India--you know. But, I 
kind of view Iraq as a big boulder sitting in the middle of the 
road, that it significantly diminishes our credibility to be 
able to generate consensus on issues from this to many others, 
and it erodes our flexibility financially in being able to deal 
with the tremendous economic imperatives we have here at home, 
spending $3 billion a week.
    So, I'd like you to briefly comment on this: Is it your 
view that our lack of flexibility and initiative--and thereby, 
lack of success--are at all related to our lack of a policy on 
Iran and our lack of a strategy with regard to Iraq, in terms 
of being able to figure out how we get out eventually without 
leaving chaos behind? Would you be--and maybe it's--I'm way 
off, here--would you comment on those for me?
    Mr. Fuerth. In which order would you like for----
    The Chairman. Either way.
    Mr. Fuerth [continuing]. Us to do that?
    The Chairman. Doesn't matter.
    Mr. Fuerth. To go back to the scenario that you presented, 
if you--if I were in that situation, I would at once 
acknowledge that these things have tremendously limited our 
scope for action in every way, politically and financially and 
so on. And then I'd pray for a brainstorm about how to do 
workarounds so that we could, nevertheless, make some progress, 
because time is passing.
    The Chairman. Absolutely.
    Mr. Fuerth. And with its passing, there are opportunities 
that are going by us that cannot be retrieved. That's----
    The Chairman. Exactly.
    Mr. Fuerth [continuing]. The thing that's so scary. And so, 
one of the things that I would say is that, while we struggle 
to figure a decent way to end the war in Iraq, and while we 
struggle to figure out a way to get the Iranians to talk sense 
with us, there are other things that would establish our bona 
fides again. For example, in energy policy. But, I'd also say 
that the game has gotten much more complicated, because now 
energy policy is linked to environmental policy----
    The Chairman. Yes.
    Mr. Fuerth [continuing]. And now energy policy has all of a 
sudden become linked to the price of food and hunger in the 
world, so that, again, what was complicated enough in the 1990s 
has now expanded exponentially in terms of its difficulty.
    But, the final thing that I would say is, just because it's 
complicated doesn't mean it can't be done.
    Ms. Baran. Briefly, if we think about Russia, I think 
Russia's position at the U.N. Security Council has been very 
important, in terms of not taking certain steps in that part of 
the world, because we needed Russia in Iraq, and now we need 
them on Iran. So, that has some limiting influence.
    From the regional perspective, I travel to the region a 
lot, and, right after this hearing, I'm flying to Kazakhstan, 
and I know if I meet with the senior leadership, they will say, 
``Why isn't the U.S. paying more attention to us?'' And the 
next question is going to be, ``What's going to happen in 
Iraq?'' There are different possibilities for Iraq's future. 
You, Senator Biden, have a vision. There are other visions out 
there. People in that part of the world need to know, and right 
now there is confusion.
    And then, of course, the big elephant in the middle of the 
room is Iran. If there is going to be, as some speculate, some 
sort of a military confrontation, this would have huge 
consequences to everything going on in and across Europe and 
Eurasia, because Iran is right next to those countries. It's a 
stereotypical thing to say, but Iran really is not Iraq, and 
having a destabilized Iraq and Iran at the same time would make 
matters very, very complicated.
    So, I am afraid, until there is a little bit more clarity 
about where the U.S. is headed, there is not going to be much 
more traction.
    The Chairman. I thank you both.
    Now, the question I have for you, sir, is going to sound 
like I'm being facetious, but I'm not. What is the difference 
between Gazprom having an organized criminal element to it and 
having Putin? You laid out--which I think is accurate--the 
degree of influence of organized crime within the largest 
state-owned gas facility in the world. And my question is, 
``Yeah. So, what?'' What would be the difference if organized 
crime wasn't there, and the way in which Putin operates with 
regard to the use of that significant monopoly? I'm being 
deadly earnest. What would the geopolitical ramifications be if 
there was no organized crime, but Putin was running it in the 
way in which he has essentially run it?
