[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
EUROPEAN AND EURASIAN ENERGY: DEVELOPING CAPABILITIES FOR SECURITY AND 
                               PROSPERITY 

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


                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON EUROPE AND EURASIA

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 2, 2011

                               __________

                           Serial No. 112-48

                               __________

        Printed for the use of the Committee on Foreign Affairs


 Available via the World Wide Web: http://www.foreignaffairs.house.gov/

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                      COMMITTEE ON FOREIGN AFFAIRS

                 ILEANA ROS-LEHTINEN, Florida, Chairman
CHRISTOPHER H. SMITH, New Jersey     HOWARD L. BERMAN, California
DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
ELTON GALLEGLY, California           ENI F.H. FALEOMAVAEGA, American 
DANA ROHRABACHER, California             Samoa
DONALD A. MANZULLO, Illinois         DONALD M. PAYNE, New Jersey
EDWARD R. ROYCE, California          BRAD SHERMAN, California
STEVE CHABOT, Ohio                   ELIOT L. ENGEL, New York
RON PAUL, Texas                      GREGORY W. MEEKS, New York
MIKE PENCE, Indiana                  RUSS CARNAHAN, Missouri
JOE WILSON, South Carolina           ALBIO SIRES, New Jersey
CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
JEFF FORTENBERRY, Nebraska           THEODORE E. DEUTCH, Florida
MICHAEL T. McCAUL, Texas             DENNIS CARDOZA, California
TED POE, Texas                       BEN CHANDLER, Kentucky
GUS M. BILIRAKIS, Florida            BRIAN HIGGINS, New York
JEAN SCHMIDT, Ohio                   ALLYSON SCHWARTZ, Pennsylvania
BILL JOHNSON, Ohio                   CHRISTOPHER S. MURPHY, Connecticut
DAVID RIVERA, Florida                FREDERICA WILSON, Florida
MIKE KELLY, Pennsylvania             KAREN BASS, California
TIM GRIFFIN, Arkansas                WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina
ANN MARIE BUERKLE, New York
RENEE ELLMERS, North Carolina
VACANT
                   Yleem D.S. Poblete, Staff Director
             Richard J. Kessler, Democratic Staff Director
                                 ------                                

                   Subcommittee on Europe and Eurasia

                     DAN BURTON, Indiana, Chairman
ELTON GALLEGLY, California           GREGORY W. MEEKS, New York
GUS M. BILIRAKIS, Florida            ELIOT L. ENGEL, New York
TIM GRIFFIN, Arkansas                ALBIO SIRES, New Jersey
TOM MARINO, Pennsylvania             THEODORE E. DEUTCH, Florida
JEAN SCHMIDT, Ohio
TED POE, Texas



























                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

The Honorable Richard L. Morningstar, Special Envoy for Eurasian 
  Energy, U.S. Department of State...............................     9
Ambassador Keith C. Smith, senior associate, New European 
  Democracies Project, Center for Strategic and International 
  Studies........................................................    35
Ariel Cohen, Ph.D., senior research fellow, The Kathryn and 
  Shelby Cullom Davis Institute for International Studies, The 
  Heritage Foundation............................................    42
The Honorable Ross Wilson, director, Dinu Patriciu Eurasia 
  Center, Atlantic Council.......................................    58

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Dan Burton, a Representative in Congress from the 
  State of Indiana, and chairman, Subcommittee on Europe and 
  Eurasia: Prepared statement....................................     4
The Honorable Richard L. Morningstar: Prepared statement.........    13
The Honorable Tom Marino, a Representative in Congress from the 
  Commonwealth of Pennsylvania: Statement by Mr. Boyko Nitzov, 
  director of programs, Dinu Patriciu Eurasia Center of the 
  Atlantic Council of the United States..........................    27
Ambassador Keith C. Smith: Prepared statement....................    38
Ariel Cohen, Ph.D.: Prepared statement...........................    45
The Honorable Ross Wilson: Prepared statement....................    60

                                APPENDIX

Hearing notice...................................................    76
Hearing minutes..................................................    77
The Honorable Gregory W. Meeks, a Representative in Congress from 
  the State of New York: Prepared statement......................    78


