[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]






115th Congress                                                        Printed for the use of the
1st Session                                       Commission on Security and Cooperation in Europe
___________________________________________________________________________________________________                                                         

 
                  ENERGY (IN)SECURITY IN RUSSIA'S PERIPHERY


                                                         





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                                 July 13, 2017
                                 
                                 
                                 
                                 
                                 
                                 
                                 Briefing 

               Commission on Security and Cooperation in Europe
__________________________________________________________________________________________

                            Washington : 2017
                            
                            
                            




                       Commission on Security and Cooperation in Europe
                               234 Ford House Office Building
                                     Washington, DC 20515
                                         202-225-1901
                                    [email protected]
                                    http://www.csce.gov
                                     @HelsinkiComm
                                                          
                                                          
                                                          
                                                          

                          Legislative Branch Commissioners

              HOUSE                                              SENATE
CHRISTOPHER H. SMITH, New Jersey                       ROGER WICKER, Mississippi,
Co-Chairman                                            Chairman
ALCEE L. HASTINGS, Florida                             BENJAMIN L. CARDIN. Maryland
ROBERT B. ADERHOLT, Alabama                            JOHN BOOZMAN, Arkansas
MICHAEL C. BURGESS, Texas                              CORY GARDNER, Colorado
STEVE COHEN, Tennessee                                 MARCO RUBIO, Florida
RICHARD HUDSON, North Carolina                         JEANNE SHAHEEN, New Hampshire
RANDY HULTGREN, Illinois                               THOM TILLIS, North Carolina
SHEILA JACKSON LEE, Texas                              TOM UDALL, New Mexico
GWEN MOORE, Wisconsin                                  SHELDON WHITEHOUSE, Rhode Island
          




                       

                          Executive Branch Commissioners
                               
                               DEPARTMENT OF STATE
                               DEPARTMENT OF DEFENSE
                               DEPARTMENT OF COMMERCE
                               
                                     (II)


ABOUT THE ORGANIZATION FOR SECURITY AND COOPERATION IN EUROPE




    The Helsinki process, formally titled the Conference on Security 
and Cooperation in Europe, traces its origin to the signing of the 
Helsinki Final Act in Finland on August 1, 1975, by the leaders of 33 
European countries, the United States and Canada. As of January 1, 
1995, the Helsinki process was renamed the Organization for Security 
and Cooperation in Europe [OSCE]. The membership of the OSCE has 
expanded to 56 participating States, reflecting the breakup of the 
Soviet Union, Czechoslovakia, and Yugoslavia.
    The OSCE Secretariat is in Vienna, Austria, where weekly meetings 
of the participating States' permanent representatives are held. In 
addition, specialized seminars and meetings are convened in various 
locations. Periodic consultations are held among Senior Officials, 
Ministers and Heads of State or Government.
    Although the OSCE continues to engage in standard setting in the 
fields of military security, economic and environmental cooperation, 
and human rights and humanitarian concerns, the Organization is 
primarily focused on initiatives designed to prevent, manage and 
resolve conflict within and among the participating States. The 
Organization deploys numerous missions and field activities located in 
Southeastern and Eastern Europe, the Caucasus, and Central Asia. The 
website of the OSCE is: .

ABOUT THE COMMISSION ON SECURITY AND COOPERATION IN EUROPE


    The Commission on Security and Cooperation in Europe, also known as 
the Helsinki Commission, is a U.S. Government agency created in 1976 to 
monitor and encourage compliance by the participating States with their 
OSCE commitments, with a particular emphasis on human rights.
    The Commission consists of nine members from the United States 
Senate, nine members from the House of Representatives, and one member 
each from the Departments of State, Defense and Commerce. The positions 
of Chair and Co-Chair rotate between the Senate and House every two 
years, when a new Congress convenes. A professional staff assists the 
Commissioners in their work.
    In fulfilling its mandate, the Commission gathers and disseminates 
relevant information to the U.S. Congress and the public by convening 
hearings, issuing reports that reflect the views of Members of the 
Commission and/or its staff, and providing details about the activities 
of the Helsinki process and developments in OSCE participating States.
    The Commission also contributes to the formulation and execution of 
U.S. policy regarding the OSCE, including through Member and staff 
participation on U.S. Delegations to OSCE meetings. Members of the 
Commission have regular contact with parliamentarians, government 
officials, representatives of non-governmental organizations, and 
private individuals from participating States. The website of the 
Commission is: .




ENERGY (IN)SECURITY IN RUSSIA'S PERIPHERY


                             July 13, 2017


                                                                                     Page
                              PARTICIPANTS

 Paul Massaro, Policy Advisor, Commission on Security and Cooperation in Europe .......1


Dr. Peter Doran, Executive Vice President and Interim Director, Center for European 

Policy Analysis [CEPA] ................................................................2

Edward Chow, Senior Fellow, Energy and National Security Program, 
Center for Strategic and International Studies [CSIS] .................................4

Andrian Prokip, Senior Associate, Kennan Institute; Energy Expert, 
Institute for Social and Economic Research ............................................6

Lyndon Allin, Associate, Baker McKenzie ...............................................7

Dr. Mamuka Tsereteli, Senior Fellow, Central Asia-Caucasus 
Institute ............................................................................11

                               (IV)






              ENERGY (IN)SECURITY IN RUSSIA'S PERIPHERY
                              ----------                              

                             JULY 13, 2017




    The briefing was held at 3:32 p.m. in room G11, Dirksen Senate 
Office Building, Paul Massaro, Policy Advisor, Commission on Security 
and Cooperation in Europe, moderating.
    Panelists present: Paul Massaro, Policy Advisor, Commission on 
Security and Cooperation in Europe; Dr. Peter Doran, Executive Vice 
President and Interim Director, Center for European Policy Analysis 
[CEPA]; Edward Chow, Senior Fellow, Energy and National Security 
Program, Center for Strategic and International Studies [CSIS]; Andrian 
Prokip, Senior Associate, Kennan Institute; Energy Expert, Institute 
for Social and Economic Research; Lyndon Allin, Associate, Baker 
McKenzie; and Dr. Mamuka Tsereteli, Senior Fellow, Central Asia-
Caucasus Institute.

