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46–049 PDF 2008

S. HRG. 110–668 

OIL, OLIGARCHS, AND OPPORTUNITY: 

ENERGY FROM CENTRAL ASIA TO EUROPE 

HEARING 

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JUNE 12, 2008 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: 

http://www.gpoaccess.gov/congress/index.html 

COMMITTEE ON FOREIGN RELATIONS

JOSEPH R. BIDEN, JR., Delaware, Chairman

CHRISTOPHER J. DODD, Connecticut 

JOHN F. KERRY, Massachusetts 

RUSSELL D. FEINGOLD, Wisconsin 

BARBARA BOXER, California 

BILL NELSON, Florida 

BARACK OBAMA, Illinois 

ROBERT MENENDEZ, New Jersey 

BENJAMIN L. CARDIN, Maryland 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

RICHARD G. LUGAR, Indiana 

CHUCK HAGEL, Nebraska 

NORM COLEMAN, Minnesota 

BOB CORKER, Tennessee 

GEORGE V. VOINOVICH, Ohio 

LISA MURKOWSKI, Alaska 

JIM DEMINT, South Carolina 

JOHNNY ISAKSON, Georgia 

DAVID VITTER, Louisiana 

JOHN BARRASSO, Wyoming 

ANTONY J. BLINKEN, Staff Director

KENNETH A. MYERS, JR., Republican Staff Director

(II)

C O N T E N T S 

Page 

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

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

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

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

Brzezinski, Hon. Zbigniew, counselor and trustee, Center for Strategic and 

International Studies (CSIS), Washington, DC ................................................. 1 

Fuerth, Leon, research professor, The Elliot School of International Affairs, 

the George Washington University, Washington, DC ....................................... 14 

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

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

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

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

(III)

(1) 

OIL, OLIGARCHS, AND OPPORTUNITY: 

ENERGY FROM CENTRAL ASIA TO EUROPE 

THURSDAY, JUNE 12, 2008 

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC. 

The committee met, pursuant to notice, at 2:33 p.m., in room 

SD–419, Dirksen Senate Office Building, Hon. Joseph R. Biden, Jr. 

(chairman of the committee) presiding. 

Present: Senators Biden, Bill Nelson, Cardin, Lugar, and Hagel. 

OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., 

U.S. SENATOR FROM DELAWARE 

The CHAIRMAN. The hearing will come to order, please. 

I welcome all our witnesses. After a brief conversation with my 

colleague, Senator Lugar—we have a very distinguished group of— 

who are going to testify today, none more distinguished than the 

Honorable Zbigniew Brzezinski, and because of a 3 o’clock vote, and 

because of a time constraint our first witness has, we’re going to 

do something a little unusual. Senator Lugar and I are going to 

forgo our opening statements and invite Mr. Brzezinski to make his 

statement. We’ll get a chance to answer—ask him some questions, 

and we will then give our opening statements. 

But, we’re honored to have you here, Zbig. We’re honored that 

you would come before the committee. And you’re—as you can tell 

by the way we’re proceeding, we always look forward to your testimony. And so, the floor is yours. 

STATEMENT OF HON. ZBIGNIEW BRZEZINSKI, COUNSELOR 

AND TRUSTEE, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES (CSIS), WASHINGTON, DC 

Dr. BRZEZINSKI. Thank you very much, Mr. Chairman. Thank 

you, Senator Lugar. 

I’m not an expert on the energy problem, as such, but I am willing to discuss that issue in the larger context, both of the longer 

range and the shorter range prospects for the relationship with 

Russia. And let me, accordingly, do so. 

I very much partake of the view that, in the long range, Russia 

and Euro-Atlantic community will come to share deeper and larger 

and wider interests. There is a fundamental comity of historical 

purpose, of culture between Russia and the rest of Europe, and I 

envisage, at some point in the more distant future, the emergence 

of something that has been vaguely describe as a larger community, from Vancouver to Vladivostok. In that broad context, closer 

2 

energy cooperation between the West, the European Union, and 

Russia—namely, Russia provides the energy, the West provides the 

foreign direct investment—is a shared interest, and it is a balanced 

interest, and it is an interest that potentially produces positive geopolitical consequences. 

The problem is not in the long run, the problem is in the short 

run, because in the short run that shared long-term interest can 

become quite complicated, and, indeed, aspects of it will begin to 

collide against one another. More specifically, I have in mind several policies currently pursued by Russia that, in my view, create 

complications that adversely affect that otherwise desirable longrange vision. 

First of all, we have the problem of Russia’s ongoing efforts to 

limit the West’s role in upstream aspects of energy cooperation, 

even while Russia energetically promotes its right to seek more active downstream role. That asymmetry is a problem. 

Second, Russia seeks, very actively, to isolate the central Asian 

region from direct access to the world economy, and particularly to 

its energy supplies. 