EUROPEAN AND EURASIAN ENERGY: DEVELOPING CAPABILITIES FOR SECURITY AND 
                               PROSPERITY

                              ----------                              


                         THURSDAY, JUNE 2, 2011

                  House of Representatives,
                Subcommittee on Europe and Eurasia,
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 2172, Rayburn House Office Building, Hon. Dan Burton 
(chairman of the subcommittee) presiding.
    Mr. Burton. The committee will come to order.
    I apologize to you, Ambassador, as I said a moment ago, 
because my Democrat colleagues are at the White House 
discussing the debt limit and other things. We did that 
yesterday. So, hopefully, they will be coming back here pretty 
quickly.
    Unfortunately, because of issues that are hot and moving 
right now, I will have to go to a meeting with our leadership 
in just a few minutes. So my staff and my colleagues will be 
here, and I will go through all of your testimony and come back 
as soon as I meet with them.
    For decades, energy and energy security have been global 
concerns. All economies, developed and developing, need 
reliable, affordable, and secure sources of energy to drive 
economic growth. As more nations join the cadre of developed 
countries, demand for energy continues to rise and the search 
for reliable energy and stable sources grows further.
    Everyone needs energy, but it has become rare for countries 
to develop domestic sources because of safety and environmental 
concerns. This ``not in my backyard'' mentality has allowed 
Russia, North Africa, and the Middle East to become primary 
providers of energy. And we are very concerned about this 
because we are not doing what we need to develop reliable 
energy sources real quickly and we are becoming more energy 
dependent on other countries. Reliance on such unstable foreign 
sources of energy puts U.S. and European economies at risk. As 
we have all witnessed in a very real way this year at the gas 
pump, any time there is a global security scare, real or 
predicted, including terrorist attacks and civil unrest, the 
cost of energy in global markets dramatically increases.
    Under this administration, the United States exemplifies 
this unhelpful ``not in my backyard'' mentality. We refuse to 
drill offshore, we refuse to drill in Alaska, and we refuse to 
embrace new technology such as hydraulic fracturing to extract 
large deposits of oil and gas from shale. Instead, the United 
States chooses to rely on unstable foreign sources of energy, 
including regimes dedicated to advancing the polar opposites of 
our democratic ideals. Hypocritically, we ask our foreign 
partners to increase production using the same technology and 
innovation we ourselves scorn.
    This must change. We should not ask European and Central 
Asian countries to adopt policies and build infrastructure that 
we are not willing to put in place on our own soil. We cannot 
ask our partners to drill, build pipelines and operate nuclear 
power plants if we are unwilling to do so here at home. 
Furthermore, we should not support ventures that further enrich 
bad actors in Europe and around the globe; for example, plans 
to connect Iranian energy with Western consumers. Every dollar 
that we spend on energy from such sources is a dollar given to 
anti-Western and anti-democratic radicals.
    Europe's energy future is uncertain. Germany and 
Switzerland appear to share our ``not in my backyard'' 
mentality. In the wake of the emergency at Fukushima, both 
countries have announced their intention to forego nuclear 
development. Germany alone has recently announced that they 
will shutter 17 reactors by 2022. As a result, these countries 
will be more reliant on energy from Polish coal plants, Russian 
gas, and Czech nuclear plants. Meanwhile, Russia uses Europe's 
dependence on Russian gas to hold the region hostage. Just this 
week, Ukraine again opened discussions with Russia to have 
natural gas prices lowered. These talks come less than 2 years 
after Russia cut supplies to Ukraine, bringing the country's 
economy to a halt.
    For over 10 years, we have heard of the development of the 
Nabucco pipeline and its ability to connect Western Europe with 
diverse energy sources in Central Asia and the Middle East. 
However, continuous delays have pushed back the forecast 
completion date for this project to 2017. Negotiations over 
transit rights have hampered the project, while historic 
disputes between neighbors poison discussions and prevent 
resolution.
    In addition to Nabucco, proposed projects, including the 
Trans-Caspian gas pipeline, the Trans-Adriatic pipeline, the 
Arab gas pipeline, and other pipelines connecting Central Asia 
with the Balkans, all have potential to provide Europe with 
diverse sources of energy. The North Stream and South Stream 
projects, which will connect Europe to Russia, are also in 
development. All of these proposals represent progress toward a 
Europe that relies on diverse sources of energy. However, we 
must be cautious and ensure that Europe and its partners enact 
these projects in a fair and transparent manner, open to all 
investors.
    All of these projects are of interest to the United States, 
as they will stabilize global energy prices. And we really need 
that. These projects also present opportunities for American 
investors. The U.S. Government should work to guarantee that 
American companies can access these new markets and projects in 
a free and fair manner. The proposed European, Eurasian and 
Central Asian pipelines also provide exporting countries with 
new sources of revenue. This income must be used to develop 
infrastructure, support democratic governments and build strong 
civil societies.
    Central Asia, the Caucasus and the Middle East are all 
experiencing instability as people seek basic human rights, 
economic reforms and true democracy. Accordingly, the United 
States must work with these partners to increase transparency, 
the rule of law, free and fair elections and good governance. 
We must be careful to ensure that European and American 
investment strengthens democracy instead of weakening it by 
filling the Swiss bank accounts of autocratic leaders with the 
money they use to prop up their regimes.
    American energy policy should be seamless at home and 
abroad. Our goals overseas should be our goals here in the 
States. Instead of the ``not in my backyard'' mentality, the 
United States and Europe must develop an all-of-the-above 
policy that combines economically viable sources of renewable 
energy with environmentally responsible development of fossil 
fuels. Moreover, we should achieve understanding with our 
closest European partners that a diversified energy market will 
protect economies from unwanted political influence and 
increase connections between like-minded nations.
    The United States and our European partners have made 
considerable investments in the energy sector. We must not 
allow our cooperation to fragment during critical negotiations. 
The United States and Europe must continue to cooperate with 
Eastern Europe and Central Asia to achieve a diversified energy 
market. Only a transparent and diversified energy market will 
perpetuate transatlantic security and prosperity.
    Now, my minority colleague is here in spirit but he is not 
in body. He is down at the White House. I am sure when he gets 
back he will have an opening statement.
    At this time I will recognize my colleague from the great 
State of Arkansas to chair the committee in my absence, and I 
will be back shortly.
    [The prepared statement of Mr. Burton follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
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    Mr. Griffin [presiding]. I recognize the gentlelady for an 
opening statement.
    Mrs. Schmidt. Thank you, Mr. Chairman, and thank you for 
holding this hearing on an issue that perhaps does not receive 
enough attention, but is extremely important, given the 
uncertain nature of the energy sector in today's global 
economy.
    Mr. Chairman, I believe it is in our national security and 
economic interests to promote a stable environment in Europe 
and Eurasia, particularly with regard to the production, 
transportation and availability of oil and natural gas. With 
global oil consumption on the increase, particularly with the 
huge surge in demand from developing countries like China, 
India and Brazil, it is of utmost importance that we work with 
the European Union, Russia, Ukraine and other countries of 
Central and Eastern Europe to help them maximize their oil and 
natural gas production and distribution.
    When one understands that approximately 85 percent of all 
oil exported from Russia is consumed by European countries, 
many of whom are our active NATO partners in the war on terror, 
it becomes very obvious as to why we need to be involved in 
helping this region of the world with development and security 
of its energy capabilities. While many of the Eurasian 
countries such as Azerbaijan and Kazakhstan hold the promise of 
increased oil and natural gas production, they are prevented 
from realizing this objective due to governmental and 
bureaucratic corruption, economic uncertainty and the lack of 
open and transparent decisionmaking.
    Beyond production, however, is the matter of 
transportation. Oil and natural gas are no use to anyone if 
they cannot be transported to the market where they are needed 
so the people who need it can purchase it. Pipeline development 
is therefore essential to and a necessary component of the 
increased production of oil and natural gas in Eurasia.
    Whether it is the development of the North Stream pipeline, 
the South Stream pipeline or the Turkey-Austria pipeline, 
increased and improved infrastructure is necessary if Eurasia 
is to increase its energy sector.
    Mr. Chairman, I look forward to the testimony of our 
witnesses and to learn more about this important issue.
    I yield back my time.
    Mr. Griffin. Would the gentleman wish to make an opening 
statement?
    Mr. Marino. Yes, sir. Thank you, Mr. Chairman, and I want 
to thank our witnesses for participating.
    Emerging economic powers like China, India and Brazil 
consume more and more of the world's energy resources every 
day, which is steadily increasing international demand. This 
increased demand coupled with the continuing instability in 
North Africa and the Middle East has only put additional 
pressure on the world's energy supplies. As we look to secure 
our own energy and economic future, I believe it is essential 
that we reduce our dependency on energy resources imported from 
overseas by exploring all of our domestic energy capabilities, 
and that includes not only fossil fuels, but nuclear, solar, 
wind and other renewable energy sources as well.
    Today, our counterparts in Western Europe find themselves 
in a similar position, dependent on relatively unstable and 
unpredictable partners for the energy resources needed to power 
their economies and largely unwilling to take advantage of 
domestic resources.
    As Europe reevaluates its energy policy and security, there 
is increasing reluctance to increase drilling and to construct 
additional nuclear power plants. Recently, German Chancellor 
Angela Merkel backed proposals to shut down all of the 
country's 17 nuclear power plants within a decade.
    Interesting, though, the United States has the capacity to 
be a large part of the energy solution for Western Europe. 
Increased interest in unconventional natural gas production on 
both sides of the Atlantic holds great promise, accounting for 
nearly 25 percent of our domestic natural gas production, and 
Western Europe nations which had been overly reliant on Russia 
for natural gas are evaluating whether to develop their own 
substantial shale gas resources.
    In addition to enormous shale gas reservoirs in places like 
Poland and the Ukraine, my Congressional district, the 10th 
District of Pennsylvania, sits atop a large portion of the 
Marcellus Shale, where natural gas is being produced. I am 
already familiar with many of the positive benefits that the 
unconventional gas drilling industry can yield. To date, there 
has been a huge amount invested in and around my district to 
develop the industry and the accompanying infrastructure. This 
investment has brought good jobs to our area at a time when 
Pennsylvania needs them the most.
    As Pennsylvania strives to develop the best practices and 
become the architect for the unconventional gas industry in 
America, I am particularly interested in how knowledge of gas 
development, the tools and techniques used to extract gas in 
the most environmentally accepted manner, as well as new uses 
for gas for transportation, fuel for example, can be shared on 
both sides of the Atlantic to ensure a more energy independent 
future in both the United States and our European allies.
    If European nations move forward with exploration of their 
unconventional gas reserves as part of a greater plan for 
energy security and to reduce its reliance on imported oil from 
Russia and the Middle East, it will likely have a positive 
impact on the overall international price of natural gas and 
could yield economic benefits for the United States. 
Furthermore, as these nations develop the expertise and 
infrastructure necessary to grow and expand the unconventional 
gas industry, they will likely continue and increase their 
reliance on American firms that already have the knowledge and 
the capability to do so and further intertwine our common 
economic and energy interests going forward.
    Finally, as the production of natural gas increases in the 
United States, and particularly in the 10th Congressional 
District of Pennsylvania, we can begin to export resources to 