    Mr. Massaro. All right. Let's get started.
    Good afternoon, ladies and gentlemen. Thank you all for coming and 
welcome to today's briefing on energy security in Russia's periphery. 
My name is Paul Massaro, and I am the policy adviser responsible for 
economic and environmental issues at the Helsinki Commission.
    Energy security is a crucial issue for the Organization for 
Security and Cooperation in Europe, or the OSCE.
    The availability of energy supplies is a cornerstone of the 
economic viability of modern societies. There is an undisputable link 
between energy security and the stability of states in the 21st 
century.
    Today we will focus on energy security in Russia's immediate 
neighborhood, post-Soviet Eastern Europe and the Caucasus.
    Under the presidency of Vladimir Putin, Russia has used its 
neighbors' dependence on Russian energy supplies as a source of 
geopolitical leverage and has sought to keep these countries' energy 
sectors underdeveloped and corrupt.
    Ukraine, Moldova and Georgia have all been targets of these tactics 
and will make up the case studies of today's briefing. Each one has 
reacted differently to Russia's energy influence, and each has 
experienced a different level of success. In specific, we hope to learn 
why the initiatives of these states have had such varied results and 
mine them for lessons on how best to achieve energy security in the 
future.
    We are grateful to have such distinguished panelists with us here 
today. I look forward to hearing your thoughts and views on this 
important issue.
    We'll kick things off with Peter Doran, the executive vice 
president and interim director at the Center for European Policy 
Analysis, or CEPA, where he leads the center's Energy Horizons program. 
Peter is a recognized expert on energy security as well as on Russia 
and Ukraine and transatlantic defense.
    Second, we'll hear from Edward Chow, senior fellow at the Energy 
and National Security program of the Center for Strategic and 
International Studies, or CSIS. Ed is an international energy expert 
with more than 35 years of industry experience who has worked in Asia, 
the Middle East, Africa, South America, Europe, Russia and the Caspian 
region, so all over the globe.
    Mr. Chow. Not North America, though. [Laughter.]
    Mr. Massaro. Missing that one.
    Ed has written extensively on the energy sector in Ukraine and its 
relationship to corruption in the country, the topic of his 
presentation today.
    Following Ed, we have Dr. Andrian Prokip, senior associate at the 
Kennan Institute of the Woodrow Wilson Center and energy expert at the 
Institute for Social and Economic Research. He has authored over 50 
peer-reviewed papers and op-eds and three books on energy and energy 
security.
    Next, we have Lyndon Allin, associate at Baker McKenzie. Between 
2011 and 2016 Lyndon spent five years working for the OSCE as a 
political officer in Moldova on various issues, including corruption, 
and in the energy sector. He was also previously the IREX embassy 
policy specialist for Moldova.
    And finally, we have Dr. Mamuka Tsereteli, who joins us from the 
Central Asia-Caucasus Institute at the John Hopkins University School 
of Advanced International Studies, SAIS, where he is a senior research 
fellow. Dr. Tsereteli teaches classes on energy and security in Europe 
and Central Eurasia at American University and John Hopkins University.
    Once all briefers have spoken, we will conclude with a Q&A session.
    I'd like now to give the floor to our first panelist, Peter Doran, 
who will provide us with an overview of energy security in the 21st 
century, both generally and in the regional context of the post-Soviet 
space. Peter, the floor is yours.
    Mr. Doran. Thank you very much, Paul.
    Before we get started, I absolutely want to thank you for the 
invitation to come here and speak and certainly for the Commission 
itself for targeting this issue and this question for discussion.
    And the task before me today is actually to set up in many ways the 
scope of what we will be discussing today. Frankly, I think anyone here 
on this panel could probably do this and possibly even better than I. 
But I thought I would zero in on two specific points, the good news and 
the bad news, when it comes to energy security or insecurity in 
Russia's neighborhood.
    By way of a little background, my organization, CEPA, the Center 
for European Policy Analysis, is the only U.S.-based American think 
tank dedicated exclusively to the countries of Central and Eastern 
Europe. We exist with a very clear mission, and that is to promote an 
economically vibrant, geopolitically secure Central Europe with close 
and enduring ties to the United States.
    This is important in the context of energy security because without 
energy security, you cannot have countries that are economically 
vibrant or geopolitically secure. And their links to the United States 
are often tenuous at best. This has been enduring dynamic that we have 
engaged in for many years.
    And when speaking on energy security in this part of the world, I 
often like to present a little thought exercise, especially for 
American audiences, in order to understand the true nature of the 
tensions and dynamics that countries in Russia's neighborhood must 
face, or at least have faced. I often invoke the idea of imagining the 
citizens of Denver, Colorado, having to chop down trees in their own 
public parks in the middle of winter because Mexico got into a fight 
with Canada over the shipment of natural gas deliveries. For many 
Americans, this seems like a mind-blowing, almost impossible scenario, 
but that is exactly what happened to the residents of Bulgaria when we 
saw the pivotal Russia-Ukraine gas dispute back in 2009.
    Fast forward to today, and the game board is fundamentally changed. 
Europe has improved. Energy security at the tail end of these pipes 
from Russia has gotten remarkably better. The regulatory environment 
has improved, thanks to efforts like the Third Energy Package, which we 
can talk about, to make downstream customers further west in Europe 
more resilient and have more options to Russian gas imports. This is 
not necessarily the case for countries closer to Russia.
    And here I think it is important to make our first important point. 
The energy world, though, is changing. Many of the talking points of 
politicians are fundamentally out of date. The old saying, if we 
recall, that we just can't drill our way to lower gas prices proved to 
be false. Russia's outdated monopolistic pricing business model is 
outdated. And given changes in the wider energy sphere, thanks to the 
abundance of new energy sources, we're even approaching a point where 
even mighty Saudi Arabia may someday encounter a situation where they 
run out of new customers for their oil before they ever run out of 
crude.
    If the first point here is that we were bad and we're getting 
better, that's an important one to digest because we are now 
approaching something that would've been hard to imagine back in 2009 
during the Russia-Ukraine gas crisis. And that is this: The world of 
energy scarcity is fast becoming something in the rearview mirror. The 
world of energy abundance is fast becoming the new normal. And that is 
a game-changer for Russia's neighbors on the question of energy 
security.
    And the signs of this transformation are already underway. Many of 
us have already seen how Poland has just received the first shipments 
of liquified natural gas [LNG]. A similar dynamic is underway with 
Lithuania and the Baltic states. And even Hungary and Croatia have just 
signed a breakthrough agreement that will make possible the overland 
shipment of LNG to Hungary from an Adriatic entry point.
    All of this is the good news. Now for the bad.
    The bad news is that Russia is not taking this game-changing market 
shift lying down. Russia is fighting back, and it is fighting back 
through a very specific vehicle that has immediate ramifications for 
the country of Ukraine. And that, of course, I'm speaking of the Nord 
Stream 2 pipeline.
    Now, we will probably talk a bit about the Nord Stream 2 pipeline, 
but I would put forward this: The Nord Stream 2 pipeline is not a 
commercial pipeline. Nord Stream 2 is a political pipeline with 
strategic ramifications for Ukraine. It is important for the Commission 
and members of the audience to remember: Right now Russia is in a 
military conflict with Ukraine. If it can complete Nord Stream 2, 
Russia is in a position to deny billions of dollars of transit revenues 
to Ukraine equivalent to around 10 percent of the annual Ukrainian 
budget. If money is the muscle of war, the ability to deny your 
opponent in war of the money to continue a fight against you--well, if 
Russia succeeds at that, that would give Moscow a tremendous advantage. 
This is the ultimate upside for Russia for Nord Stream 2.
    It is also why it should be relevant for considerations of the 
Commission as well as U.S. policymakers, because if the United States 
is committed to advancing downstream energy diversification and free-
market principles in Europe, promoting and supporting the independence 
of Ukraine, and being a leader and offering energy alternatives to 
monopoly suppliers like Russia, then pushing back against Nord Stream 2 
has several significant advantages to what are core U.S. interests.
    So if the good news for many of us is that energy is becoming more 
abundant, the bad news is that old monopolies are resisting this and 
finding ways to push back against it. I think it is a sobering takeaway 
that there is no time here for the United States or Europe to take this 
lying down or to assume that things will work themselves out if we 
stand on the sidelines. This is not a time for the United States, the 
Commission or anyone who cares about the things that matter to be 
assuming that doing nothing will produce good results.
    Mr. Massaro. Well, thank you very much, Peter, for that great intro 
and an eye-opening analysis of what's going on in the world of energy 
security. I particularly love that analogy. I'll be using that one with 
my parents this weekend, I'm sure. [Chuckles.]
    So next we have Ed Chow. Please, Ed.
    Mr. Chow. Thanks, Paul, and thank the U.S. Helsinki Commission, as 
Peter said, for sponsoring this meeting and this briefing.
    I guess I come to this from a slightly different perspective than 
Peter. I don't disagree with what Peter says, and he might even agree 
with me, that structural reform of the Ukraine energy sector is central 
to meeting the challenge that Russia does pose to Ukraine.
    So let's review a little bit about what has happened in Ukraine 
since independence more than 25 years ago now. You have the legacy of 
the Soviet Union. And it's not just a matter of pattern of trade or 
infrastructure that preserves that pattern of trade but also a highly 
centralized and therefore political allocation of energy assets and 
energy supply.
    An underdeveloped market economy in energy--so you don't have the 