    Mr. Kupchinsky. I believe there would be no difference, to 
be very honest.
    The Chairman. That's my point.
    Mr. Kupchinsky. Well, what is illustrates, however, is that 
in the Kremlin, beginning in the mid-1990s, a nexus was formed 
between organized crime and the government. The government--the 
Russian Government--some would say the Russian Government, the 
ruling elite in the Kremlin, the handful of people who 
actually, not own Russia, but control its destiny, they came to 
an agreement with organized crime. They saw that--how to use it 
for their own benefits, I believe. When I look at all these 
schemes that I talked about, this Gazprom-Germania scheme, 
which--the Germans don't understand why it's there. I mean, 
it--look, it serves no purpose, they can see no reason for it. 
And yet, that company has branched out into 30 other companies, 
and has a branch right now in Houston, Texas. Yeah.
    So, I mean, it's--it's not for the good of the Russian 
people, these things. They're not being done for the Russian 
treasury or for the Russian people. It's what the Russians 
call--I mean, the--a lot of people in Russia that I know and I 
meet with feel the Gazprom leadership, in Russian the word is 
``vremenshchiki,'' people who want to grab everything at the 
moment when they can, ``This is the time to steal it, let's 
steal it now. You know, forget about the grandchildren, the 
future, that's not important. This is when we can do it. We're 
in power. Let's take as much as we can.'' And that's--
unfortunately, has shown itself to be true.
    The Chairman. Well, I thank you. I thank you all.
    With your permission, I have one more question for you--
I'll submit it in writing, Leon, if I may; and a couple for 
you, unfortunately. I know I'm making work for you, but I'd 
appreciate it very much.
    Your testimony has been very useful. I look, where I am, 
and I'll just be blunt about it--I think, quite frankly, the 
role of this committee has very little influence on the 
remainder of this administration, but hopefully it can begin to 
lay out a larger matrix for the next administration, whomever 
it is, to maybe view, through a different prism, a number of 
these real and glaring dilemmas.
    You know, I--I'll conclude by saying that we are at an 
inflection point here where it's either going to go up, down, 
left or right, and the trajectory's going to be set for some 
time to come. That's an inflection point.
    We're at that point. And it is not hyperbole to suggest 
that if we miss the opportunity to be able to influence, in 
this one narrow subject we're discussing today, the 
construction of these pipelines that do not allow for monopoly, 
it will be created; the other pipelines will be built, they 
will--it'll be there. It's not like you can undo it, it's not 
like you say, ``Well, you know, now we have--it's clear that 
Russia is controlling, in a monopolistic way, the totality of 
what's coming out of, not only Russia, but the Caspian Sea, 
and, by the way, that's a bad thing for Europe, it has used''--
I think there's a--there's a clear reason why Putin's gone to 
these countries: it is their foreign policy. It is their--it is 
their national strategic doctrine. I mean--and to say, ``Well, 
you know, why don't we dismantle those other pipelines now and 
build new ones.''
    So, I just think there's such an urgency here. You've added 
to that, to help us add to that sense of urgency. I certainly 
do not have the answers, all the answers, but I do know one 
thing, it better be addressed up front very quickly by the next 
administration, and make some very hard, tough choices. As you 
point out, Leon, there's tradeoffs here, man. There's the 
environment, there's food--I mean, on a much broader scale, but 
regionally there's real tradeoffs.
    Mr. Fuerth. Well, what's happening, Senator, is, now we are 
writing the history of the future, as you're pointing out.
    The Chairman. Well, safe travels. And I hope, when you come 
back, you'll be willing--I mean this sincerely--to--if you have 
the time, to be willing to--either on the telephone or in 
person, to debrief our staff, it would be very useful for us.
    And I thank you all. I thank you for your patience.
    And we are adjourned.


    [Whereupon, at 4:47 p.m., the hearing was adjourned.]

                                  
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