Western Europe as a reliable and stable source to meet their 
energy needs.
    Again, thank you, Chairman, for calling this hearing, and I 
look forward to hearing from our esteemed panel and witnesses 
about this issue.
    Mr. Chairman, before yielding, I would like to ask 
unanimous consent to enter into the record a recent piece from 
the Foreign Affairs Magazine that provides an interesting look 
at how unconventional gas development here at home could have 
major positive effects in Europe.
    Thank you.
    Mr. Griffin. Without objection. Thank you.
    I recognize myself for 5 minutes to give an opening 
statement, and then we will get to you, Mr. Ambassador.
    I want to thank Chairman Burton for holding this hearing 
today. We have a lot of natural gas in the Second Congressional 
District of Arkansas and we are very concerned about domestic 
energy policy, but also what is going on in Europe and how it 
is going to impact us. Also I would like to thank in advance 
all the witnesses for coming and testifying today and look 
forward to hearing your testimony.
    Everything we produce in this country requires energy, and 
any time energy costs go up, we are paying more--at the 
supermarket and the department store and at the pump. There are 
a lot of factors that determine the price we pay at the pump, 
but one thing is clear, that we could be doing more to lower 
the price of gas, lower the price of energy in this country.
    The President has instituted a series of policies that I 
believe has reduced American-made energy production and the 
result has been higher prices and fewer jobs. The 
administration has systematically locked up the entire Atlantic 
Coast, the Pacific Coast and much of Alaska, preventing the 
creation of an estimated 1 million jobs. This administration 
imposed a real and then de facto moratorium on drilling in the 
Gulf of Mexico, which according to their own estimates cost 
approximately 12,000 jobs. According to the U.S. Energy 
Information Administration, production in the Gulf has declined 
by nearly 300,000 barrels of oil a day since last April.
    This lack of a commitment to energy production in our own 
backyard is sending the wrong signal to our allies in Europe 
and Eurasia. According to an analyst from an energy market 
firm, for every penny the price of gasoline increases, it costs 
consumers an additional $4 million per day. That equals $1.4 
billion over an entire year. Even the smallest increase in 
gasoline prices has a significant impact on our economy. That 
means that instability in Europe's energy security has a 
negative impact on global energy prices and in turn how much 
Americans pay at the pump. Worse, the United States chooses to 
rely on foreign sources of energy in unstable areas of the 
Middle East, including from regimes dedicated to advancing 
anti-democratic ideals.
    Unfortunately nothing is happening fast, and in some cases 
European countries are going in the wrong direction. Nuclear 
plants in Germany and Switzerland are now set to be dismantled, 
and this will further strain markets for non-renewable energy 
sources. Eastern Europe is still heavily dependent on Russian 
energy, which disallows a full disconnect from Moscow's 
political pressures, as evident in the Russian showdown and 
continued moderation of gas loads to Ukraine from 2005 to 2009. 
Political pressure from Moscow is prevalent throughout the 
region. Regional reliance on a sole supplier makes countries 
vulnerable and subservient to that provider. In turn, this 
destabilizes the entire region and makes Western investment 
riskier.
    Energy production in Europe and Eurasia presents 
opportunities for American investors. We should ensure that 
American companies can access these new markets and projects 
through free and transparent market systems. I agree with the 
chairman that the U.S. must institute and promote an all-of-
the-above approach to energy, not only at home but also in 
expanding markets throughout the world.
    Thank you. I will now introduce our first witness.
    Richard L. Morningstar is the Secretary of State's Special 
Envoy for Eurasian Energy. Appointed by Secretary Clinton, he 
was sworn in on April 6, 2009. From June 1999 to September 
2001, Ambassador Morningstar served as United States Ambassador 
to the European Union. Prior to this, Ambassador Morningstar 
served as Special Adviser to the President and Secretary of 
State for Caspian Basin Energy Diplomacy, where he was 
responsible for assuring maximum coordination within the 
executive branch and with other governments and international 
organizations to promote United States policies on Caspian 
Basin energy development and transportation.
    Thank you very much for being with us today. Go right 
ahead, Ambassador.

  STATEMENT OF THE HONORABLE RICHARD L. MORNINGSTAR, SPECIAL 
      ENVOY FOR EURASIAN ENERGY, U.S. DEPARTMENT OF STATE

    Ambassador Morningstar. Thank you very much, Mr. Chairman. 
It is a great pleasure to be here today. I appreciate it very 
much, hearing all of your comments, and I hope that between my 
written testimony and oral testimony and answering your 
questions, that I can respond to many of the points that you 
made.
    I have submitted detailed written testimony that I would 
like to ask to be made part of the record. So I will lead off 
today with an overview of our strategy to leave time for your 
comments and questions. I am also happy that three good friends 
will be testifying in the second round after I finish. They 
will all have their own views. Some of them may be different, 
but I am sure that they will add very much to what you are 
trying to accomplish here today.
    Let me start off by discussing first what is our Eurasian 
energy strategy. There are three main components.
    First, we encourage the development of new sources of oil 
and gas and the adoption of clean and efficient energy 
technologies. As we have seen and as you have mentioned in the 
past few months from events in North Africa and the Middle East 
and the nuclear crisis in Japan, the global and regional energy 
security picture can change literally in a heartbeat. It is 
therefore critical that consumer countries have secure energy 
supplies from diverse sources, and that is really what the key 
focus is of my job.
    Second, we do specifically work with Europe in its quest 
for energy security; that is, building the markets and 
architecture necessary to deliver a balanced and diverse energy 
supply from multiple sources through multiple routes.
    Third, we work to build new routes to European markets for 
energy producers in the Caucasus and in Central Asia. This not 
only meets our goals in Europe, but it provides economic 
development and political independence for these countries of 
the former Soviet Union. The main point is that we want these 
countries to be free to make their own choices as to how to 
best utilize their resources, and that is what we are striving 
towards.
    So, how are we going to achieve our energy security goals? 
First, natural resources are produced, transported, bought and 
sold primarily in the private sector, but governments can play 
a role by creating the right economic climate for commercial 
activity to prosper. We can be facilitators.
    At the heart of our policy is the belief that energy 
security is best achieved through diversity of suppliers, 
transportation routes and consumers, together with a focus on 
alternative and renewable energy technology and efficient 
energy usage. More specifically, we have talked a lot about the 
Southern Corridor, you have heard about that and about Nabucco.
    In line with this approach that I just described, the Obama 
administration, and I might say every administration going back 
to the Clinton administration, strongly supports the southern 
energy corridor, which will be a pathway to bring natural gas 
to Europe via Turkey from the Caspian and potentially other 
sources beyond Europe's southeastern frontiers, including for 
example, Iraq and Turkmenistan. Gas from the Shah Deniz project 
in Azerbaijan will be the first gas to enter the Southern 
Corridor and is absolutely necessary for the development of the 
Southern Corridor.
    Three separate pipeline consortia, Nabucco, ITGI, which is 
the Italy, Turkey, Greece Interconnector, and the Trans-
Adriatic pipeline, are competing for the right to ship Shah 
Deniz gas. In the abstract, a large dedicated pipeline like 
Nabucco would be preferable, politically and strategically, but 
it must be commercially viable. And we expect that the Shah 
Deniz consortium will make a decision on a pipeline route by 
the end of this year, choosing among these three pipelines. I 
might also add that oil markets are also key to our strategy, 
and we certainly actively support Kazakhstan's new export 
routes to world markets.
    With respect to Russia, we have had productive discussions 
with Russia on world market energy trends and possible 
bilateral investment with Russia through our Energy Working 
Group, which is part of the U.S.-Russian Bilateral Presidential 
Commission. Through the Department of Energy, we are developing 
pilot-smart grid projects with Russia and sharing technical 
information on new technologies. We want to engage with Russia 
in areas where we can cooperate and discuss areas where we 
disagree, and I think we are making at least progress in having 
those discussions.
    I would be happy to talk further about whatever your 
concerns are or also talk about Russian strategic projects such 
as South Stream during the questioning period.
    Regarding Ukraine, through the U.S.-Ukraine Commission on 
Strategic Partnership and the U.S.-Ukraine Energy Security 
Working Group, we continue to encourage Ukraine to make the 
necessary measures to attract foreign investment and to make 
the necessary reforms to qualify for international financing, 
which will allow it to modernize its gas transit system.
    There is no reason why Ukraine can't become energy secure 
and energy dependent through the development of its own 
conventional and unconventional resources. But to do that, if 
has to follow through on creating the proper investment climate 
for Western companies to offer financing and technology for 
these projects, and we think we are making some progress.
    I might also add, partly in response to Mr. Marino's 
points, that in February 2011 we signed the U.S.-Ukraine 
memorandum of understanding on unconventional gas resources to 
help them in the process of developing shale, which we are also 
doing with other countries such as Poland and particularly 
other Eastern European countries and other countries in the 
rest of the world.
    With respect to Central and Eastern Europe, we have worked 
very closely, I have probably spent more time with Central and 
Eastern European countries than anybody else, very closely with 
Central and Eastern European States in their efforts to come up 
with a balanced energy strategy and diverse energy sources and 
to encourage them to work toward a common energy market in 
Europe.
    We have actively supported the Baltic Energy Market 
Interconnection Plan. We have encouraged increased regional 
energy coordination through the Visegrad Four, that is Poland, 
Czech Republic, Slovakia, Hungary, and other countries in the 
region. It is critical that these countries to become energy 
independent again have a balanced and diversified energy 
strategy.
    I also want to emphasize that new pipelines alone will not 
make Europe energy secure. Europe is making progress in 
building a single market for energy, unbundling the 
distribution and supply functions of energy firms, building 
interconnectivity of networks, developing shale gas reserves, 
enhancing their LNG import capabilities, and I might, by the 
way, add that Poland just signed a memorandum of understanding 
with an American company, Cheniere, to supply LNG to--I am 
sorry, Lithuania has signed this agreement to supply LNG to 
Lithuania directly exported from the U.S. By liquefying shale 
gas into LNG, which I think could be an extremely important 
possibility for American companies.
    Also, Europeans are making progress in increasing gas 
storage and improving energy efficiency and exploring 
alternative and renewable sources.
    Finally, I might make some mention of the U.S.-EU Energy 
Council. This is one of our primary engagement mechanisms with 
the EU, and we work in three areas, global energy security, 
energy policy and standards, and technology and research 
cooperation. We coordinate our approaches with the European 
Union to Ukraine, Russia, the Southern Corridor, Iraq. We are 
also making strides toward harmonizing standards for such 
things as electric drive vehicles, software for smart grids, 
and we are working to increase cooperation and research and 
technology.
    I also want to emphasize, we don't work just with the 
European Union in Brussels. We work very closely with member 
states. I have visited 20 of the 27 EU member states in the 2 
years-plus since I have been in this job.
    So, in summary, the key to achieving our Eurasian energy 
strategy is engagement. We will continue to work with the EU, 
engage with the EU and individual European states, with Turkey, 
with Russia, with Caucasus and Central Asian countries, and, 
very importantly, with the private sector. And our job is to 
listen, identify common interests and priorities, and play a 
facilitating role where we can.
    We appreciate your interest in these matters and look 
forward very much to working with you to build stronger 
relationships throughout Europe and the world so that we can 
all enjoy an energy secure future.
    I will stop at this point to answer whatever questions you 
may have. Thank you.
    [The prepared statement of Ambassador Morningstar follows:]