market mechanism, for example, of market clearing pricing formulation, 
no security of property rights, or obligations, for that matter. And 
you have a terribly nontransparent system.
    So the legacy for Ukraine is you have the highest energy-intensive 
economy in Europe--energy intensity right after independence that 
remarkably is a higher energy intensity than Russia itself. It has 
about twice the energy intensity of Poland, which--rather similar 
structural economy, highly dependent on gas imports, in spite of the 
fact that Ukraine enjoys favorable geology. Up until the 1970s, Ukraine 
used to export gas to the Russian Republic. So there's nothing 
particularly under-resourced as far as Ukraine is concerned.
    It also had tremendous transit advantage. Eighty percent of Russian 
gas going to Europe transited through Ukraine. That leverage has been 
eroded over time mainly because they've been hijacked by corruption at 
the highest level of Ukrainian Government. We're talking about 
presidents and prime ministers, not low-level petty corruption. We're 
talking about billions of dollars of economic rent that's been 
extracted by Ukrainian politicians from the energy sector.
    You have political allocation of cheap energy and division of 
energy assets under control of various oligarchic groups. I have 
written elsewhere and I've said that Ukraine energy corruption is, in a 
way, the original sin of Ukrainian independence. It's easy enough to 
blame Russia. And there's plenty of blame to be placed on Russia: 
Russia seems to prefer weak and dependent neighbors rather than 
economically strong neighbors. But it's also been facilitated by the 
Ukrainian political class.
    We've had a missed opportunity, the Orange Revolution, more than 10 
years ago now, when vested interest groups in the energy sector became 
more entrenched, not removed. And of course energy corruption expanded 
to outrageous levels under Yanukovych.
    Ten years after the Orange Revolution, we have a second golden 
opportunity called Euromaidan. And it's an opportunity not to be 
missed. There's no longer any disguising that Russia, at least under 
the current regime, is a threat to Ukraine.
    The results of the current reform process is, shall we say 
diplomatically, incomplete. It still suffers under the lack of 
transparent regulation or market competition. No market competition, no 
transparent regulation. This results in the preservation of the 
incentives for corruption. Political change means reshuffling of the 
deck of energy assets rather than changing the business model 
altogether. So you continue to have energy inefficiency and shortages, 
chronic underinvestment in the energy sector because the market players 
are focused primarily on rent extraction, not value creation.
    The difference is that Ukrainian society has fundamentally changed. 
Ukrainian civil society has changed. The population's expectations of 
economic outcomes have changed, even if the politicians' expectations 
have not. The old game is no longer acceptable to the general 
population. There will be a political cost to be paid if this 
continues.
    The upside on energy sector reform is that Ukraine can very easily 
be self sufficient in energy. In fact, it can contribute towards 
European energy supply by higher efficiency gains in the domestic 
economy as well as higher domestic production.
    Reform of the energy sector, which is going to be difficult, will 
release economic value, unlike, say, reform of the education sector or 
the health sector, which are equally corrupt but will cost money. The 
reform and restructuring of the energy sector would actually generate 
income for the government.
    The transit leverage I'm afraid is gone forever. Given the 
adversarial relationship between Russia and Ukraine and Russia being 
the only conceivable shipper, it's only a matter of time before the 
transit leverage disappears altogether. And we can have a separate 
debate about Nord Stream 2 in the Q&A section.
    Mr. Massaro. Looking forward to it.
    Mr. Chow. What can the West do to help?
    I would say the first thing is conditionality of Western assistance 
is very important. The reforms that have taken place, as limited as 
they have been, has been the result of Western conditionality on 
economic assistance. I'm not particularly happy with today's news that 
the IMF is apparently taking land reform legislation off the table as a 
conditionality for the next tranche of IMF funding. But in the energy 
sector, that pressure needs to be sustained, in my view.
    But beyond that, we need to help Ukraine with capacity building. 
It's not just a matter of money. It is the capacity to modernize 
policymaking in energy as well as business practices in energy.
    I think there's been way too much made about U.S. energy dominance; 
that's the buzzword of the last couple weeks in Washington. U.S. energy 
exports is not a substitute for structural economic reform in Ukraine.
    It means that we have to engage civil society, which is the 
strength of the Ukrainian society, it seems to me, to support the 
process of reform and not just individual political leaders. Now, 
that's hard. That's very hard in our system because we tend to identify 
with personalities in our policy. But it seems to me that that's really 
inescapably important.
    Without fundamental reform, there will be no major direct foreign 
investment in the Ukrainian energy sector. Ukraine will continue to 
attract the bottom fishers of the international oil and gas market as 
well as domestic rentiers. And so maintaining the momentum on reform is 
really critical in my mind. Reform is a little bit like rowing upriver: 
If you're not moving forward, you going to go backwards. That's an old 
Chinese saying, by the way. [Laughter.] So that's my recommendation--
Washington should be keeping its eye on as far as Ukraine is concerned.
    Mr. Massaro. Excellent. Well, thank you very much, Ed, for that 
very insightful overview of the original sin of Ukraine. I also really 
appreciated the emphasis on civil society. In my own readings and 
research, I've seen again and again that Ukrainian civil society is it. 
That's the comparative advantage. That's what we need to be focused on, 
and that's what they really have going for them.
    So with that, I'd like to hand it off to a Ukrainian, Dr. Andrian 
Prokip. Thank you so much.
    Dr. Prokip. Thank you. Thank you, Paul. Thank you, the Commission, 
for talking about such important issue. And that's an honor and 
pleasure for me to talk here today.
    Mostly, I agree with previous speakers. They were talking about 
extremely important and interesting issues.
    So briefly talking about Ukraine: A lot was done during the last 
three years. Necessary laws on energy markets were adopted. Energy 
supply started to be diversified. Being diversified, there was changing 
approach to pricing for final consumers. But much more, more, more and 
more have to be done in the nearest future in very quick way.
    So energy reforms on the track, but those are too slow, and those 
are going too slowly. Necessary laws and amendments still were not 
adopted, not voted in the parliament. And those which were already 
voted still are not implemented at full extent. There is no significant 
increment in inland gas production. Country is still relying on foreign 
gas supplies. And I must say that the regulation regarding improving 
the conditions for gas extraction in Ukraine still wasn't changed. And 
beside this, country has got new problems with coal.
    Another problem that is for Ukrainian energy, the cyberattacks. In 
the end of 2015 there was the first actually big successful cyberattack 
on Ukrainian energy which led to blackout. And two weeks ago we had 
another attack; there was no blackout, but main energy companies were 
affected.
    That's very important for Ukraine issue, those pipelines bypassing 
Ukraine, Nord Stream and Turkish Stream. And I agree that probably 
transit leverage will be lost in the future. And sure, that is a threat 
for Ukraine. That is a problem because interdependency between Ukraine 
and European Union will decrease, and that mean less interest in 
Ukraine for European Union, and that means more leverages for Russia to 
destabilize the situation.
    But besides gas, Ukraine is also an important transmitter of coal 
and oil. And the situation is also not very good because Russia plans 
to bypass Ukraine in those supplies too. And in this case, I must say 
that in Ukraine, there is a perception that Nord Stream 2 is a great 
problem and threat for European Union, but actually, for European 
Union, it's not so big threat as Ukrainians think. And Ukrainians 
expect that Europeans will solve this problem. For me, that's not a 
good strategy.
    So, talking about main threats in Ukraine--in the field of 
Ukrainian energy security, those are unpredictability of actions of 
Russia Federation. That's looseage of the status of important energy 
transmitter of gas, coal and oil. It's a lack of strategical vision in 
energy development for future. Those are non-transparency, and those 
are corruption, and those are inefficiency of regulators, including 
energy regulators. Those are depreciation of energy assets. Those are 
issues of affordability of energy services for final consumers and 
subsidizing of energy consumption. Extremely high energy inefficiency 
in the country; however, there are some objective reasons for this. 
Cyber threat. Problems with access of Ukraine to enter site extracted--
located in Donbas. And extremely important problem and threat for 
Ukraine is relying on others when thinking about energy problems and 
energy security. So it's relying on U.S. It's relying on European 
Union. And it's postponing in taking steps inside Ukraine that would 
affect very good.
    So I'm sure that the country should implement reforms very quickly. 
And a kind of help from outside, from European Union, from U.S., is 
desirable, but that is the help of giving advice in controlling the 
government, because government, president, parliament--because in some 
cases that is the only one leverage to pressure on authorities to 
continue implementing reforms.
    So that was briefly about current status of energy security in 
Ukraine.
    Thank you.
    Mr. Massaro. Excellent. Thank you very much, Andrian, for that in-
depth look on what's going on there.
    We would now like to move to the other two case studies, moving on 
from Ukraine, to talk about energy security in Moldova, another country 
in Russia's periphery, and Georgia. So first of all, we'll speak about 
Moldova. And I'd like to hand the floor to Lyndon Allin. Thank you so 
much, Lyndon.
    Mr. Allin. Thanks a lot, Paul. And I want to thank you and the 
Commission for giving me the chance to speak here today. Interestingly, 
the last time that I spoke at one of these public briefings was almost 
six years ago to the day, and the title was I believe ``Thawing the 
Frozen Conflict in Transnistria.'' Well, today I'll be talking again 
about Transnistria a little bit certainly because energy issues in 
Moldova very much implicate that protracted conflict. And now we have 
