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66–781PDF 2011

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/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

ILEANA ROS-LEHTINEN, Florida, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

RON PAUL, Texas 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

GUS M. BILIRAKIS, Florida 

JEAN SCHMIDT, Ohio 

BILL JOHNSON, Ohio 

DAVID RIVERA, Florida 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

VACANT 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ELIOT L. ENGEL, New York 

GREGORY W. MEEKS, New York 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

DENNIS CARDOZA, California 

BEN CHANDLER, Kentucky 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

CHRISTOPHER S. MURPHY, Connecticut 

FREDERICA WILSON, Florida 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

YLEEM D.S. POBLETE, Staff Director 

RICHARD J. KESSLER, Democratic Staff Director 

SUBCOMMITTEE ON EUROPE AND EURASIA

DAN BURTON, Indiana, Chairman 

ELTON GALLEGLY, California 

GUS M. BILIRAKIS, Florida 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEAN SCHMIDT, Ohio 

TED POE, Texas 

GREGORY W. MEEKS, New York 

ELIOT L. ENGEL, New York 

ALBIO SIRES, New Jersey 

THEODORE E. DEUTCH, Florida 

(III)

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

(1)

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 

2

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 TransCaspian 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. 

3

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:]

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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. 

7

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 AfVerDate 0ct 09 2002 10:44 Aug 18, 2011 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 F:\WORK\EE\060211\66781 HFA PsN: SHIRL
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fairs 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. 

9

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 

10

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 

11

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 imVerDate 0ct 09 2002 10:44 Aug 18, 2011 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 F:\WORK\EE\060211\66781 HFA PsN: SHIRL
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portantly, 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 

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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 

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lies 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. 

22

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 

23

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. 

24

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 

25

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 terVerDate 0ct 09 2002 10:44 Aug 18, 2011 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 F:\WORK\EE\060211\66781 HFA PsN: SHIRL
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rorism, 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 

36

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 

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pany 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 

43

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. 

44

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, 

59

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. 

64

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 

65

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. 

66

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 

67

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 

68

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 

69

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 freemarket 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. 

70

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 

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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; 

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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 offiVerDate 0ct 09 2002 10:44 Aug 18, 2011 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 F:\WORK\EE\060211\66781 HFA PsN: SHIRL
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cers 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, 

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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.] 

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eign Affairs Magazine entitled ‘‘The Good News About Gas,’’ by John Deutch, is not 

[NOTE: An article submitted for the record by the Honorable Tom Marino from Forf 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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