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    Mr. Griffin. Thank you, Mr. Ambassador. I recognize myself 
for 5 minutes.
    First I would like to ask you just as a general matter what 
your reaction is to the recent announcement from Germany that 
they are going to move away completely from nuclear energy, and 
if you would talk about what you think the impact it will have 
on other sorts of energy that they are going to have to consume 
to replace their reliance on nuclear. If you would comment on 
that generally, I think a lot of us are really interested in 
this move. And I know there are some politics at work there, at 
least that is my understanding. But do you have any comment on 
that as a general matter?
    Ambassador Morningstar. Yes. As luck would have it, I was 
in Berlin I guess 12 days ago. I feel like I am a time zoneless 
person, so it all blurs. I think it was 2 weeks ago, maybe it 
was last week. But, in any event, I was in Berlin and talked to 
many members of their government up to very high levels. They 
have clearly made the political decision, as you put it, to get 
out of nuclear, and I think that is a done deal. That is what 
they are going to do, and they intend to be out by 2022. That 
is their right as a sovereign country.
    I think it is going to have an impact, as you suggest. It 
is going to have an impact in Germany because it is going to 
cost a lot of money to come up with the alternative sources of 
energy that are necessary. I think it could have, in part, 
along with other situations like what is going on in North 
Africa, the overall nuclear situation, it is going to have an 
impact on gas. It is going to I think actually help the 
promotion of gas as a bridge fuel toward a cleaner economy. It 
is going to have an effect on coal in Germany, which could have 
an effect at least in the short to midterm on their carbon 
emissions. They recognize this, and it is a high-risk bet they 
are taking but they think they can accomplish what they are 
setting out to do during that 10-year period, and we will see.
    I would make one other comment. We are strongly supporting 
those countries in Europe that want to continue their nuclear 
ambitions. While on the trip to Europe when I visited Berlin, I 
also spent time in Warsaw. Poland is continuing, along with 
shale and other policies, a very strong pro-nuclear policy.
    Lithuania is doing the same. We have worked with them, and 
they have just received two bids from American companies to 
build a nuclear reactor at Visaginas. We have a very detailed 
strategy to work with the Czech Republic with respect to their 
proposed nuclear reactor in Temelin. We are working in other 
countries as well.
    So I want to assure you that we are working closely with 
American companies, and this is on an interagency basis, to 
help further the goal of those companies winning transparent 
bids on new nuclear reactors. So as much as what is happening 
in Germany, Switzerland, maybe some other countries as well, 
there are still some real opportunities in Europe and 
opportunities for American companies.
    Mr. Griffin. What are the chances of a political reversal 
2, 3, 4, 5, 6, 7 years down the road in Germany, for example? I 
mean, this obviously is a political decision that could be 
reversed when they find that it may not be as easy as they 
expect. What sort of coalition has been behind this in Germany 
and is there a possibility of this coalition weakening and it 
reversing?
    Ambassador Morningstar. Well, it is interesting, because I 
asked that very question.
    Mr. Griffin. It is a good question.
    Ambassador Morningstar. It is an excellent question. I did 
ask that question to at least three or four people while I was 
in Berlin, and the feeling, at least right now, is that that is 
unlikely. I have learned in life never to say never, because, 
as you have said, facts change. They will see what the effects 
of this are. We will see if it has any effect on their economic 
competitiveness and so on. Those are questions that will have 
to be answered over time.
    But right now there is a very strong coalition in support 
of eliminating nuclear power. Part of it relates to the fact 
that the Green Party did so well in the local elections after 
the Fukushima tragedy. Chancellor Merkel has taken a very 
strong position. So right now there is a very strong coalition. 
Again, you know, the view in Germany is that that won't change, 
but, again, I would say never say never.
    Mr. Griffin. Do you think--I see my time has expired, I 
just want to get this last question in. Do you think that this 
shift would have occurred absent the Japanese tragedy?
    Ambassador Morningstar. It is hard to say, but my educated 
guess is that it would not have occurred, because Chancellor 
Merkel had made the decision prior to the Japanese tragedy that 
she would extend--that lives of existing nuclear plants would 
be extended until 2036, and so that has obviously changed 
dramatically after Fukushima.
    Mr. Griffin. Sure, sure.
    I see my time has expired. I recognize the gentleman from 
Pennsylvania for 5 minutes.
    Mr. Marino. Thank you, Chairman.
    Ambassador, I was pleased to hear you say that the 
development in these respective countries is ultimately up to 
the country and the people in those countries themselves. We 
cannot and must not force an upper hand in any of these 
situations. But with that said, what is the likelihood of 
Russia, China, stepping in and trying to get ahead of the 
United States with regard to assisting in development in these 
countries and actually trying to keep the United States removed 
from it?
    Ambassador Morningstar. Again, another very good question. 
You know, we try to think of it in terms of it not being a zero 
sum game, but at the same time there is no question that China, 
with its growing demand for energy resources, is going to play 
a very, very aggressive role with respect to finding sources 
for its energy; that Russia, the Russian natural resource 
sector is its most successful and profitable economic sector. 
So I think that both countries are going to do everything that 
they can do to develop their sources of energy and to take 
advantage of whatever comparative advantages they may have, 
which means, it seems to me, that it is all the more important 
that we continually focus, and it is not simply to compete with 
Russia or to compete with China--I don't know that that is the 
point--we want to cooperate as much as we can. But at the same 
time, we have to ensure that we and our allies have adequate 
sources, have adequate sources of energy. We have to mobilize 
our own private sector to work in developing resources in many 
of these areas and do the best we can.
    When I testified a couple of years ago I guess at this 
point before the Senate Foreign Relations Committee, I made the 
statement that has been quoted many times that, hey, when China 
comes into Turkmenistan and offers $11 billion and says here it 
is, build a pipeline, that that is a deal easy to accept. But 
what is also interesting is you never get something for 
nothing, so now countries like Turkmenistan are recognizing 
that they have to pay back that debt, that a lot of the jobs 
are not Turkmen jobs, but become Chinese jobs, Chinese 
technology. So, there are pluses and minuses.
    I think that we can have answers to that. We have companies 
that can go into some of these countries who can help to 
finance projects and provide help to these countries with 
respect to their own development. We have financing agencies 
that can help projects, whether it be OPIC or Ex-Im Bank, and 
we have to continue to keep that on the radar screens of all 
countries and maybe do a better job sometimes in explaining 
what we can do and what our companies can do in various parts 
of the world. That is what we are trying to do with the nuclear 
industry in Central and Eastern Europe, and I think it is 
beginning to work.
    Mr. Marino. Do you see us in a situation where China, or 
Russia for that matter, would come in and fund a project 
outside their country trying to work a deal out with being an 
exclusive purchaser and reduce pricing, whereas in the United 
States do you think that it is going to take investment from 
private industry as opposed to the United States?
    Ambassador Morningstar. Just to make sure I understand the 
question, that, for example, if China were to come in and deal 
with Turkmenistan, for example, where they would be saying we 
will provide this money, we will give you reduced prices, but 
you can't sell to anybody else, that hasn't happened yet, and 
hopefully would not happen.
    In a country like Turkmenistan, there is so much gas that 
there is enough to go around. I think that leaders in most 
countries understand that they need--as a supplier, just as 
consumers need diversity, that suppliers need diversity as 
well. And I know that--I don't mean to continually use 
Turkmenistan as an example, but given the question, they 
recognize that they are selling to Russia, they are selling to 
China. We hope that they will sell across the Caspian and on 
into Europe. We are talking with Turkmenistan about the so-
called TAPI pipeline that would go through Afghanistan, 
Pakistan and India. So they are looking for diversity, too.
    The message we keep sending to all countries is whether you 
are a supplying country or a consuming country, in this global 
market where there are so many potential sources of energy, 
that it is critically important that everybody, whether a 
supplier or consumer, have balanced and diversified policies. 
And, frankly, it is in Russia's interest, for example, to have 
a diversified supply strategy, not just to Europe, but they are 
selling to China, they are selling to Japan, they are selling 
to South Korea. They should.
    Mr. Marino. I see my time has run out.
    Ambassador Morningstar. Sorry for the long answer.
    Mr. Marino. It is a good answer.
    Mr. Griffin. We will give you more time in a minute.
    I want to ask a few questions about energy in the countries 
where we have been at war. First of all, Afghanistan and in 
Iraq.
    With regard to Afghanistan, what potential is there for 
significant energy exploration that might help Afghanistan 
economically and could be a resource for Europe and Eurasia? I 
just got back from Afghanistan last weekend, and there was a 
discussion of some of the gas reserves there and the 
difficulty, not too much unlike the difficulty we have had in 
certain parts of the United States, in extracting the gas. I 
was wondering if you have any comments on Afghanistan and what 
the potential is there?
    Ambassador Morningstar. It is certainly at the beginning 
stages in Afghanistan. There are potential gas fields. I think 
my colleague sitting behind me will confirm that Sheberghan is 
one potential gas field, but we really don't know. We really 
don't know the extent that it can be. But it needs to be 
explored.
    There is some oil in Afghanistan. I know that some 
companies have looked, for example, at exporting--it is not 
large amounts--but exporting oil to Turkmenistan or Uzbekistan 
to be refined and then to be sent back into Afghanistan. I 
think it is too early to say that Afghanistan would be a major 
source for the Southern Corridor, although you never know. It 
certainly would be a transit country for the TAPI pipeline, and 
I could get into a separate discussion on that with all of its 
inherent risks and so forth. But it is something that we are 
looking at.
    One of the other things in Afghanistan that is very 
important that needs to be explored is rare earth, and there is 
apparently some real potential there.
    Mr. Griffin. With regard to Iraq, what is the status of the 
oil and gas business in Iraq in terms of their ability to 
export it and ultimately to be a source for Europe?
    Ambassador Morningstar. Again, another very good question 
that we have spent a lot of time thinking about. I can 
guarantee you that the EU and Turkey have also spent a lot of 
time thinking about.
    First of all, just with respect to oil, of course, you know 
there are various bid runs that have taken place. They have 
very ambitious goals as to increasing the production of oil. 
The production of oil is in fact going up, but one of the 
problems is infrastructure and getting that oil out. We are 
working hard with them to see that that happens, and I know 
that the companies are as well.
    Gas is a very, I think, incredibly fascinating issue with 
respect to Iraq. First of all, as I am sure you well know, 
their biggest concern right now is increasing the amount of 
electricity to their own consumers. That is a real problem. So 
from a political and substantive standpoint, they are very 
concerned about as much gas as possible going to power plants 
and to provide electricity to consumers. There are issues, 
again, on infrastructure and getting the gas from fields to a 
power plant, building power plants, and it all gets very 
complicated.
    We have been talking with companies. I know companies have 
been looking at how can you come up with projects that meet the 
Iraqi need to increase the supply of electricity to its 
citizens, but at the same time allow for exports and allow for 
a revenue stream that will actually help create funding to 
improve the infrastructure. I think that is the key, to create 
some win-win situations that will help the electricity sector 
and at the same time allow for exports to give incentive to 
companies to go forward.
    There are also issues, as you know, relating to Baghdad and 
Arbil reaching agreements as to how oil and gas may be 
exported. There has been some progress in the oil sector, but 
there still is work to be done as far as hydrocarbon and 
revenue sharing laws to be enacted. It is something that we are 
watching every day. We think that some day, hopefully soon, 
there will be gas going north to Europe, but the question is 
when.
    The last point I will make is there was a declaration 
signed by the EU and by the Deputy Prime Minister Shahristani, 
who is responsible for energy in the Iraqi Government, at least 
in principle, stating that Iraq should ultimately transit gas 
to Europe, or supply gas to Europe, but again a question of 
when given all the complicating difficulties.
    Mr. Griffin. Thank you for that. I am see that I am out of 
time.
    I want to have, if I could have one more question before I 
go to you. I want you to comment generally on rule of law in 
Russia and whether some of the problems with rule of law are 
impacting commercial agreements vis-a-vis Russia and whether 
some of the rule of law and corruption problems that we have 
seen in Russia, whether they have impacted willingness of 
Western investors to go in and do business in Russia, American 
investors included. Could you comment on that?
    Ambassador Morningstar. Sure. I would say a couple of 
things. One, rule of law is an issue clearly in Russia still. 
Two, that corruption, there have been obviously corruption 
issues, and that that does have an effect on investors.
    Having said that, I think that there are two other areas 
that have actually had even a greater effect on larger, 
particularly on larger energy projects. One is the Russian 
fiscal regime, in which once you get above--if you are 
producing oil and you get above some level, I heard the figure 
yesterday, something like $27 a barrel or some number such as 
that, then a huge, huge percentage of the revenues are taxed by 
the government, which does have an effect on incentives.
    Second, there is a strategic sectors law which potentially 
has a problem with respect to some investments in which a field 
which has been explored can be in effect taken over by the 
government for basically national security reasons once the 
exploration has taken place. So nobody wants to go in and spend 
the money on exploration and then basically lose the field.
    Russia understands that both of these are problems. They 
are working on them. They have made deals in the last several 
months with both Exxon and Chevron and are addressing those 
issues.
    But I think at least in the energy area, those types of 
issues are actually even more significant, whereas the issues 
that you talk about in terms of rule of law and corruption is a 
more overarching issue that does have a general effect.
    Mr. Griffin. All right. Thank you. I recognize the 
gentleman from Pennsylvania for 5 minutes.
    Mr. Marino. Thank you.
    Concerning Russia, I have got a large concern over what is 
taking place in Russia right now, given the fact that Medvedev 
and Putin do not see eye to eye. Putin wants to be President 
again. They may be running against one another, if that is the 
right term to use. But Medvedev seems to be more orderly, more 
structured, more concerned about rule of law relationships with 
foreign countries, particularly the United States. Putin, on 
the other hand, is just quite the opposite.
    Can you tell me what the administration's position is in 
dealing with one or both of these individuals if there is a 
change in the presidency, if Putin gets back in to be 
President.
    Ambassador Morningstar. I am a little bit hesitant to get 
into any detail on that because I am really not the person who 
is responsible for our U.S.-Russia relations on the political 
level, so it might be a mistake for me to say too much about 
it.
    I will say this, that if you ask anybody in the 
administration, for that matter if you ask anybody in Russia, 
and I have had this discussion in fact in the last couple of 
days, who will be the next President of Russia, almost anybody 
would say ``I don't know.'' They don't know. It really is still 
very much up in the air. I mean, I have heard discussions 
essentially saying that, you know, maybe Mr. Putin would be 
happy the way things are right now. But we don't know. We 
really have no idea.
    If Putin becomes President, I can assure you we would do 
everything we can to work with him, and the devil would be in 
the details as to what would happen if such were to be the 
case. So I don't think--certainly I am not the person to 
hypothecate as to what would happen if Putin becomes President. 
Obviously there are people thinking about it and I am sure the 
answer would be, well, you know, we will see how he reacts if 
he does become President.
    Mr. Marino. I am a supporter of the Nabucco pipeline. 
However, I am unequivocally opposed to having anything to do 
with Iran, whether it is on a joint venture or assistance of 
somehow, or development in the least way of doing anything 
concerning Iran, if a terrorist regime is involved in it. Can 
you address that issue?
    Ambassador Morningstar. Yes, I can. Are you referring 
specifically to new sanctions issues in the Shah Deniz project?
    Mr. Marino. Yes, sir.
    Ambassador Morningstar. I just wanted to make sure that is 
where you were going. Look, you know, it is a very difficult 
policy issue when it comes to Nabucco, the Southern Corridor 
and the question on Iran. We have been, certainly in the time I 
have been in office and before, we have been very, very direct 
and straightforward that there is no way in our view that 
Iranian gas should be part of the Southern Corridor. And there 
are, by the way, many Europeans and European companies that 
have advocated that Iranian gas be part of it.
    But we do have I think what is a very difficult policy 
issue potentially with respect to the Shah Deniz project and 
the Southern Corridor. There is an Iranian subsidiary of the 
Iranian National Oil Company that owns 10 percent of the Shah 
Deniz project. This goes back to I think as far as 1996. They 
are a passive investor. They have absolutely nothing to do with 
the operation of the project. So that raises a question and a 
serious policy question. And I speak of somebody, and the 
administration as well, as a strong supporter of Iran 
sanctions. The question becomes whether 15 or 20 years of the 
bipartisan Southern Corridor policy should be in effect 
eliminated as a result of that passive Iranian interest.
    The other thing I think that needs to be considered, and, 
you know, when I raise these issues, I am not necessarily 
saying what is right and what is wrong, but just what needs to 
be considered is the unintended consequences if the Shah Deniz 
project ended up being sanctioned. Because what would probably 
happen is that the Western companies would have to pull out of 
the project, and the unintended consequence would be that the 
resources, which are absolutely necessary for the Southern 
Corridor, wouldn't go to Europe.
    But there are three possibilities of where they could go 
to--Russia, China, or Iran. And I could make the argument that 
Iran would in fact benefit by that project being sanctioned 
because it could end up that they ended up being the recipient 
of much of that gas if the project continued in some form. And 
Iran needs gas, which may be surprising to some.
    In any event, I would leave it at that. It is a serious 
policy issue, and I just think that before any final decision 
is made with respect to that policy question, that at least all 
of the ramifications on both sides be considered.
    Mr. Marino. Thank you, Ambassador.
    Mr. Griffin. I want to thank you, Mr. Ambassador, for being 
here today. I think we are going to move on to the second 
panel. Again, I apologize for the President taking this entire 
side down to the White House today. They would otherwise be 
here. But I think we are going to make a transition and the 
gentleman from Pennsylvania is going to take the chair.
    Thank you.
    Ambassador Morningstar. Thank you very much.
    Mr. Marino [presiding]. If the witnesses can come up to the 
table, please. Thank you, gentlemen, for being here. I would 
like to introduce the witnesses.
    Ambassador Keith Smith is currently a senior associate at 
the Center for Strategic and International Studies. Ambassador 
Smith retired from the U.S. Department of State in 2000, where 
his career focused primarily on European affairs. From 1997 to 
2000, he served as U.S. Ambassador to Lithuania. Ambassador 
Smith's earlier postings in Europe include Hungary, Norway, and 
Estonia. Ambassador Smith also served the State Department as 
Director of Policy for European and Senior Advisor to the 
Deputy Secretary of State for Support of East European 
Democracies.
    Dr. Cohen is a senior research fellow for Russia and 
Eurasian Studies and International Energy Policy at the Kathryn 
and Shelby Cullom Davis Institute for International Studies of 
The Heritage Foundation. Dr. Cohen brings firsthand knowledge 
of the former Soviet Union and the Middle East. In addition to 
energy policy, Dr. Cohen's studies covers issue such as 
economic development and political reform in the former Soviet 
Republics, the global war on terrorism, and the continuing 
conflict and unrest in the Middle East. Welcome.
    Ambassador Wilson is director of the Dinu Patriciu Eurasia 
Center at the Atlantic Council of the United States and a 
lecturer on international affairs at George Washington 
University. In December 2008, Ambassador Wilson completed 
nearly three decades of U.S. foreign service. From 2005 to 
2008, he served as United States Ambassador to Turkey. From 
2000 to 2003, he served as United States Ambassador to 
Azerbaijan. Prior to these postings, Ambassador Wilson served 
at the U.S. Embassies in Moscow and Prague and as Consul 
General in Melbourne, Australia. Ambassador Wilson's colleague 
at the Atlantic Council, Mr. Boyko Nitzov, had agreed to 
provide testimony for this hearing at its earlier date, but was 
unable to do so when the hearing rescheduled for today.
    Without objection, I would like to include Mr. Nitzov's 
statement in the record.
    [The information referred to follows:]