another protracted conflict which also has its own interesting energy 
issues in Ukraine, unfortunately.
    I want to just provide a slight amendment to the kind introduction 
that Paul provided. When I was at the OSCE mission to Moldova and had 
the honor and privilege to serve there, my portfolio actually did not 
include economic and corruption issues. It's something that I certainly 
follow quite closely because there's quite a nexus with politics around 
those issues. But the OSCE mission to Moldova actually does not 
officially have a mandate to cover economic issues, which is I would 
say a longstanding and quite unfortunate deficiency because so many of 
the issues in that conflict are economic.
    But let me turn to the topic of the day, energy security in 
Moldova. According to one recent authoritative publication, Moldova is 
among the most vulnerable countries in the world in terms of energy 
security. There's actually a private analyst firm that has assessed 
that Moldova is the ninth most risky country in the world in terms of 
short-term energy security. So that's--[laughs]--that's not great, not 
great company to be in. And of their total energy consumption, 98 
percent is imported. And if you then consider electricity generation, 
which I will come to a little bit later, for the entirety of Moldova 70 
percent of the electricity is generated in Transnistria. So that's 
quite some challenge for the folks in Chisinau to ensure that they're 
able to keep the gas-fired things fired and keep the lights on.
    As with so many things having to do with Moldova, the problems are 
related to geography and history. If we look at the way the pipe goes, 
I would not purport to be as much of a specialist in the way pipes go 
as some of the folks on this panel, but one thing I do know is that 
Moldova has been lucky in the sense, for now, that Gazprom doesn't 
really have the opportunity to shut off the supply to Moldova because 
the pipe that goes through Transnistria and Moldova supplies a lot of 
consumers downstream. Now, what I understand to be the case is that if 
and when Nord Stream 2 and the southern project--I believe it's called 
TurkStream--are completed, then that would be a chance to do that. So 
that's something to look forward to. And I agree with Peter that, I 
think as with many energy infrastructure projects, there's a high 
political element, really, to any strategic energy infrastructure 
project just because the upfront outlays are so high.
    So the options that have been considered in terms of gas for 
Moldova have been an interconnector with Romania. There has been a low-
capacity interconnector opened in 2014. It is not able to meet anywhere 
near the full needs, but there is the hope that they'll be able to 
build up the transmission network around the interconnector in a way 
that would allow it to be a higher-capacity way to get gas into Moldova 
from the west, and not only from the east.
    The other interesting issue--actually, I'll come to that later. In 
terms of own gas, there is a hope. At least an American company called 
Frontera Resources has the belief that there may be shale gas in 
Moldova, and in January of this year they signed a concession with the 
government of Moldova giving them exploration rights for a substantial 
portion of the country's territory. So it'll be interesting to see how 
that develops.
    When we talk about the gas that comes into Moldova and the gas that 
Moldova sometimes struggles to pay for, it's critical to talk about the 
gas that goes to Transnistria. It would be interesting to see a study 
of the energy intensivity, if that's the right term, of the 
Transnistrian economy broken out separately. Certainly, I would posit 
that at the beginning--because it was similarly developed, on a much 
smaller scale of course, as Donbas as a sort of industrial center.
    So what's happened over the years--and you'll see this figure 
referred to, frequently growing over the years--is that because Gazprom 
has continued to deliver gas to Transnistria without requiring that 
that gas be paid for, the total debt--and it's disputed who is on the 
hook for that debt--Moldovagaz, and probably not the Moldovan state--
that number is now over $6 billion, which is quite a large amount for 
Moldova. Where does that money go? Well, first of all, that number is 
not necessarily a real cost number. So we have to think about how is 
that subsidy--because, in effect, it's one of the--probably the most 
important way in which Russia subsidizes the existence of Transnistria.
    That gas, though, has to be monetized. So how is it monetized 
today? Today it's monetized through one of--in part the way it works is 
Tiraspoltransgas delivers natural gas to residential and industrial 
customers, charges the rates that it charges--highly subsidized low 
rates for residential customers; individually negotiated rates for 
industrial customers, which I believe are generally still lower than 
the--almost always still lower than the prices on the right bank or in 
Europe--and that money goes into an account called the gas account.
    There's been some great work about this by some guys at IDIS 
Viitorul in Moldova, and I'll--if anybody's interested, I can send you 
the link to their recent study, which is fortunately in English, 
tracking the amount that has sort of accrued over the years. And so a 
number of years ago, when I discussed this with a Transnistrian de 
facto official, he said, oh, well, this is a way that we use to sort of 
fill in holes that we have from time to time in our budget, but more 
and more it's become actually a key way of making up the 
Transnistrians' budget. So a very, very important subsidy.
    And the biggest source of gas revenue is the power plant that does 
produce some 70 percent of Moldova's electricity. That's called Moldova 
GRES. Sometimes it's referred to by Kuchurgan, the village that it's 
located in. It's owned by Inter RAO, which is a subsidiary of RAO UES. 
And it was originally designed to power all of the Moldovan SSR and 
parts of Romania, parts of Bulgaria, parts of Ukraine, so it has a huge 
capacity. So even though at the moment I think only 9 of 12 turbines 
are operational or something like that, it still has quite a 
substantial capacity to export. And it's exported to Romania, even, 
from time to time.
    So what's been going on there is, up until April of this year, 
Moldova GRES was the exclusive supplier of imported electrical energy 
to Moldova. And last year, there were some--I'm not blowing anybody's 
cover here--there was very good investigative reporting that 
demonstrated that the pricing and the payment for that electricity 
involved some intermediary companies, which allegedly were linked to 
political figures on both sides of the revenue stream, both Tiraspol 
elites and Chisinau elites. That caused a bit of a stir. And in April 
of this year, when the tender came up, the tender for that imported 
electricity supply was won by DTEK, a Ukrainian company. A lot of folks 
saw that as a victory over this less-transparent pricing scheme, and a 
victory in the sense that it would not mean effectively subsidizing the 
budget of Transnistria. However, what's happened in the past month or 
two is that--and a number of sort of more-knowing people at the time 
said that this would happen--is that the Moldovans have begun 
purchasing again some electricity from the plant in Kuchurgan, from the 
Transnistrian plant. This may seem all like very minute details, but it 
is a very--I think a fantastic case study in the way in which energy 
security, geopolitics, and corruption and non-transparent procurement 
sort of roll into one in this region.
    With electricity, there's also a plan to try to connect to the 
Romanian grid. That's a technical challenge and it's somewhat costly, 
although that is in process.
    Let's see if there were any other key points. I don't want to take 
too much time.
    Oh, yes. Also, if we consider the scenario under which Ukraine does 
supply Moldovan electricity, it's important to note, again, Kuchurgan 
power station [MGRES] and its sort of--the Soviet legacy of 
interconnected energy networks, that's the history part. And the 
geography part is that from Ukraine to Moldova, six of the seven high-
tension electricity transportation wires go through Transnistria, and 
four of them actually go through the circuit at MGRES. So, in theory, 
it would not be good for the circuit because it's all, experts have 
told me, harmonized, and if you cut a part of it off it doesn't do 
well; the rest of the grid has instability. But in theory, this is an 
energy security issue for Moldova in the sense that Transnistria could 
cut that switch at some point in some kind of an escalatory thing.
    In terms of recommendations, I won't be as ambitious as some, 
although I would agree with one thing that Andrian said about Ukraine, 
which is that in Moldova, like in Ukraine, there needs to be more of an 
effort to solve their own problems and not only look to foreign 
partners for the solutions. Funding, sure. Advice, sure. But there is a 
fatigue level with folks not solving their own problems, recognizing 
that these are difficult problems.
    One of the recommendations that the IDIS Viitorul study put forward 
was that this figure, the $6 billion plus figure of the gas debt that's 
often thrown around, that there be some kind of an audit of that 
figure. They claim that some of the amounts that have accrued there 
were actually gas that was paid for, gas that was not used in 
Transnistria but was used on the right bank, that the prices that were 
applied in calculating that debt may not have always been correct. 
That's an interesting proposal if Moldovagaz would be interested in 
opening its books for that.
    And also, certainly, I think this is probably just almost a generic 
point in any energy security presentation, right--diversification of 
supply. I know that there is a wind power initiative in Moldova. I 
believe there are other sorts of renewable initiatives that are taking 
place there. You know, that obviously would be nice to increase the 
level of self-sufficiency from 2 percent currently.
    That's all. I'll be happy to take questions and discuss further in 
the Q&A.
    Thanks.
    Mr. Massaro. Absolutely. And I'm sure we will have questions, 
seeing how complicated that all is. Very, very, very difficult to 
understand, especially for someone that hasn't spent a lot of time with 
the issue. We're very lucky to have you on the panel.
    Mr. Allin. Slides. I wish there were slides.
    Mr. Massaro. [Laughs.]
    Mr. Allin. A lot of times you need a picture for this thing.
    Mr. Massaro. Yes, absolutely, absolutely. Well, thank you very 
much.
    We'll now go to our final briefer, who will talk about the case of 
Georgia, a country that's generally thought to have achieved a modicum 
of energy security in Russia's periphery. So, with that, I'll hand it 
off to Dr. Mamuka Tsereteli. Thanks so much.
    Dr. Tsereteli. Thank you, Paul.
    Thanks to Helsinki Commission for organizing this timely event in 