Third, we have had repetitive cases of Russian pressure on 

Ukraine, a pressure derived from political concerns and otherwise 

unrelated to the energy relationship, as such. 

We have, fourth, seen instances of possible threats to Georgia 

from Russia, motivated not so much, in reality, by any serious territorial problems, though there are territorial problems between 

Russia and Georgia, but derived more from the desire to gain a 

controlling hand over the Baku-Ceyhan line. If the Georgian Government were to be destabilized, Western access to Baku, to the 

Caspian and beyond would be limited. 

And last, but not least, we have seen a number of instances of 

energy supplies being cut to both the countries, for political reasons. These instances have been repetitive, they have occurred in 

several instances since 2002, and they continue to this day, insofar 

as actual cutoff of supplies for political reasons is concerned. 

Moreover, beyond the specific problems, there is the potential, 

but quite serious, short-term asymmetry or vulnerability in the existing relationship between the European Union and Russia, insofar as energy supplies are concerned. To be sure, the EU needs 

Russian energy. To be sure, Russia needs the EU’s direct investments. But, the problem is that, in any hypothetical cutoff, the consequences for the West would be immediate, the negative consequences for Russia would be much delayed, the stoppage in the 

flow of energy would have an immediate political and social impact, 

and a halt in Western direct investment, even any restrictions imposed on Russian investments in the West, would only make themselves felt much later. And thus, the political consequences would 

be asymmetrically unfavorable to one party—namely, to the EU— 

and more advantageous to the party imposing them. 

Thus, we need a policy in the West that, in fact, enhances the 

prospects that short-term cooperation will be more consistent with 

the otherwise desired long-term interdependence between the West 

and Russia. And that should be the object of Western policy. 

Let me, therefore, in a nutshell, summarize a few points pertaining to what needs to be done. 

3 

First of all, the West should more consistently, and at a higher 

level, seek more direct access to Central Asia. The fact is that Central Asian leaders would welcome that, but they’re in a squeeze, 

they’re basically isolated and vulnerable. It is up to the West to 

push hard to establish more direct links with Central Asia and to 

promote more direct opportunities for access. This means pushing 

the Baku line, the so-called ‘‘southern access to the East’’ for the 

Baltic countries—Turkey, the Black Sea, through Caspian; it 

means, eventually, even a much more energetic effort to explore 

the possibilities of a pipeline through Afghanistan from Central 

Asia to the south. That would maximize access to the Central 

Asian markets, energy markets, for the world community. 

Second, we need to back the Baltic States, as well as Sweden, as 

well as Poland, regarding their reservations concerning the northstream pipeline being planned from Russia to Germany. The ecological concerns that have been articulated in this context are pertinent, they have political implications. I think there is a reason to 

be responsive to the concern of the states affected—Sweden, Poland, the Baltic States—and the United States should do so. 

In addition, we should encourage Germany to diversify the benefits of any North Stream flow, once it becomes available, to make 

certain that it is not limited to Germany alone, but that countries 

east of Germany, which are part of the EU, would benefit from 

these additional supplies, as well. 

I think, in this regard, the negative role played by a former German chancellor who is now an employee of Gazprom is noteworthy, 

and it does introduce a complication which cannot be entirely ignored. 

Third, we should encourage and support the flow of energy from 

Odessa and east of Odessa, from the Caspian Sea region and Central Asia up to Brody, in Poland, and thence, either north to the 

refineries in Poland or west to Western Europe. Moreover, the 

West should more actively press Ukraine to enhance the opportunities for Western investment in the Ukraine energy sector, which 

has become very much dominated by corrupt practices, and has become rather exclusive. 

Fourth, we should encourage continued support of the West for 

Ukraine and Georgia, given their vulnerability and the risks that 

would arise to the West if these countries were in any way subordinated or limited in their freedom of action. And I’ve already mentioned the significance of Georgia to the continued independence of 

the Baku-Ceyhan line and Western direct access to Azerbaijan. 

Fifth, we should seek greater symmetry between opportunities 

for Russia’s downstream investments in return for Western opportunities upstream in Russia. That is an issue regarding which the 

Europeans would be responsive, and symmetry in this regard is desirable. 

Last but not least, in the longer run we should also not ignore 

the significance of Iran’s potential energy contribution to Western 

energy independence. We have to be aware of the fact that energy 

diversification, which we seek as a goal, would become easier if 

both oil and gas from Iran became available to Western purchasers. 

That, of course, is related to the ongoing crisis with Iran, but it is 

4 

a calculation that should also be taken into account in any grand 

strategy that we choose to define. 