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    Mr. Griffin. Again, thank you all for being with us today. 
We will begin with Ambassador Smith, sir.

 STATEMENT OF AMBASSADOR KEITH C. SMITH, SENIOR ASSOCIATE, NEW 
    EUROPEAN DEMOCRACIES PROJECT, CENTER FOR STRATEGIC AND 
                     INTERNATIONAL STUDIES

    Ambassador Smith. Thank you, Mr. Chairman. It is a pleasure 
to be here. I have been at various committees before talking 
mainly about the issue of the supply of gas and oil from Russia 
to Central Europe. But my concern nowadays has refocused to 
some extent on the question of corruption and transparency, 
because I believe that while diversity of supply is important, 
part of the problem and a big part of the problem, quite 
frankly, in Central Europe and especially in east Central 
Europe, but not exclusively in east Central Europe, is a 
question of transparency and corruption in the energy trade.
    It takes you back to--I am old enough to remember when the 
U.S. bank robber Willie Sutton, they kept asking him why he 
kept robbing banks and get caught. His answer was, Well, that 
is where the money is. Quite frankly, the corruption around the 
world is generally, in large measure, in the energy trade. And 
that is where the money is.
    Quite frankly, in the East-West energy corridors, 
particularly those running from Russia into Central Europe and 
Western Europe, that is where you have had a lack of 
transparency because you have companies which are state-owned 
companies that are the suppliers in Western Europe and Eastern 
Europe, particularly in Russia, and then you also have Central 
Europeans. I think this is the major challenge really in 
Europe, this whole question of transparency. There has been a 
problem that I think goes back a ways in the European Union to 
the fact that the new member states of the European Union--
these are countries that I feel very close to--have been 
treated as second-class citizens, quite frankly, by the larger, 
more powerful countries in Western Europe, and you have had up 
until 2009 the January cutoff of gas to Ukraine and it affected 
for the first time Western Europe. And that suddenly brought 
the Western Europeans I think to the conclusion that they 
needed to do something to help the more energy island states, 
the Baltic states, Poland, Bulgaria, Romania.
    But at the same time as that has gone on you still have a 
question in Western Europe of the large energy companies. Each 
country, of course, wants to put its own companies in a 
position of influence within Russia, and the competition for 
favor by the Russian Government, particularly by Mr. Putin, who 
really runs the energy policy of Russia, has really resulted in 
a divide-and-conquer policy within the European Union where the 
large countries, their energy companies can kind of determine 
what the energy policy is within the European Union. And there 
isn't really a coordinated energy policy. Although the EU was 
started as a coal and steel community, there is no energy 
community within the European Union. This puts the weaker 
states to the East--the Baltic States, Poland, Bulgaria, 
Romania, to some extent Hungary--in a very disadvantaged 
position because they have been, the way the Soviet Union was 
set up and the Warsaw Pact, the energy pipelines all went from 
east to west and they were coordinated out of Moscow. A lot of 
this hasn't changed until very recently. It is just beginning 
to change to some extent.
    Another thing which I think influenced the situation in 
Eastern Europe was the fact that when they became members the 
European Union required these countries to do certain things 
which, quite frankly, in the long run increased their 
dependency on Russia. The Lithuanians were required to close 
down their nuclear power plant. And that was a power plant 
which our experts thought could safely operate for another 15 
years. But the anti-nuclear lobby within the EU I think was 
responsible for the Lithuanians having to close that down, and 
that made Lithuania more dependent on Russian energy.
    I think there are a whole series of elite groups within 
Russia, Ukraine, and Central Asia, which have benefited from 
this lack of transparency.
    The European Union in another area has refused up until now 
to enforce its own antitrust and competition policies. And I 
think that is--for instance, they have made it illegal for 
Microsoft to bundle its music program with its Windows program. 
That seems to be a real threat. But at the same time, the 
monopoly position of Transneft, which is a state monopoly for 
all the export of oil from Russia to Europe, and of Gazprom, 
which is the monopoly exporter of gas, remains and has not been 
challenged as monopolies in violation of the competition laws.
    I could go on, and I have long papers which I could submit 
on this issue, but I think that there has to be some stronger 
enforcement within the European Union. It is beginning a little 
bit, but I think the lack of transparency even in the pipeline 
area hurts the Central Europeans, the people who populate your 
district to some extent and I have a strong tie to myself. 
These people are--for instance, there is no policy which says 
that if a country has secret negotiations going on with Russia 
regarding a pipeline issue that it has to first let its member 
state--the other member states know about it or that they have 
to let the EU Commission know about it. They don't have rules, 
for instance, like we have, which require--for instance, the 
Foreign Agents Registration Act. So Russia can put a lot of 
money into trying to influence the energy policies in Brussels, 
in Berlin, in Paris, in Vienna. And they do. They don't have to 
report that. And so nobody knows.
    Now there are a lot of universities and NGOs in Europe that 
are taking money from Gazprom. In the U.S. we know that just 
down the street from CSIS, where I work, there is a company 
that takes $250,000 a month from Gazprom. But in Europe you 
wouldn't find that information because it is not public 
knowledge.
    Anyway, these things have to be done. I think there needs 
to be much greater coordination. We are limited in what we can 
do. But I think by putting out a lot of information, I think 
that we can help the Central Europeans in their attempts to 
become more energy secure.
    I had the occasion to give a talk to the Business Club in 
Poland, in Warsaw, and I arrived in Poland the day that 
President Medvedev left, and he said that he wanted his 
company, the Rosneft, the state company, to buy Poland's most 
modern oil company and the refinery. Well, fortunately that day 
I was able to get hold of some information which showed that 
one of the 10 sleeper agents that we had expelled from the 
United States had just been hired by Rosneft that day. It was 
announced that this person would assume responsibilities for 
international projects, which fit very well.
    If you look at the whole scheme of things, part of the 
problem is in Russia most of your energy companies are 
dominated by former KGB or GRU officers and they are 
negotiating with people in Western Europe who don't have the 
experience or the intelligence background or the intelligence 
information on how to negotiate these kinds of deals.
    I think I have taken more than my time, and I will yield 
and try to answer any questions later on.
    Thank you, Mr. Chairman.
    [The prepared statement of Ambassador Smith follows:]

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    Mr. Marino [presiding]. Thank you, Ambassador Smith. 
Gentlemen, if you don't mind, I would like to get your 
statements in. Don't worry so much about the 5 minutes. We are 
a captive audience here today, just you and me and the people 
in the room.
    Dr. Cohen, please.

 STATEMENT OF ARIEL COHEN, PH.D., SENIOR RESEARCH FELLOW, THE 
  KATHRYN AND SHELBY CULLOM DAVIS INSTITUTE FOR INTERNATIONAL 
                STUDIES, THE HERITAGE FOUNDATION

    Mr. Cohen. Thank you, Mr. Chairman. It is a pleasure. The 
views expressed here are my own and should not be construed as 
representing any official position of The Heritage Foundation.
    With that, I would like the full text to be included in the 
Congressional Record.
    Mr. Marino. Without objection.
    Mr. Cohen. Thank you.
    Russia is indeed the 3,000-pound elephant in the room when 
it comes to energy in Eurasia. It has the largest reserves of 
natural gas in the world. It has giant reserves of oil. And it 
competes with Saudi Arabia, the largest producer and exporter 
of oil in the world. Despite this vast resource base and its 
formal assurance of reliability as a partner, Moscow has 
already proved that it is willing to hike up oil prices to 
match the general trend of higher energy prices, engage in 
anti-free-market practices, especially at home and in Europe, 
and use energy as a foreign policy tool.
    Russian energy strategy, adopted in 2003, amended in 2009 
to last through the year 2030, says that Russia is building its 
energy security on protection of the country, its citizens, its 
economy, from external and domestic threats to the reliable 
energy supply, including geopolitical and energy market risk 
factors. President Medvedev added that the wars in the future 
may be fought over natural resources and that Russia will be 
willing to protect its interests, including through the use of 
force.
    Russia is seeking to maximize its economic and geostrategic 
advantages as a major energy producer, and it becomes even more 
poignant as the Middle East supplies are now suffering from the 
repercussions of the so-called ``Arab Spring,'' and the future 
of nuclear power has become more uncertain as a result of 
nuclear power station disasters triggered by the recent tsunami 
and earthquake in Japan. We heard from Ambassador Morningstar 
how they affected Germany in the nuclear sector.
    Russia may be controlling up to 20-plus percent of the 
global energy reserves because it has the largest, longest 
coastline in the Arctic. The Arctic is a particularly 
interesting case because there are competing claims on the 
water, subsoil and on the sea shelf in the Arctic, including 
from Russia, Canada, Denmark, and other countries, but Russia 
specifically went the security route by announcing that special 
forces will be created to be deployed in the Arctic. However, 
Russia does not have sufficient technology or funds to develop 
the Arctic on its own. Nevertheless, when it came to a large 
natural gas field named Shtokman in the Barents Sea, Russia did 
not invite American companies, despite earlier promises, to 
include Chevron and possibly ConocoPhillips. They went with 
Statoil Hydro from Norway without giving them any equity stakes 
in that field.
    What Ambassador Smith already referred to, I could not 
stress enough. It is the control of these natural resources 
through the closest people to Prime Minister Putin, such as 
President Medvedev; Victor Zubkov, his former mentor; Alexei 
Miller, the CEO of Gazprom; and First Deputy Prime Minister 
Igor Sechin, who until recently was chairman of the board of 
Rosneft, the largest Russian state-owned oil company. Through 
control of state companies and through appointing of the senior 
officials, Russia indeed controls its oil and gas wealth and 
uses it as tools of foreign policy.
    Now when you have former KGB and other security 
apparatchiks in charge, it is not surprising that some of the 
tools they use in order to gain that control came from the 
security services practices. And I am specifically talking 
about the Yukos case and the former owners of Yukos such as 
Mikhail Khodorkovsky and his partner Platon Lebedev. These two 
people were prosecuted for the first time in 2003. They were 
arrested in 2003, and then sentenced to 13 years of jail time, 
and then prosecuted again, just changing the charges, last 
year. And currently they appealed for parole. The U.S. 
Government, the British courts, and other European courts, as 
well as Amnesty International repeatedly said that 
Khodorkovsky, Lebedev and others connected to Yukos were 
prosecuted for political reasons. And as a result of 
nationalization and expropriation of Yukos, many shareholders, 
including Americans, lost billions of dollars in their 
investment without recourse to the Russian Government.
    To summarize, the Obama administration, while focusing on 
improvement of relations with Russia, the so-called ``reset'' 
policy, neglected its involvement in the non-Russian countries 
of the former Soviet Union, which Ambassador Wilson will talk 
more; specifically Azerbaijan, Georgia, Turkmenistan, to 
certain extent, Kazakhstan; countries that are strategic if we 
want to encourage independence of Europe of Russian oil and 
gas.
    Secondly, we are not emphasizing the issues of the rule of 
law enough. Congress is considering S. 1039, the Sergey 
Magnitskiy Rule of Law Accountability Act, that talks about 
revoking of visas and prohibiting financial transactions for 
Russian officials who engage in ``extrajudicial killings, 
torture, and other gross violations of human rights committed 
against individuals seeking to expose illegal activity carried 
out by the officials of the Government of the Russian 
Federation or to obtain, exercise, or defend or promote 
internationally recognized human rights and freedoms.'' At the 
same time, President Obama meets President Medvedev in 
Deauville, France, and they talk about expanding the visa 
regime between our two countries.
    Now freedom of travel is a good thing overall, but the U.S. 
Congress is seeking to limit travel to the U.S. on the part of 
clearly corrupt Russian officials, of those engaged in human 
rights violations or property expropriation. Why did the Obama 
administration not mention that in the Deauville declaration? 
In that respect I think the administration is defying Congress 
and going in the wrong direction.
    To conclude, Congress has an important role to play in 
changing the relations with Russia in the energy field for the 
benefit of Russian and American peoples and our European 
allies, but that can be only done if the Russians open their 
oil and gas industry to foreign investment, improve the rule of 
law, make the courts independent, and fight corruption. 
Otherwise, just as my colleague said, they will treat our 
European allies in accordance to the Roman principle of divide 
et impera. We need to get the message across that curbing the 
use of energy as a geopolitical tool is a top American 
priority.
    [The prepared statement of Mr. Cohen follows:]

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    Mr. Marino. Thank you, Dr. Cohen.
    Ambassador Wilson.