times of some uncertainty of internal political process and Russian 
meddling in internal political process in the U.S. I think focusing on 
major issues and important issues is a priority.
    One clarification: Central Asia-Caucasus Institute is no longer 
part of SAIS. We are part of American Foreign Policy Council, which is 
closer here. We decided, in these times of uncertainty, to move closer 
to the Capitol Hill. [Laughter.]
     I'll make a couple of general points and then I'll move to the 
case of Georgia. I think we all agree that the Russian Federation has a 
strategic intent to limit the sovereignty of the countries of its 
neighborhood at all costs, and to maintain control over the foreign 
policy priorities of these countries. Russia uses an entire arsenal or 
spectrum of means to achieve this strategic goal, and this spectrum 
includes manipulating and then acting as an intermediary in the 
conflicts that Russia instigates and initiates; corruption of officials 
and manipulation that leads to high debts and consequent transfer of 
ownership of assets to Russian entities in the energy industry and 
infrastructure; economic blockades; military invasions like in Georgia 
in 2008 or Ukraine 2014,; annexation of territories like open 
annexation of Crimea--in Crimea's case and creeping, unheeding 
annexation in the case of Abkhazia and Tskhinvali Region in the case of 
Georgia.
    Any weakness of the countries of Russia's neighborhood gives 
Russia, obviously, an opportunity to manipulate and take advantage to 
advance its objectives. Corruption is one weakness that Russia usually 
utilizes. I think the cases presented here are a real demonstration of 
that. But I think we should admit that that's also a reflection of 
those legacies of Soviet times, but even pre-Soviet time legacy of the 
Russian empire to have this corrupt practice.
    In terms of energy security, I think all countries that are 
discussed here, they and other countries in Eastern Europe inherited 
two major problems. One is Soviet-style governance, with corruption at 
the core of major decision making, allowing easier access to 
infrastructure, free and lower prices for selected enterprises, special 
treatment of those selected enterprises connected to government 
officials and influential politicians, and so forth. And second, the 
energy infrastructure made all of these countries dependent on Russian 
energy sources because that's, again, a legacy of Soviet times.
    Since the collapse of the Soviet Union and the independence of 
these countries, it was imperative for all these countries to get rid 
of these two major problems: infrastructure dependence, as well as 
governance issues. The Western institutions in assistance, as well as 
investments of Western companies, had a very important role to play in 
this process. But their efforts only could succeed if governments have 
political will to reform and implement those reforms.
    All three countries of today's focus had identical systemic 
problems of the energy industry since the early 1990s. That's culture 
of corruption, non-payments and low collection rates by the state 
entities, attachment to Russian suppliers, operational inefficiencies, 
and so forth.
    So let's review briefly the case of Georgia. I think there are 
several points that I'll make. Determination of the leadership of the 
country since the early days of independence to1990s to closely 
corroborate with Azerbaijan and other major oil- and gas-producing 
countries in the Caspian region on development of market access 
infrastructure is another important element. It was an opportunity to 
put Georgia on the map of the major global energy companies, but also 
to diversify its sources of energy and to reduce dependency on Russia.
    Working with international financial institutions on creating the 
environment for foreign companies to operate in the Georgian energy 
sector was another important issue. Already in 1998 Georgia privatized 
the electricity distribution business. In Tbilisi, the capital city, 
the electricity distribution business was required by AES Corporation, 
an American company. And in very difficult circumstances and 
environment, the company started to implement very serious reforms, 
changing culture of non-payments and so forth, which is still existing 
in many, many other places. We can review the case of AES a little 
later if there are some questions.
    Natural gas supply was a major issue at that time, and Georgia was 
solely dependent on Russian gas. And this factor was used several times 
by Russia to exert pressure on Georgia for gaining political benefits. 
There were cuts of supplies and so forth. Couple this discontent with 
the existing corrupt and dysfunctional governance at that time led to 
change of the government in 2003. The popular support for 
anticorruption measures and other reforms allowed the government to 
eliminate many regulations and licenses, and to conduct major reforms 
in police, education, government services, and the energy sector. Those 
are the sectors that were mentioned by Ed earlier as well. The new 
government had a mandate from the population and the political will to 
act on anticorruption measures in all those areas. And, by the way, 
they used that mandate very forcefully, sometimes too forcefully.
    The new wave of reforms in the energy sector eliminated subsidies 
to industrial electricity users, liberalized prices for electricity, 
and eliminated any preferential treatment of the industrial facilities. 
Only entities who were paying their bills were able to receive 
electricity, and this allowed flow of money into the system. Again, Ed 
was mentioning that. And investments necessary for necessary repairs, 
upgrades, and new developments became possible with that funding coming 
into the state system.
    In two years between 2004 and 2006, Georgia eliminated blackouts 
and every electricity user--by the way, prior to that some users--
residential, hospitals, bakeries, others--were receiving electricity 
for only two or three hours per day. And in two years, between 2004 and 
2006, Georgia eliminated blackouts, and every paying electricity user--
residential or commercial--was able to have 24-hour electricity supply.
    Mid-2000 was also the period when Baku-Tbilisi-Ceyhan oil pipeline 
started to operate. And then, 2007, the so-called South Caucasus 
natural gas pipeline also became operational. Since 2008, the major 
source of natural gas supply of Georgia has been Azerbaijan, thus 
eliminating Georgia's critical dependency on Russia.
    Georgia continues the process of institutional integration, 
institutional reforms and institutional integration with European 
institutions. Georgia is signatory of association agreement with the 
European Union, signed in 2013, as well as a different comprehensive 
free-trade agreement also signed in 2014, finalized. Georgia has free-
trade agreements with Turkey, other neighbors, and recently signed 
free-trade agreement with China, and is one of rare countries that has 
free-trade agreements with China at this point.
    The point I'm making with this is that countries trying to [win?] 
institutional reforms and openness for trade and investment tries to 
integrate in global economic system, and energy reforms and energy 
security is a very integral part of that process.
    I would like to end my brief comments on one, in my view, one very 
important issue. I think more needs to be done in terms of looking at 
the Black Sea area from the energy security perspective, and the 
interconnectivity of the countries in the Black Sea, both eastern 
shores and western shores. Several pipelines we have mentioned here, 
like TurkStream and some others, competing pipelines to the pipelines 
that are developing for some time already and in the final stages of 
implementation, that system of pipelines that will connect Shah Deniz 
field in Caspian Sea all the way to Italy, passing through seven 
countries.
    But as we see, Russia is trying to use its tools. That includes, 
obviously, diplomatic means, negotiations with the Turkish Government 
as well as the European Union, some of the members of European Union 
countries. I think in this environment, it's absolutely crucial and 
essential to focus more on--again, on the Black Sea connectivity in 
terms of energy. There are multiple options that exist that I think we 
should focus on them for the interest of particularly Eastern European 
countries, and Ukraine as well. I think that will help us to eliminate 
this long discussion of lack of natural gas. If we manage to build a 
pipeline from Turkmenistan via Georgia--Azerbaijan/Georgia--to the 
western shores of Black Sea--and under the circumstances, again, that 
Russia is discussing all those pipelines crossing Black Sea--I think 
it's feasible--at least technologically, to have this discussion. That 
would eliminate for good long-term discussion about Eastern European 
countries have alternative supply of natural gas coming from the 
Caspian region.
    And also, this is only possible if there is a security dimension 
enforced in the Black Sea areas as well, because we know Russian 
presence increased in Crimea and so forth. And without that element 
being in place, this will remain, as we call it, a pipe dream.
    Thank you.
    Mr. Massaro. Well, thank you very much, Dr. Tsereteli, for that 
fascinating overview of the Georgian energy security. Georgia remains 
such a hopeful example of what can happen in countries in the post-
Soviet space.
    You actually beat me to the punch in the Q&A session. My first 
question I wanted to ask about is Azerbaijan, and that's fascinating 
that you bring up how important the Black Sea area is. So we'll go 
ahead and move on to the Q&A session, and I'll start with one question.
    Over the past decade, Azerbaijan has played a key role as an 
alternative energy supplier for the post-Soviet region. During the 
winter of 2006-2007, when gas exports to Georgia were halted by Russia 
for political reasons, Azerbaijani energy supplies helped to counter 
Georgian dependency on Russian energy supplies. Today, the Baku-
Tbilisi-Ceyhan pipeline, as you state, the Baku-Tbilisi-Erzurum 
pipeline, and the Southern Gas Corridor pipeline are considered central 
to Georgian energy policy.
    Azerbaijan has also stepped up cooperation with Ukraine since the 
outbreak of the conflict with Russia. According to official Ukrainian 
sources, during the first five months of 2017 Azerbaijan supplied 83.4 
percent of all crude oil imported by Ukraine. Indeed, Ukraine's 
ambassador to Azerbaijan, Alexander Mishchenko, recently emphasized 
Azerbaijan's strategic importance as an alternative energy supplier, 
just as you have just now.
    So, given this role as an alternative energy supplier, how does 
Azerbaijan fit into the equation for achieving energy security in the 
post-Soviet region? And if you could elaborate on what you just said, 
Dr. Tsereteli, and then also I'd like to direct this at Ed. And then 
anybody else who'd like to chime in afterward, that would be great.
    Thanks so much.
    Dr. Tsereteli. I think the strategic partnership that started 