STATEMENT OF THE HONORABLE ROSS WILSON, DIRECTOR, DINU PATRICIU 
                EURASIA CENTER, ATLANTIC COUNCIL

    Mr. Wilson. Thank you very much, Mr. Chairman. Let me join 
my colleagues in thanking you and the committee for the 
opportunity to be here. With your permission, I will summarize 
a longer statement that I would ask be entered into the record.
    Mr. Marino. Surely.
    Mr. Wilson. For nearly 20 years, the United States has 
pursued a Eurasian energy strategy that is based on four sets 
of interests that I think remain valid.
    First, given our dependence and that of most of our allies 
on imported energy, we have attached importance, as Ambassador 
Morningstar noted, to the development of new sources of oil and 
gas. The political changes that came after the Cold War ended 
made available to world markets resources in Eurasia that were 
previously inaccessible. American leaders have strongly 
supported the region's energy development. And I am proud to 
have been part of that effort as an American Ambassador in 
Azerbaijan and Turkey.
    Second, we have regarded the success of the former Soviet 
states to be in America's interest. For over four decades, the 
principal threat to our way of life came from a Eurasian land 
mass dominated by a hostile Kremlin. More recently, new threats 
came from al-Qaeda that has offshoots in Central Asia. These 
countries' ability to govern themselves effectively, to secure 
their borders, and to foster prosperity for their people 
matters to American national security. Energy is an asset that 
they have to build a better future.
    Third, we have supported multiple pipelines. Our policy has 
recognized that economies depending on a single set of transit 
routes through Russia will be neither strong nor independent, 
and their relationships with Russia won't be very healthy 
either. Multiple pipelines are the deliverers of energy 
security for Caspian producers and for our European allies 
alike.
    A fourth set of U.S. interests can be ungrammatically 
summed up as: Not Iran. From your questions, Mr. Chairman, I 
think this is particularly pertinent for you. It has long been 
U.S. policy, reflected in legislation that this committee has 
been associated with, to oppose the development of Iran's oil 
and gas industries. Caspian energy, especially gas, has been a 
positive complement to the threat of sanctions, an alternative 
source for Iran for U.S. allies who are desperate to diversify 
their energy supplies. By helping to develop pipelines to the 
Black and Mediterranean Seas we have assured Iran could not 
become a principal export route for Caspian energy.
    The next phase of Caspian energy development is natural 
gas, and it needs American support. The operator of 
Azerbaijan's offshore Shah Deniz project expects to decide, as 
Ambassador Morningstar indicated, soon on fully developing this 
giant gas field and an export route to Europe for that gas. The 
realization of the so-called southern gas corridor and the 
exploitation of Shah Deniz as a supplier for Europe will 
advance American interests. However, I believe there is a 
possibility that well-intentioned new Iran sanctions 
legislation under discussion may imperil this future. Surely, 
this is not intentional.
    In the mid-1990s, Azerbaijan's President and a friend of 
the United States, Heydar Aliyev, decided on Western firms, 
U.S. and Western firms, to lead his country's energy 
development. He made sure that the pipelines to take those 
resources to market would avoid Russia and Iran. He thought it 
politic to give modest and non-controlling shares in key 
projects, including Shah Deniz, to Russia and Iran. One could 
argue from the vantage point of hindsight whether this was wise 
policy. At the time, Azerbaijan felt its security was directly 
threatened by both those countries and so needed to placate 
them at a time when there was really no other option available 
for doing so.
    As I understand it, Iran's sanctions language now under 
discussion might require Western firms with a stake in Shah 
Deniz to divest themselves of their investments and walk away. 
As Ambassador Morningstar indicated, the effect of this is that 
Shah Deniz will stall. Other Caspian gas will not get developed 
for Europe. No new East-West gas pipelines will be built. That 
will deprive our European friends and allies of gas that they 
need and increase pressure on them to turn to Russia and Iran 
for alternative supplies. I urge Congress and the 
administration to work together on Iran sanctions legislation 
that will be strong and effective to be sure, but that will 
also not sacrifice longstanding U.S. objectives and interests 
with respect to Shah Deniz and Eurasian energy.
    Mr. Chairman, Eurasia is part of a vast region of 
instabilities whose evolution I think will have a lot to do 
with whether the 21st century is reasonably peaceful or not. 
Recent events in the Middle East and North Africa remind us 
that no energy strategy can ignore regional politics and 
economics. Eurasia faces many challenges. We need more intense, 
sustained and broadened American and Western diplomacy on 
energy and the full range of issues that affect these countries 
and Western interests there. This is not just my view, but it 
is also what I hear from leaders in Uzbekistan, Azerbaijan, 
Kazakhstan, Georgia and other countries.
    The administration has taken some steps. I know that there 
are members of this committee who visited this region, too. 
This effort should be sustained, it should be strengthened. 
Building cooperation, drawing these countries more toward the 
West and toward more prosperous, peaceful, and free futures 
will be better for all of us.
    Mr. Chairman, thank you. I look forward to responding to 
your questions.
    [The prepared statement of Mr. Wilson follows:]

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    Mr. Marino. Thank you, Ambassador Wilson.
    Gentlemen, just for the record, your full written 
statements will be made part of the complete record. I have a 
myriad of questions here for you. One of my great interests is 
the country of Russia, one I studied in college; the Soviet 
Union. So you are going to have to actually cut me off.
    I am going to ask a specific question to each of you, but 
if the others have comments on it, please relay those comments 
to us as well.
    I am going to start off with Ambassador Smith, please. You 
mentioned indifference of Europe and the U.S. toward Russia's 
business mentality. Would you suggest that the West is too 
eager to oppose Moscow to get to its resources and is this 
adverse to the U.S. and European national security interests?
    Ambassador Smith. Yes. Mr. Chairman, I certainly agree with 
that. There has been a big rush by companies, particularly 
European countries, to try to get into Russia, at a point where 
even--take BP. BP has been in and pushed out three times. Shell 
has been in and pushed out three times. There is a very good 
book by a professor at Harvard called ``Petrostate,'' which 
documents the eagerness of companies to go in thinking they are 
going to make enough money. The Russians get the technology and 
then boot them out. This has gone on and on and on.
    I think that there has been too much competition. They have 
not followed a lot of the companies in Europe. I think the 
American companies on the whole have been pretty good; pretty 
open and transparent in their operations in Europe. I think a 
lot of the Europeans have scrambled hard to get an advantage.
    You will notice that of all the companies that have had 
trouble in Russia--and most of the European and American 
companies have had trouble since Mr. Putin came in--have had 
problems with their contracts. Germany has not. Quite frankly, 
one has to ask oneself: Why have the German companies been able 
to operate without retaliation on the part of the Russians or 
having their assets taken away?
    I think it is plain that the German Government has been 
very friendly to the Russians, and I think that has had an 
effect. But I think the whole area of transparency and 
corruption is one that we have been too lax, and I think we, 
being the Europeans mainly, but I think the United States--I 
think, quite frankly, Russia--and I will just end this. I am 
not a Russian specialist, although I have been following this 
for a long time. But I think that Russia is somewhat in a 
corner right now, and partly because of the United States. And 
what has happened is the big revolution in unconventional gas 
that is taking place in Europe and in the other parts of the 
United States is really having an enormous influence on the 
price of gas in Europe and on Russia's ability to squeeze these 
countries for higher and higher prices.
    I think that now, with the kind of a new revolution in the 
United States of unconventional oil and the refracking for oil, 
that in the long run this is going to have an effect. Because 
the Chinese are picking this up, the Australians are picking 
this up. Poland of course is getting very much into 
unconventional gas. And I suspect there may be some 
unconventional oil there, too.
    So all this is going to have an effect. I think the 
politics, we can do what we want, what we think is best in 
trying to help our European friends on energy security, but I 
think quite frankly that the facts on the ground, particularly 
in the United States, with the unconventional gas and oil, is 
going to have a big effect. What we have to do I think is fight 
back against a lot of absolutely insane propaganda in the 
United States, which is being quoted all over Europe by the 
Russians about the dangers of unconventional gas.
    This movie ``Gasland'' I think had a bad effect. Also, I 
think Cornell University did a study which was very flawed. We 
have to kind of explain to our European friends over and over 
again this is not--these are not factual; that there are 
problems and we have to be careful. But this is really the 
direction they should be moving.
    Mr. Marino. Ambassador, that movie was based on the heart 
of my district. I am very, very familiar with it, and I do have 
to state this: 35 or 40 years ago, when I was going to my 
uncle's cabin, he would entertain us by turning on the spigot 
and lighting a lighter or match and there would be a poof of 
the methane. So it is nothing new.
    Ambassador Smith. No, sir. But that wasn't the 
unconventional fracking that caused that.
    Mr. Marino. Right.
    Dr. Cohen, do you have any response to my question?
    Mr. Cohen. Yes, sir. I think it is an excellent question 
because there is a linkage between interest of Europeans in 
investment in Russian oil and gas and getting a steady supply, 
or interest, for example, of the Obama administration to 
accomplish unrealistic goals of getting to zero, meaning to get 
the world rid of nuclear weapons in the time, which it is 
absolutely unrealistic when Pakistan, Iran, China, are all 
building nuclear arsenals. To entice the Russians to sign arms 
treaty agreements, we put our energy interests on the back 
burner. We did not promote independence of non-Russian post-
Soviet states as vigorously as we did under the Clinton and 
Bush administrations. I would say that there is a break between 
the bipartisan policy of engagement in Eurasia in the Bush and 
Clinton administrations and what the Obama administration did 
in the Caspian and the Caucasus.
    Additionally, other countries, like the Europeans, took 
steps that were appeasing to the Russians and probably from a 
business perspective provided jobs. I am talking specifically 
about the sale of helicopter carriers, the Mistral class ships, 
by France to Russia. They agreed to sell two French ships and 
then to build two more in Russia. At the same time, the 
Russians stuck to their guns.
    The former First Deputy Prime Minister Sergey Ivanov, said, 
``No Western companies will have access to Russian strategic 
energy fields.'' The laws--the natural resources law and other 
laws that control Western investment in the energy field are 
Draconian. They discriminate against Western companies. And as 
I mentioned with the Yukos case, the Russian Government went 
after private companies and destroyed them and expropriated 
them, because they wanted to consolidate all these resources 
under the control of the selected few who run the state-owned 
energy companies.
    So, you have a situation not unfamiliar from other places: 
An extreme case of resource nationalism that is against the 
interests of the consumers in Europe and around the world and 
against the interests of the Russian taxpayers because of the 
opacity of the state sector, opacities and violations that were 
documented by brave whistleblowers like the lawyer Alexei 
Navalny who now, instead of a thank you, has a criminal 
investigation against himself. Navalny documented $4.5 billion 
disappearing, stolen, or defrauded from the state in the 
construction of the East Siberian oil pipeline.
    So these are examples where we need more transparency, and 
the Obama administration should not be shy bringing these 
issues up in their meetings with President Medvedev, and if 
they manage to meet with Putin, which is a tough call, a tough 
job to get these meetings, but I understand Vice President 
Biden was successful in that back in April, bringing it up with 
Mr. Putin without shying away from these tough questions.
    Mr. Marino. Point well taken, Doctor.
    Ambassador, do you have any response to that question?
    Mr. Wilson. The only thing I would add to what my 
colleagues have said is the energy companies have worked very 
vigorously in Russia for the obvious reason: Russia has a lot 
of energy. Conditions are difficult. Many of the same issues 
referred to arise in lots of our countries where they operate, 
and they have concluded properly, more or less correctly, that 
they just have to try to work their way through those matters.
    I can't speak in a lot of detail to the Obama 
administration's approach on these things. I know that previous 
administrations worked hard on issues of energy sector 
transparency and rule of law in that sector. Our leverage is 
limited. This sector is the crown jewel or one of the crown 
jewels of the Russian economy, and the leaders there have been 
very protective of it.
    Mr. Marino. A specific question for Dr. Cohen. Russia likes 
to bend the rules and at times makes new ones and forgets old 
ones in the middle of the game. U.S. investors are out $12 
billion, as was stated just several minutes ago, after Moscow 
pursued Yukos into a nonexistence through manipulation of its 
legal system. First, how can the U.S. Government work to 
recover lost investment from Russia? And second, this is a 
repeating theme, as we have seen Russia's legal system file 
claims against international investors. Why would this change?
    Mr. Cohen. I didn't hear the last part of the last 
sentence, sir.
    Mr. Marino. Why would this change?
    Mr. Cohen. Sir, the only way Russia may modify its behavior 
is when there are assets or policy priorities at stake that 
they value more than the current practice. With the Yukos case, 
yes, there were vast numbers of American investors. There were 
vast numbers of non-American investors--Russians, Brits, and 
others, including pension funds, including firefighter 
retirement funds, including the former National Security 
Adviser to President Reagan--who were all investors in Yukos. 
As the company was expropriated and its owners were either put 
in jail or turned into fugitives, these American investors lost 
their assets by the acts of state that were found illegal in a 
number of courts in arbitration procedures. And Yukos' previous 
owners were found persecuted as political opponents and 
recognized, including by Amnesty International, as political 
prisoners.
    The path, which is open for American investors, is what is 
called the espousal. And in that procedure U.S. Government 
adopts the claims of U.S. nationals as the claims of its own 
because of the lack of the bilateral investment treaty between 
us and the Russians. When it adopts these claims, it can pursue 
a monetary settlement of these claims in government-to-
government negotiations. And the most common manner of the 
espousal is an attempt to negotiate a lump sum settlement.
    At the current moment, the State Department met with the 
investors, I understand, took under advisory their position, 
and in a 2011 interview with the Russian President, Ambassador 
Bill Burns, our Under Secretary of State, said,

          ``Trade and investment, as I mentioned before, are 
        increasing between the United States and Russia, and I 
        hope very much that continues. But it is also important 
        to us--both of us--to address the obstacles in the path 
        on expansion and questions that arise.
          ``The case of Yukos, for example, there is another 
        very practical reason that Americans are concerned; 
        that there is a number of Americans in Yukos with 
        several billions of dollars of investment at stake.''

So we see that the U.S. Government is aware of the situation. 
The question is why the espousal procedures have not started. 
And that is not a question to me, sir. That is a question for 
the representatives of our Government.
    Mr. Marino. Anyone care to respond to that?
    Ambassador Smith. I don't know what I can add. I knew Mr. 
Khodorkovsky personally and used to meet with him on some 
investment issues. But I think that the one thing that will 
influence the Russian Government is if we made investment--we 
don't allow them to invest in the United States in the same 
manner--for instance, Lukoil has 3,000 gasoline stations around 
the United States. The idea that an American company could have 
3,000 gasoline stations in Russia is inconceivable. This idea 
of reciprocity I think is one thing that we have because they 
do want to invest in the United States. There are big steel 
mills in the United States that are now under Russian 
ownership. That is not necessarily bad, but I think that we 
should demand, quite frankly, total reciprocity in investment 
in major industrial plants and also in raw materials.
    Russia has become a big investor in raw materials in the 
United States and Canada, and I think that they should be 
limited to the 20 percent that they limit Americans to in 
Russia. So I think reciprocity is the only language they 
understand, quite frankly.
    Mr. Marino. Doctor?
    Mr. Cohen. If I may add, in 2009 we published a 
backgrounder at The Heritage Foundation in which we are 
focusing on what is Russia doing worldwide economically; who 
are the actors, what industries do they target, and how they 
behave. While we at The Heritage Foundation clearly are the 
supporters of free markets, we also are supporters of the rule 
of law. And what we suggested in this 2009 backgrounder that I 
will be happy to share with the committee is that the U.S. will 
take a lead on focusing on illegal activities by Russian 
officials or, for that matter, some Russian business people, if 
they launder money, if they deal in illicit activities--there 
were Russian banks that were identified in criminal 
investigations as funding child pornography. This is 
unacceptable.
    So we should send a strong signal that we are looking at 
what you are doing, we know what you are doing. A good example 
is this arms dealer Viktor Bout. Viktor Bout was, through legal 
proceedings, apprehended in the country of Thailand. The 
Russian Government went full court press to prevent him from 
being extradited to the United States. They used every trick in 
the book. But Viktor Bout was extradited from Thailand and is 
facing justice in New York. This should be one of the models of 
what we can do with our allies in Europe and elsewhere.
    Another example, I mentioned, is the Magnitskiy 
legislation. A tax official who was involved in fraud that the 
late Sergey Magnitskiy exposed, was found to own with her 
colleagues and relatives real estate and other assets in the 
tens of millions of dollars around the world. The Swiss froze 
those accounts. At least part of these assets are now frozen in 
Switzerland. That is another example how illicit Russian 
behavior can be countered. Very little of that happens so far. 
I do believe we can and should be using, as Ambassador Smith 
suggested, reciprocity. But that reciprocity can be 
asymmetrical, as the Russians like to say. So if they want to 
play chess, we can play chess.
    Mr. Marino. Thank you. Ambassador Wilson, you characterized 
oil as a potential get-out-of-poverty card that could be played 
by both source and transit countries. However, in places such 
as Nigeria, the world has seen the negative effect the oil can 
have on developing countries.
    What can the United States and its European allies do to 
ensure that oil-related revenues actually benefit the people of 
the region?
    Mr. Wilson. Mr. Chairman, the problem you identify is one 
that exists all over the world among countries that have large-
scale natural resources to export and to trade in. One of the 
things that we worked on when I was in Azerbaijan, and I 
believe this has also been a theme in our diplomacy with 
Kazakhstan, has been to encourage the establishment of an oil 
fund, of a sovereign oil fund, operated in a reasonably 
transparent way with publicly available information about where 
the money is, how the proceeds are being spent, and so forth. 
Definitely not perfect and not an answer to--ultimately an 
answer to the question that you pose. Smart or cleaver leaders, 
clever oilmen, can find ways to make money even outside of--to 
make money that operates outside of that particular oil fund. 
But it has been helpful.
    The Azeri oil fund I think is now hundreds and hundreds of 
millions--billions of dollars--that have effectively been 
parked for use by future generations of Azerbaijan. Parking 
them has helped to curb inflationary and other domestic 
pressures. As I said, I know that in the Azerbaijan case that 
particular fund got very high marks from organizations that 
look at transparency and transparent use of resources.
    I think a second thing that we have to do and that we have 
done not with as much success as we would like is to encourage 
more effective economic strategies and more effective economic 
integration with the world economy and with the region. Many of 
the countries in Eurasia, including Azerbaijan and 
Turkmenistan, Uzbekistan, Kazakhstan, are not members of the 
World Trade Organization. Their trading relationship with 
others are quite limited. Their economies are in some respects 
closed and in most respects what I would call adversarial or 
predatory. Incoming traders have a difficult time and all too 
often I think lose their shirts.
    To the extent that these countries become more integrated 
into the world economy, they will have to adopt rules and rule 
of law standards more in line with those that are common in the 
West. There can still be plenty of problems. Corruption is an 
issue in lots of countries and not just in energy resource-rich 
ones. But I think developing more effective strategies to 
promote market economic reform and real open and transparent 
investment regimes, real open and transparent monetary flows, 
particularly when you are talking about these huge sums of 
money, that has got to be a big part of it.
    I think the third element is work to promote democratic 
institutions, work to promote civil society, and to ensure that 
free media can operate in these countries to identify 
shortcomings locally, to talk about those shortcomings and 
issues locally, and to be some kind of a pressure for change. 
At the end of the day, a lot of these countries don't 
necessarily respond to what the United States or what others 
tell them to do. At the end of the day they don't always 
respond to their own people either. But I think over the long 
term that is probably the most important step that the United 
States can take to promote effective use of oil revenues as 
well as of course to promote long-term stability and effective 
governance.
    Mr. Marino. Thank you, Ambassador. I am reaching back into 
my college days when I was studying political science and I 
took a course on Russia. And my professor wrote the book. I 
remember he had a quote in there. I think he referred to it as 
actum dictum, which was: Power corrupts. Absolute power 
corrupts absolutely. And I have a little twist on that. Money 
is power. But money and guns are absolute power.
    So how do we get over that hurdle when we are dealing with 
Russia, Putin, and other KGB members who we know are attempting 
to pursue what they think is a legitimate career? You have 
testified brilliantly as to what actually has been going on in 
Russia and Europe. How do we get over that hurdle with these 
individuals?
    Ambassador Smith.
    Ambassador Smith. Well, I can't say that I have the answer. 
There are a couple of things that I think are more important 
than guns in this case, and that is transparency. I hate to 
harp on that, but I think that greater transparency in the 
energy sector, particularly between Russia and Europe and 
Central Asia and Europe, would defeat a lot of, and is 
defeating to some extent, some of the actions of the 
intelligence people. In fact, these are facts on the ground. 
The countries that require greater transparency don't have the 
same problems of the others.
    I think the other issue is the science and technology 
cooperation of the United States and what is happening in the 
U.S. I think quite frankly the unconventional gas revolution is 
to some extent defeating the interests of the elites in Russia 
that benefit from the illicit profits that are made out of oil 
and gas. The studies show that 50 percent of all the investment 
by Gazprom in pipeline projects is frittered away in 
corruption. Fifty percent. That is an enormous amount of money. 
We pretty well know where it goes, quite frankly.
    But I think that yes, guns and power or guns and money can 
be a deadly combination. But quite frankly, I think that I have 
a little more faith in democracy and transparency and the 
ability of some of these countries. I think little countries 
like Lithuania standing up to Russia and taking them to court. 
They are doing other things to take away some of their assets 
that they developed through I will say nontransparent means; 
companies they were able to acquire by paying people under the 
table. When you have got that kind of a system where you can 
rely on your connections during the Cold War, you have still 
got connections in Europe. You have got people who are very 
democratic. They believe that--they are free-market people. As 
the President of a European country--I named him in my 
writings, but I don't particularly want to do it here--who in 
fact just allowed the Russians to pay for his trip to Russia to 
publish a book that he wrote. Why does a President of a free 
democratic country do that? Once that became known and freely 
available to the press in that country, there was a lot of 
backing off.
    So I think I still believe in transparency. You have got 
people in Russia--I have been a target of a lawsuit by one of 
the oligarchs who is involved in the Russian energy trade. And 
there have been some other people here in town. But their 
ability to do that in the future has now been curbed because 
President Obama signed legislation saying that U.S. courts are 
not required to carry out libel judgments of a London court, 
which is where these guys take you because they can't do it 
here because of the First Amendment. So they try to intimidate 
you. This kind of intimidation is weakened. It has been 
weakened over the last couple of years.
    So I think there are some positive things happening. The 
unconventional gas revolution in the United States has affected 
the thing that Dr. Cohen mentioned, the Shtokman field up in 
the Barents Sea. It is not working. Yes, they brought in the 
French and the Norwegians to help work in the field. But it is 
dead. It is a dead project for a long time because of what has 
happened in America.
    The science and technology cooperation that we are 
developing now with the Central Europeans I think is very 
important and we should continue that, and I hope that the 
Congress funds that adequately.
    Thank you.
    Mr. Marino. Thank you.
    Dr. Cohen.
    Mr. Cohen. You were raising very tough questions but these 
are very good legitimate questions. I think that without 
changing the mindset of the Russian people we may not be able 
to affect the outcomes of the change that you are talking 
about. But at the end of the day, it is freedom that defeated 
Communism, and it was defeated in the Soviet Union through, 
among other things, the brave lives and brave work of people 
like Alexander Solzhenitsyn and Andrei Sakharov and Lech 
Walensa.
    So the issue is, what the new generation of Russian 
people--not ethnic Russians, because Russia is a multiethnic, 
multireligious country--but new generation of Russian citizens, 
of Ukrainians and Belorussians and others, what they will 
value, what they will seek. And the Russian state is hard at 
work to make them nationalists, to make them supportive of 
their government through the Internet, through television.
    We just had a panel yesterday at Heritage on Internet 
freedom in Russia. We heard from experts that the Russian 
Government is hiring armies of pro-government bloggers to be a 
presence on the Internet. But we in the United States now are 
stepping back in launching the struggle for hearts and minds. 