between two countries, between Georgia and Azerbaijan in this case in 
the early 1990s, were crucial for energy independence of Georgia, 
building energy independence of Georgia. But I think Azerbaijan has a 
larger role to play for supply of energy to Turkey, to Greece, 
Bulgaria, and beyond, going to Italy. Resources of Azerbaijan, natural 
gas as well as oil, are already exported to some of these countries. By 
the way, through the interconnector that exists between Greece and 
Turkey, there are occasions of selling of natural gas of Azerbaijan to 
Greece via the Turkish system, exchange of molecules and swap 
operations. So Azerbaijan has crucial role to play. Obviously, in the 
Georgian context, it has a crucial and decisive role, but its role is 
growing for other countries as well.
    Azerbaijan also could play role of transit country, as I mentioned, 
for Turkmenistan. It already plays transit role for Turkmenistan, for 
Kazakhstan, for other countries. And, again, as Georgia and Azerbaijan 
have very important role to play for the transit of not energy cargoes, 
but also other cargoes, connecting Central Asia to Europe, or maybe 
China to Europe and India to Europe going forward.
    So location as well as resources are an important factor in this 
discussion. Black Sea connectivity, again, trade with Ukraine and 
export to Ukraine is very essential and has, I think, a very important 
future.
    Mr. Chow. I agree that Azerbaijan has a crucial contribution to 
play. Of course, it doesn't do this out of the goodness of its heart. I 
mean, it does it because it needs it also.
    If you think of the Caspian as a wine bottle--this is a good 
Georgian analogy, Mamuka--[laughter]--Georgia is the cork that allows 
the wine to flow, the oil and gas in this case to flow to Western 
markets. So, without Georgia and other countries, Azerbaijan would be 
dependent on its neighbors like Russia and Iran to transit its oil and 
gas, which is not a very enviable position to be in.
    But the other point to be made is the point that Mamuka also 
started making, which is that market integration is critical. Maybe 
Ukraine is a large enough market on its own, but Moldova and Georgia 
are not. In order to have world-class-scale projects to go, you need 
market integration. And market integration in Southeastern Europe is 
something that Russia doesn't want. I mean, let's face it: energy 
corruption is a tool for Russia to keep its neighboring countries 
dependent on it for energy, and to obtain kompromat on its various 
political leaders in the region as well. So, yes, you can get to 
Greece, but from Greece you need to get to Bulgaria, and from Bulgaria 
you need to get to Serbia, and onwards through the rest of the Balkans.
    So anything that blocks market integration--and corruption is one 
of those things that blocks market integration--for more than five 
years, we have been talking--maybe Doug knows exactly how long--we've 
been talking about a Greece-Bulgaria connector. And the EU has even 
devoted money to support a Greece-Bulgaria connector. But politicians 
on both sides of the border have not allowed a sensible market-
integration project to go forward. This is why the energy corruption 
question is so important to talk about, because removing energy 
corruption, it's very hard to get market integration. Without market 
integration, it's very hard to get diversity of supply. The entire 
population of the Balkans is less than the population of Turkey. So how 
much diversification can each of those small markets have on their own? 
This is why corruption is such an important challenge to tackle.
    Mr. Massaro. Would anyone else like to speak on the topic of market 
integration or Azerbaijan? OK.
    All right, I'll move on to my final question, regarding the very 
complicated situation in Moldova, actually. I understand that the 
planned extension of the Iasi-Ungheni gas pipeline to Chisinau is 
currently a major objective of Moldovan energy policy since Chisinau 
consumes over half of Moldova's gas imports. However, the extension of 
the pipeline will only have positive effects if Romanian gas can enter 
the Moldovan market and compete with Russian gas supplied through 
Moldovagaz. If Chisinau attempts to allow Romanian gas to access 
Moldovagaz's networks, there is a possibility that Gazprom could recall 
debt that is owed by Moldovagaz amounting to about a whopping 65 
percent of Moldova's 2014 GDP as a threat to Moldovan authorities. Is 
this threat realistic? And if so, how can Moldova respond to such a 
massive threat?
    Mr. Allin. Thanks, Paul, for that--for that easy question. 
[Laughter.]
    So it's an interesting idea. I will be honest and say that I had 
not heard that that debt is a weapon that could be deployed in this 
particular instance. But of course, when you have, you know, a large 
outstanding debt that's accrued over 20-some years hanging over a 
counterparty, you might decide that you're going to try to enforce it 
at any time.
    I know that there have been various legal and arbitration 
proceedings around this debt over the years. And because I have not 
studied them in detail, I do not want to make a misstatement, so I will 
not try to list them. But what I do know is what would be the--what I 
would ask--because, with so many things--and you see this, 
unfortunately, the illustration of this is in these breakaway, 
separatist, whatever you want to call them, protracted conflict 
regions--is that it's not always about what exists on paper or what 
exists in international or other kinds of law. It's about what can 
actually be done.
    And so what would Gazprom then do if they called that debt and 
Moldova didn't pay? Because what I understand to be the case--and 
again, I think some of the gentlemen here may be able to clarify this 
if I have a misunderstanding--is that it would not be viable for 
Gazprom to cut off Moldova because of the downstream customers that use 
that same pipe which provide much more substantial revenues than 
Moldova provides. Therefore, what would the enforcement be? That would 
be sort of my counter question, I guess.
    But certainly, that's why I think it's important. And this is like 
so many things with these protracted conflict regions, the ones in 
Georgia as well. They sort of get ignored until something related to 
them happens and becomes a big deal. And this would certainly be a case 
of that.
    I think, though, that again, this is a situation where--trying to 
be diplomatic--we can't simply blame Gazprom for the fact that that 
interconnector is not up and running, right? There are other people who 
probably could have done things a little bit faster. And so I would shy 
away from, as with--frankly, with a lot of things about Ukraine and 
Moldova, it's very easy to just say it's all the Russians' fault, and 
if only the Russians weren't here we could be doing just fine. Well,you 
guys all--we all know, probably many people in this room know, that is 
a valid argument in some cases, but in many, many cases it is used as 
an excuse for one's own deficiencies.
    If I may just take advantage of a moment, I wanted to make one 
comparison which I think is interesting between a situation that exists 
in Georgia and one that exists in Moldova regarding hydro plants. So on 
the Enguri River in Georgia between Georgia and Abkhazia, there's a 
hydro plant which I understand still succeeds as a joint venture, and 
the electricity goes to both sides, right, of the conflict. So in 
Moldova, on the other--even though, right, that's the one that Russia 
has recognized, that is considered a harder case. But in Moldova, the 
Transnistrians have and use and even have upgraded in recent years--
because I was able to visit it once, and quite an interesting thing to 
see--the Dubasari hydro plant, which apparently has enough capacity to 
supply almost all of Transnistria's residential users, not their 
industrial power users. So it's an interesting comparison. And right-
bank Moldova does not get any usage whatsoever of that power.
    Mr. Doran. Paul, can I jump in here real quick?
    Mr. Massaro. Yes. Please go ahead, Peter.
    Mr. Doran. Because Lyndon raised what I think is an organizing 
problem. When we talk about energy, it comes up a lot. And I think he's 
right. And this is ultimately the difference in how we approach energy.
    A lot of times in these discussions in a European context, we talk 
about energy in terms of top down rather than bottom up. It's very easy 
to say, well, we just need an interconnector here or an interconnector 
there, and there's a political motivation here, let's do it. That was 
the death of the Nabucco pipeline. It made sense on paper, but the 
economic rationale was lacking.
    This case that Lyndon's talking about in Moldova is a great test 
case or a great example for why you have to have the free market 
involved. Yeah, the Romanians have a lot of even traditional 
conventional gas. They could potentially have a lot of new offshore 
coming onto market. The problem for Romania is how to get those new 
volumes of gas to places where it's needed. It is very difficult to 
wave a magic EU wand and create interconnectors between countries. The 
Romanians have discovered this. They need private investment in large 
part to help propel these new interconnections. Moldova is one example. 
There are others.
    Ed really made an excellent point. Ed, I want to amplify and echo 
that because on this issue of how do we solve these problems, top down 
versus bottom up on Ukraine, I absolutely have to echo that. When it 
comes to the Ukrainian energy market, this issue of reform and 
corruption perception and rent-seeking must be in many ways an 
existential priority for the Ukrainian Government. The Ukrainian 
soldiers can win every single engagement on the battlefield, but if the 
Ukrainian Government does not institute the kinds of reforms that are 
needed they will lose the faith of the Ukrainian people and they could 
lose their country in the long term. This is a very sobering dimension 
of the energy security question. And so, Ed, when you talk about the 
absolute importance of solving this issue, I'd have to endorse that 100 
percent.
    Mr. Massaro. Thanks, Peter.
    Dr. Tsereteli, did you want to say something real quick? I saw----
    Dr. Tsereteli. Just very briefly. The difference in Georgia's case 
is that the actual engineering construction and dam is on the Georgian 
control side, while turbines and operational facilities are on Russian-
controlled side. And so they cannot live without each other, that's the 
kind of difference.
    But just echoing all those issues that we have mentioned here, you 
cannot ignore fact that all of these three countries since early 1990s, 
and particularly Moldova and Georgia, were under tremendous pressure 
all the time because of the conflicts. You know, we're, in fact, in a 
status--state of war, with Russia being very active part of this 
conflict. And if European countries like members of EU could not resist 
and their officials couldn't resist corruption and coercion and so 