We are not as involved in the struggle through tools of public 
diplomacy as we used to be during the Cold War. We won the Cold 
War among other things through public diplomacy, through Radio 
Liberty, Voice of America, et cetera. We are not doing a good 
job, and this applies to the previous administration and to 
this administration, in terms of fighting radical Islam and 
their proponents. Al-Qaeda has a huge online presence.
    We are not doing a good job supporting those in Russia who 
are willing to fight against corruption, to fight for freedom, 
to fight for democracy and an open political system.
    But in any case, as we saw in the Middle East, the harsh 
state policies can last only as long as people are willing to 
accept them. And once they don't, once they protest, once they 
demand free elections, open media, stopping state control of 
television, these things may change.
    Mr. Marino. Thank you.
    Mr. Cohen. And we need to do more to reach out to Russians, 
Belorussians, to people in Central Asia and other places who 
want freedom and work with them and support them.
    Mr. Marino. Doctor, you brought up a point earlier 
concerning you are amazed at the pornography that was budgeted 
for and comes out of Russia.
    Mr. Cohen. Facilitated by Russia.
    Mr. Marino. When I was U.S. Attorney, that was one of my 
main projects, prosecuting pornographers, and it was just 
unbelievable, under the guise of legitimate businessmen, the 
pornography that was coming out of Russia. It is extraordinary.
    Ambassador Wilson?
    Ambassador Wilson. Mr. Chairman, it is always great to be 
last because all the good things have been said. I agree more 
or less with what my colleagues have said. I am a realist when 
it comes to foreign policy in a lot of respects. We have to 
deal with the world as it is, maybe not as we would like it to 
be. And I think as we calibrate the United States relations 
with Russia, we want and need to distinguish between the things 
that are essential in our national interest that we have to 
work with Russia, whatever its flaws may be, and other issues 
that may not be so important to us and we draw some appropriate 
conclusions from that.
    The second thing I would say, I had the privilege of 
serving in our Embassy in Moscow for 5 years in the 1980s and I 
had the impression then and even more so now that one of the 
drivers that influenced the developments that happened in the 
late 1980s, and ultimately the breakup of the Soviet Union, was 
a strong desire among citizens of the Soviet Union to live in a 
civilized country, to live in a European country, and to be 
seen as a real place and not something that was operating on 
different standards and that was removed from the rest of the 
world. I think that desire to be in a civilized country and in 
a European country remains a strong and powerful thing.
    So to echo what some of my colleagues have said, stated in 
a different way, the more that we can draw Russia and Russians 
into the international system, the more the Russian citizens 
get out and travel and express politically in their own country 
this desire to be in a civilized country and to act on the 
things that flow from that, the more likely there will be 
internal pressures that will lead Russia in the right 
direction.
    It is not going to change in the ways we would like it to 
because we say so; it will change because of what people there 
do. And I think everything we can do, and it is limited, but 
what we can do that encourages that kind of thinking among 
Russian citizens, the more likely we will see the sort of 
country we would like to see.
    Mr. Marino. Gentlemen, in conclusion, if you could just 
answer this last question briefly, and we will start with you, 
Ambassador Wilson, so you have an opportunity to take this on 
without hearing anybody else talk about it.
    What should the U.S. be doing to convince Russia to end its 
occupancy in Georgia?
    Ambassador Wilson. I will say two things, Mr. Chairman. 
Russia needs to understand and see that there are costs in its 
relations with a whole range of countries that it cares about 
that follow from its occupation of Georgia. The United States I 
think has been reasonably clear in the objections that it has 
to the events of August 2008 and to the ongoing state of 
affairs in Abkhazia and South Ossetia. I would not say the same 
of our European allies, including allies that the United States 
gave extremely strong, vigorous and costly support to 
throughout the Cold War.
    So I think some stiffening of European spines is probably 
going to have a greater impact on Russian policy toward Georgia 
than almost anything that I can imagine the United States 
directly can do. And there I think Members of Congress in 
particular can play a role, through the NATO Parliamentary 
Assembly, through the OSCE Parliamentary Assembly and others, 
in engaging with your colleagues and talking to them about 
this, because Europeans I talk to have Georgia number 998 on 
their of list of 1,000 priorities.
    The second thing I would say is my own personal 
perspective, and nothing I have said here reflects the Atlantic 
Council's views, but my own personal perspective is that in the 
absence of some significant change, including new pressure from 
Europeans that Russia cares about, the situation in Georgia is 
likely to be a long-lasting one. I think if that is going to be 
the case, some strategic patience on the part of the United 
States that we exercised over the 40 years that Germany was 
divided is probably going to be a necessary approach.
    Work with the Russians in areas where it is in our interest 
to work with them where we have to; try to ensure that there is 
some cost to their relationship for us in what is going on in 
Georgia; stand up for what we believe and keep saying it about 
Georgia, but also be prepared for a long game.
    Thank you.
    Mr. Marino. Thank you, Ambassador.
    Dr. Cohen?
    Mr. Cohen. I generally agree with Ambassador Wilson's 
analysis. Russia also points out that despite the 2008 war, 
they won the bids to be the host of Winter Olympics of 2014 
right on the border of Abkhazia, which is part of Georgia that 
you refer to as occupied. I believe they won the 2018 world 
soccer championship, which is huge. And I am not sure what the 
year is, maybe 2020, the world hockey championship. So these 
are the achievements that are real achievements for the Russian 
people that the leadership there points out and says, you see, 
we did what we did; we are not paying the price.
    So if this is the mindset, the question to the policymakers 
is, is it possible to reverse the mindset? Otherwise we are, 
what Ambassador Wilson described, the strategic patience. 
Sometimes strategic patience does work. Not only Germany was 
divided, the Baltic States were occupied since 1939, first by 
the Soviet Union, from 1940 by the Soviet Union, then by Nazi 
Germany, and then again by the Soviet Union. We recognized the 
governments in exile, and in the end the Soviet Union collapsed 
and the Balts regained their independence.
    Steps by the Europeans like the sale of the Mistral 
helicopter carriers that I mentioned already, do not help. They 
are sending the wrong message.
    Any kind of recognition or integration of the 
representatives of these two enclaves, Abkhazia and South 
Ossetia, in Russian diplomatic delegations and any attempts to 
keep them as separate entities should not be recognized by 
American diplomats.
    And there is a sensitive issue of supply of U.S. defensive 
weapons to Georgia. Since the Obama administration came to 
power, my understanding is that no defense weapons were sold to 
Georgia, including no spare parts for something as simple as M-
4 rifles. While there are many meetings and discussions, 
including the recent meeting of Vice President Biden with 
President Saakashvili, the administration has not changed its 
position.
    But this is clearly an executive branch decision. They are 
looking at the big picture and this is something that they 
decided. Whether it is sending the right signal to the Russians 
and whether it is enhancing the security of the Georgia and 
people is an open question.
    Mr. Marino. Thank you, Dr. Cohen.
    Ambassador Smith.
    Ambassador Smith. It is hard to add much to that, except 
there are two things, and I better stress especially at this 
point that I don't speak for anybody else at CSIS but myself. 
But from my experience in that part of the world, I think, 
quite frankly, we are deficient in intelligence assets.
    There are a lot of things going on. Whether or not it is 
who is responsible for a lot of the demonstrations going on in 
Georgia, there are charges that the Russians have been behind 
it. We do know there have been several attempts by Russian 
intelligence officers to carry out certain disruptive events in 
Georgia, including possibly trying to replace the President.
    I think that we need to be sure that we are funding and we 
have adequate assets, because I know that in that part of the 
world we have drained down a lot of our intelligence assets to 
put them in the Middle East, and I think that is one of the 
things we need to work on. And we need to publicize, when we 
can back up the charges of interference in the internal affairs 
of these countries, not just Georgia but others, Ukraine for 
instance, that we do it.
    The second leverage , the big leverage we have with Georgia 
I think is WTO membership. The Georgians actually have to agree 
with it, and we told the Russians that they have to reach a 
deal with the Georgians. And I think that is a little bit of 
leverage, a lot of leverage, that we need to use and use fairly 
openly.
    The third thing, and I would agree with Dr. Cohen on this 
issue, and that is military assistance to Georgia. I believe 
that really we should be giving them equipment that is purely 
defensive, but giving them the ability to ratchet up their 
defense, particularly now that the French have agreed, as he 
mentioned earlier, agreed to sell these Mistral ships and 
missiles to the Russians, because the first thing that came out 
of Russia when the French made that announcement was some 
Russian general said, well, gee, we could have taken Georgia in 
just a few minutes rather than several days. So I think that is 
something that is important.
    The fourth and last thing is, just to repeat again, I think 
we need to put some heat on our European allies who are showing 
a lack of courage in that. The agreement between Georgia and 
Russia was brokered by the French, and the OSCE was supposed to 
play a very strong role in that, and when the Russians after 
the agreement was signed said no, we are not going to allow 
that, the Europeans did not complain. They were a little 
spineless in that, I think.
    Anyway, I will believe it at that.
    Mr. Marino. Doctor?
    Mr. Cohen. Real quick, the problem we are facing in Europe 
is that Russian modus operandi, the way they deal is directly 
with either heads of state or former heads of state. When I say 
deal, I mean deal in sometimes billions of dollars.
    The acting Prime Minister of a major European ally is known 
to be involved personally. The Prime Minister of Turkey deals 
directly with Mr. Putin on oil and gas transactions. And the 
former Chancellor of Germany chairs the consortium that built 
the Nord Stream pipeline and is a great friend of Russia, which 
is his right, but we also know it is a matter of public record 
that he receives a fat salary from Gazprom and he called Mr. 
Putin ``a great democrat.''
    So when you have personal diplomacy of that kind on that 
level, we need to devise our diplomacy and our responses very, 
very carefully.
    Mr. Marino. Gentleman, I can't thank you enough for your 
testimony today. Your expertise and your intellect was clearly 
demonstrated today. I learned a great deal. As a matter of 
fact, I rather enjoy being the only one up here asking the 
questions, because this is the first time--I have been here 5 
months, I am a new legislator, but I actually had the 
opportunity to ask all my questions and your answers 
precipitated further questions.
    Thank you so much. I am going to invite you back because my 
colleagues, they really missed a lesson today. It was 
extraordinary, and I thank you so very much.
    The meeting is adjourned.
    [Whereupon, at 4:45 p.m., the subcommittee was adjourned.]
                                     

                                     















                            A P P E N D I X

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     Material Submitted for the Hearing Record Notice 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


[Note: An article submitted for the record by the Honorable Tom Marino 
from Foreign Affairs Magazine entitled ``The Good News About Gas,'' by 
John Deutch, is not reprinted here but is available in committee 
records or may be accessed on the Web at: http://
www.foreignaffairs.com/articles/67039/john-deutch/the-good-news-about-
gas (accessed 8/18/11).]

                                 
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