forth, can you imagine what type of leverages Russia has under 
situations like this?
    Mr. Massaro. Dr. Prokip? And then we'll open it up to the audience.
    Dr. Prokip. Yes. Just a short remark to that, what Peter said about 
the necessity of conducting reforms in Ukraine. This is kind of strange 
station, yes? There are a lot of strategical documents with aims, but 
not a lot is done. And there was an interesting situation this week, 
and Monday I was talking to some members of Ukrainian Parliament. And 
you know that it was strange to me, some of them were very happy that 
they had some discussions with some people from U.S. about 
possibilities to import U.S. liquefied gas to Ukraine. And consequently 
I asked about--so the first question was about the price, and the 
second question was that we didn't talk--we didn't talk about gas 
extraction in Ukraine. And then there was another question to those 
members of parliament, that two drafts of laws are now in Ukrainian 
parliament and wait to be voted to make better conditions for gas 
extraction in Ukraine. And you know what was the answer? I don't know, 
what should I do to make those bills voted? It's a problem of 
collective possibilities. And that's why I'm talking about a kind of 
pressure, because very good statements inside Ukraine, but 
unfortunately not a lot of actions.
    Mr. Massaro. Thank you, Dr. Prokip.
    Could we take some questions from the audience now? Go ahead. We 
have a mic. Amelie, if you could take the mic up to this gentleman 
right over here.
    Questioner. I'd just like to ask, there's a lot of focus, 
obviously, on the gas component of things, the natural gas and the oil 
component of things. But, for example, there was a recent report in the 
Financial Times about how Rosatom is investing in a nuclear power plant 
in Turkey. So I was wondering if you could perhaps comment just briefly 
on the nuclear dimension of this region's energy security.
    Mr. Massaro. Anyone would like to take that?
    Mr. Doran. Ed, if you want to. The Turkish question is an important 
one.
    If you just ask for a comment, I would focus your attention on 
Russia's efforts to build a nuclear reactor about 40 kilometers from 
Vilnius, a U.S. NATO ally. There's a lot of questions about the safety 
and viability of this reactor. It is very close to about a million 
people. And to my knowledge, right now it is not being exposed to the 
kind of scrutiny under Russian and Belorussian construction that one 
would hope to see in the creation of a nuclear reactor. This is very 
dangerous for the lives of a million people nearby and a U.S. NATO ally 
like Lithuania.
    The bigger issue, though, is that the creation of this reactor 
doesn't necessarily serve a commercial purpose. Like many things, 
Russia uses its nuclear power industry--government subsidies, 
sweetheart loans, political pressure--as a vehicle to achieve political 
objectives in its neighborhood. We've certainly seen that in Belarus 
and other places. So it's always important to view these arrangements 
through the lens of both commercial rationale as well as political or 
geostrategic objectives on Russia's part.
    Mr. Massaro. Would you like to say anything to that, Ed, or----
    Mr. Chow. Well, you know, anyone who knows the history of Ukraine 
energy knows that nuclear plays an important role. We have a good case 
study not too long before the collapse of the Soviet Union. But even 
today nuclear power generates, what, 50 percent, aroundbouts, 52 
percent of total electricity generation in Ukraine, most of that old 
Soviet technology. Up until recently, all their nuclear fuel came from 
Russia. Just in the last couple years, Westinghouse fuel has been 
qualified for use in Ukrainian reactors. So some of these things have 
improved somewhat.
    But nuclear sector is another example of energy corruption in 
Ukraine. That sector has been controlled by important politicians in 
Ukraine for a very, very long time, which is the reason why it hadn't 
been restructured up until recently.
    Mr. Massaro. Great. Thanks, Ed.
    Up here, Amelie. We have Doug, is that--all right.
    Questioner. Hi. Doug Hengel. I'm a former Foreign Service officer 
with the State Department.
    The State Department has, and the U.S. Government in general has, 
put a lot of time and effort into European energy security over the 
years. I personally was very much involved in these things. And this 
went all the way up to Presidents Bush and Obama weighing in with 
leaders on these issues. You know, a lot of assistance has been given, 
capacity building, et cetera, advice to countries, pushing countries to 
do the right things in terms of their energy security, pushing Brussels 
to do the right things in terms of creating a common market, pushing 
against bad pipeline ideas like South Stream, et cetera, and Nord 
Stream now. But there's a limit to what the U.S. Government can do, and 
so I was glad to hear some of the comments over here. It takes 
political will in the countries involved, and some countries have done 
more than others, and so I was pleased to hear some of the comments Ed 
made about what Ukraine still needs to do and whatnot.
    But, Peter, at the beginning you closed your comments with words to 
the effect of, doing nothing won't produce good results. And I took 
that to be a reference to the United States; maybe I'm wrong there. But 
what else at this point can the United States do? I mean, we can 
continue to push against things like Nord Stream 2, which I agree is a 
political project. The German reaction to date has been to tell us to 
go pound sand. So what more--we can't actually send people into the 
field to build the pipelines ourselves. I mean, a lot of progress has 
been made on interconnectors and all that.
    But anyway, so my question is for you. What greater role, what more 
can the U.S. do than it has already done to date over the years on this 
issue?
    Mr. Doran. Very briefly, I won't get into the host of legislative 
initiatives. A lot of folks in this room are very familiar with those.
    But I will say this. President Trump can't pick up the phone and 
tell Chevron, hey, look, you need to do X in this country. That's just 
not the way the United States is. It is the way other countries are 
geared. So it's always a problem. It is a fundamental impediment from a 
policy perspective to make things happen in the energy world.
    That said, I ascribe to the belief that it is old and in the 
foreign policy DNA of the United States, that it is part and parcel of 
the job of American diplomats overseas to first and foremost advance 
the interests--the commercial interests of America overseas. And I 
would encourage the new folks who are in place or coming into place at 
the State Department, for example, to do a better job in positioning 
themselves to advance U.S. energy interests overseas. There's nothing 
wrong with it. In fact, it goes back to the very founding of why we 
exist as a country, as a commercial trading state. And I would like to 
see that--many diplomats and Foreign Service officers, in their day-to-
day, see this as a main part of their job, not a part of the job that 
we don't really focus on too much.
    Mr. Massaro. Thanks, Peter.
    We have a question right here.
    Questioner. Good afternoon. I'm Giorgi Tsikolia. I'm the Deputy 
Chief of Mission. I'm at the Embassy of Georgia.
    My question is not directly related to Ukraine, but on energy 
security issue overall. The recent initiative by the Senate on the Iran 
sanction bill I am assuming it is correct, it has part of the bill 
where the U.S. Government is being forbidden in working into any 
project where the Russian involvement is at hand. Unfortunately, there 
is one development--[inaudible]--Shah Deniz, with Russian involvement 
in the 10 percent stake of the Lukoil in the project is outwardly 
known. And having discussions with the companies on the project, it 
seems like that bill would hurt the countries through which the 
pipeline lies, and the U.S. companies first of all, and the project, 
which is probably the only alternative supply of energy to Europe 
because on the northern side there is no supply connections yet.
    So my question would be: What would be the take of the Helsinki 
Commission? And have there been any discussions on that note? Because I 
saw a note that the majority leader today, that they are taking kind of 
matters in hand and they probably will be changing the language. But my 
question would be if there have been additional discussions, and is 
there hope that that language will be changed to the point where the 
bill will hurt Russia and at the same time help the countries in the 
region to achieve the great energy independence? It would be to your 
end and to Ed as well, from your perspective.
    Mr. Massaro. Well, I'll start off by saying, great question. 
Unfortunately, I am not the Helsinki Commission. I'm the staff of the 
Helsinki Commission. And I direct you to speak with our members and 
send that question to their offices, and I'm sure it'll trickle down. 
So I'll go ahead and hand it off to Peter.
    Mr. Doran. Or Ed.
    Mr. Massaro. Or Ed.
    Mr. Chow. Yes. Thank you, Giorgi [ph].
    Given that I have no responsibility at all, I can speak freely. 
[Laughter.]
    Legislative sanctions are generally a very blunt instrument. It 
seems to me the Senate amendment to the Iran Sanctions Act was as much 
a signal to the Trump Administration that it needs to get its act 
together to do something about Russian aggression in this part of the 
world, and generally speaking executive actions are better designed to 
tailor the sanctions so they don't have the unintended consequences 
that's been much-discussed in this town in the last couple weeks now. 
I'm hopeful that there will be a fix in the House version, if there is 
a House version, coming through.
    But I really think it's incumbent on the executive branch to get 
engaged in this. And part of the Senate's frustration was that they've 
been waiting for the administration to act for most of the spring, and 
by June they couldn't hold off having a vote anymore. But a lot of 
these unintended consequences not only for BTC, but also for Central 
Asian projects that involve American companies, as well as other 
projects that maybe the Senate never intended to be affected but the 
broad wording of the amendment can easily be interpreted that those 
projects will fall under as well.
    So my guess is that, in the typical Washington fashion, we'll 
muddle through and figure out a way of correcting the overreach that 
was probably unintended.
    Dr. Prokip. Paul, can I comment on this? There is a precedent. Same 
consortium includes Iranian company. And there was an Iran Sanctions 
Act adopted several years ago, and that project was----
    Mr. Doran. Carved out, yeah.
    Dr. Prokip. ----exempt from that sanction. There's a clause in the 
law. So there's a precedent specific projects can be exempted from the 
law as long as Senate, obviously, agrees on that. There will be no need 
to invent something new. There is existing procedure that can be done.
    Mr. Chow. But I certainly agree with Paul that members' attentions 
are needed.
    Mr. Massaro. Absolutely. Yes, please take that question to members' 
offices.
    All right. Back there, please.
    Questioner. Hi. Chris Anderson [sp], ABPS News [ph].
    Some news media have buttonholed Senator Corker in the hall back 
here about two hours ago to ask about this. And his view on this was 
that it was a technical issue that he had raised with Senator Cardin 
and with [Representative] Steny Hoyer, that they were thinking that 
this would be fixed and it wouldn't be a problem because they 
understood the difficulties this would be for an American company. So 
just FYI.
    Mr. Chow. Thank you.
    Mr. Massaro. Very helpful. We've got to get you a seat on the 
panel. [Laughter.]
    All right, we had a question up here.
    Questioner. Hi. I'm wondering if you would be able to focus on sort 
of a lower form of energy, on the food and water security crisis that's 
kind of plaguing the region, maybe specifically in Central Asia, and 
maybe any policy recommendations that you have specifically for the 
gendered outcomes that have happened in the region.
    Mr. Massaro. Anyone specific that you'd like to target that 
question at?
    Questioner. Maybe Dr. Mamuka. That's maybe your specialty.
    Dr. Tsereteli. It's not my specialty, but I'll try to answer. 
[Laughter.]
    First of all, it's beyond the scope of this panel. I think it's 
more the issue for Central Asia than the Caucasus, but it's also an 
issue for the Caucasus somewhat.
    But I think going forward there are some studies done, by the way, 
by the World Bank and some other international financial institutions, 
and projections of how some of the climate changes and other factors 
could influence water security in Central Asia. Probably it makes sense 
not to go into deep discussions right now, but maybe I'll refer you to 
go to and look at those studies. There will be impact of--I mean, there 
are several dimensions. There's a political dimension there. There's, 
obviously, environmental dimension there. And when I talk about 
political dimension, I mean that control of the water resources in some 
cases are in the hands of one government, and some of the resources are 
also used by other governments, and there are planned hydropower 
facility constructions in different countries that impact, obviously, 
neighbors.
    Maybe I'll just stop here. It's a long and complicated issue, 
probably, I won't address it here. [Laughter.] Thank you.
    Mr. Massaro. You've opened a Pandora's Box.
    Yes, please. Go ahead, Lyndon.
    Mr. Allin. This is not necessarily responsive to your question, but 
if we're talking about issues with water security, I know that there--
and I'm sure Andrian knows more about this--there has been some 
friction between Ukraine and Moldova because of a large hydro plant 
that Ukraine wants to build that's upstream from the river that flows 
through Moldova. So it's a growing issue.
    Dr. Prokip. A short note?
    Mr. Massaro. Yes, please.
    Dr. Prokip. Regarding border security, many mini hydro in Ukraine, 
in 1970s, there were thousands of mini hydro, but now it's about 146 
operating in Ukraine. And mostly those are not built because local 
societies oppose building mini hydro because they say that that will 
badly impact upon access to water and the quality of forests.
    But actually, those were operating in 1970s. The problem that those 
first mini hydros built in Ukraine were built without keeping to all 
standards--environmental standards, first of all--and that impacted 
very badly on development of mini hydro in Ukraine.
    Mr. Massaro. Well, excellent. Somehow they did relate it to energy 
security again. Very nice.
    Any other questions? Oh, OK. Great.
    Questioner. Ben Schmitt, State Department Energy Bureau.
    I have a question for Peter, and maybe Ed can chime in as well. 
I've been working on European energy security for the better part of a 
few years now, and one of the things that I've noticed in the past, I 
guess, especially six months, but especially over the past year, has 
been the prevalence of a lot of especially Russian-sourced but other 
sources of misinformation, especially from outlets like RT, Sputnik and 
Moscow Times, et cetera, et cetera, who make it difficult to advance 
policy that's actually fact-based and -oriented because, again, all of 
these energy security projects and European energy security is based on 
physical infrastructure, again, that has statistics and actual numbers 
and very scientifically and technically founded statistics backing up 
what policy decisions can help drive and solve geopolitical issues.
    So, to that extent, U.S. opposition to Nord Stream 2, for example, 
has just in the past few months been turned around and said, look, the 
U.S. is only opposed to Nord Stream 2 to sell U.S. LNG, which is fully 
false narrative. Obviously, we've been supporting European energy 
security for 30 years on a bipartisan basis and had numerous projects 
that have no U.S. investment. And again, because that's a diversionary 
pipeline, it wouldn't even open a market for the U.S. were it stopped. 
So how do you counter this sort of misinformation and make sure that 
fact-based narratives keep going in this space?
    Mr. Doran. Ben, I really want to thank you for that because 
actually your office is one of the--the energy folks at the State 
Department are an example of a great team that tries, in my opinion, to 
fulfill the mandate that I believe citizens would expect of them, 
advancing U.S. interests overseas.
    On the question of Russian propaganda in the energy space 
specifically, my organization, CEPA, for several years now has had an 
ongoing effort. You can go to infowar.CIPA.org to see how we have been 
active in analyzing, assessing, exposing, and ultimately rebutting fake 
narratives, toxic Russian propaganda that is injected into the Western 
media space.
    Specifically on this question of Nord Stream 2, I will be very 
clear on this: Nord Stream 2 has become a vehicle for Russian 
propaganda. If you're interested, afterwards you can come up and you 
can talk where I tell everybody now we have published analysis on this, 
where we look at point by point, myths and facts about what the Russian 
Government, Russia's commercial proxies, and economic constituents that 
have a financial incentive in Nord Stream 2 have been saying about Nord 
Stream and exposing that to the cold light of reality. And what happens 
is those myths about Nord Stream 2 shrivel and die very quickly.
    We've produced some reporting on this. It has informed much of my 
presentation here today. Afterwards I'll give you a link if you want, 
but it's all available at CEPA.org.
    The bigger issue, though, is that this problem is not going away. 
What we can do about it is to be very clear in understanding that the 
old terms of debate, where you can have your own opinions but you're 
not free to have your own facts, that is yesterday's dynamic. Today, 
the debate has become muddled, it's become confused. And the antidote, 
in my belief, is to be very clear about what is and is not true when it 
comes to fake narratives about Nord Stream 2.
    Mr. Chow. Ben, I would suggest that you and the State Department 
should support Peter's think tank, as well as mine--[laughter]--in 
making sure that there's good fact-based analysis, objective analysis 
out there. But I agree with you that this is a problem.
    On June 25th I was sitting in my hotel in Tbilisi, flipping 
channels and watching Greek television documentary on TurkStream. Now, 
that's pretty expansive coverage by Russian propaganda, sitting in 
Tbilisi on a Greek television channel talking about the lay barge that 
just entered the Bosporus and started laying pipe for TurkStream. So I 
agree with you. And the only way of doing it is to make sure that good 
information doesn't get pushed out by bad information.
    But the other point I would make--and this is not a problem for the 
career U.S. government officials--but we also have to be mindful that 
we don't let our political leaders exaggerate with empty promises, like 
U.S. LNG exports is going to substitute for Russian gas and solve--
you're right, that's not what the official policy is, but there are 
people who left those Ukrainian parliamentarians with the notion that 
that's an option. As market reform that leads to market development 
that actually allows a LNG regasification terminal to become bankable 
in Ukraine, it's a much more important conversation if Ukraine is going 
to achieve energy security.
    Today I heard that U.S. anthracite is going to be the solution for 
Ukrainian coal shortage this winter. Well, you know, I'd like to make 
America great again too, but we have to put a certain amount of 
reality.
    So when our political leaders also play into that game, I don't 
think that's helpful. We need to distinguish between what we say, which 
is based on good analysis and facts, against Russian propaganda that's 
based on false news.
    Mr. Massaro. Would you like to speak real quick? If we could keep 
it short. We're at the end of our time.
    Dr. Prokip. Very short.
    Mr. Massaro. But I'd like to give everyone an opportunity, so 
please go ahead.
    Dr. Prokip. Sure. There was a follow-up question regarding Nord 
Stream 2, but we have--we are out of time, so----
    Mr. Massaro. Great.
    Lyndon?
    Mr. Allin. Yes, just briefly. I think, just like it was said that 
we can't send people to build pipelines into the field, we can't or we 
would like to think we can't and don't make up facts, and we can't give 
politicians in other countries suitcases of cash. However, other 
geopolitical actors can and do those things. So the big dilemma for 
U.S. foreign policy in a more realist-feeling world and in a world--
especially in a region that encounters a lot of scarcity, which drives 
this corruption at its root--is how can we compete, right? How can we 
compete when people are not--you know, they would rather have a lower 
gas bill than feel good about the values? I think that's a dilemma. I 
don't have a solution. There are some initiatives on countering 
misinformation and fake news, not to use a term.
    But I think it's, candidly, a really, really big challenge, 
countering state-run businesses who are willing to take a loss. And 
then you have to ask yourself, how much does this region matter to the 
U.S.? How great is the U.S. interest, and what we are willing to commit 
in terms of subsidies for the things that have to be subsidized versus 
the country that we position ourselves in rivalry with to now? They may 
be willing to commit more. So this is a challenge.
    Mr. Massaro. Well, thank you very, very much to this terrific 
panel.
    Before we end, I'd like to make a plug for a Helsinki Commission 
briefing next week on Russian kleptocracy. Same place, same time, same 
handsome moderator. [Laughter.]
    And, with that, the briefing is concluded. Thank you. [Applause.]
    [Whereupon, at 5:05 p.m., the briefing ended.]
 

 

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