In brief, Mr. Chairman, you have before you an issue of enormous complexity regarding which a much more purposeful Western 

response is needed and much more visible American leadership is 

needed. I have great respect for the U.S. officials that have been 

toiling in this area, and have been doing their best to improve the 

prospects of the West, but I am concerned by the fact that, by and 

large, this issue has not had the kind of leadership visibility in the 

United States that is needed for very good geopolitical and historical reasons, and particularly reasons related to the much more 

promising vision of the longer range relationship with Russia, 

which I mentioned briefly at the outset of my remarks. 

Thank you. 

The CHAIRMAN. Thank you very much. 

Let me start off with a question. I think on the surface something you said that seems inconsistent. You talk—and I fully 

agree—that the long-term prospects for being able to work with 

Russia are promising, but short-term cooperation is the issue, and 

we need a strategy to enhance that cooperation, short term. And 

then, the things which you’ve listed, none of which at least I personally disagree with, from more direct access to Central Asian 

leaders to pushing the Baku line, et cetera—on the surface, they 

seem to fly in the face of what the Soviet—what the ‘‘Soviets’’— 

Freudian slip—what the Russians would view as cooperation. My 

impression is, based on Putin’s actions—which I think are very, 

very aggressive, in Georgia, but also in Azerbaijan— are directly 

related to the one thing we don’t want to see happen, a disruption 

of the oil flowing through Georgia, through Turkey, and into Western markets. So, can you square that circle for me? How do you 

think—can you tell us, from your perspective, how they view this 

notion of greater Western access to oil that is in Central Asia beyond their direct control? 

Dr. BRZEZINSKI. I think it’s quite evident, from the record, that 

the Russian approach to this issue is essentially derived from a monopolistic ambition; namely, to maximize the degree of Russia’s 

control over energy resources of the entire former Soviet Union. 

And, in that sense, the newly independent states that are major 

producers of energy are viewed by the Russian leadership as somehow subordinate to the Russian desire that their access to the 

world economy be channeled exclusively through Russian territory, 

through Russian facilities. In any sort of business relationship, obviously there is a temptation to maximize one’s control to widen 

the scope of one’s monopolistic authority. It’s true to any contractual business relationship, almost. But, the party involved in that 

relationship—namely, the West—has every reason to oppose the effective implementation of such a state of affairs, because its longer 

range consequences are potentially dangerous. So, we—— 

The CHAIRMAN. Was the—— 

Dr. BRZEZINSKI [continuing]. Shouldn’t be shy in speaking up, in 

raising these issues, but we should also be more active, at a very 

high and visible level, in negotiating, particularly with those nonRussian suppliers who, in the long run, want to be accessible to the 

world, but, in the short run, are squeezed. 

5 

The CHAIRMAN. Yup. 

Dr. BRZEZINSKI. And the top leaders in these countries, by and 

large, are also top energy executives, and, in fact, probably benefit 

from it materially, as well. They have to be approached at a very 

high level with a degree of respect for their sensitivities and 

vulnerabilities. 

The CHAIRMAN. Chairman Lugar has been preaching from this 

hymnal for a long time about the potential benefit that can flow 

from this access. In the last 2 months, I have recently attended 

several conferences with our EU and NATO partners, and what I’m 

a little surprised at—and I wonder if you could, (a) tell me whether 

you see the same thing, and (b) if you do, an explanation as to 

why—is the failure of a direct, coordinated European Union-United 

States response to the very heavyhanded way in which the Russians have used their oil dollars and oil, and access to oil, to apparently affect policy, from the expansion of NATO to maintaining this 

and increasing the prospect of a monopoly. 

I find it surprising that—from my perspective—that Russia has 

been as effective in dividing Europe, preventing it from coming up 

with coherent, aggressive strategy to—not just with us, but with 

them, at the highest levels—deal with these central powers, to generate the very access to oil that we’re all talking about. Am I making any sense by the question? 

Dr. BRZEZINSKI. Yes; you are. And I think there are several 

causes for this condition, which you describe very accurately. First 

of all, the fact is that over the last several years, for reasons that 

we know all too well, there has been a rift in the Atlantic relationship, and, as a consequence, it has become more difficult, in general, to shape a common Western policy. Hopefully, that will begin 

to end, one way or another, after the elections, but that reality, I 

think, has impeded a common transatlantic position on this complex issue. 

Beyond that, within Europe itself, the absence of this common 

Atlantic posture has further enhanced different European emphases on the part of different European players. So, we have, in Germany, a former chancellor, in effect, becoming an employee of a 

major Russian conglomerate, which itself is an extension of a Russian state. That’s a rather peculiar circumstance. We have an 

Italian Prime Minister, currently and recently returned to office, 

who practically made a sport out of genuflecting in front of Putin. 

We have a government in Greece that, for a variety of historical 

reasons—the Cypriot problem, the conflict with Turkey—has been 

much more sympathetic to some of the Russian initiatives in the 

energy sector. We have a government in Hungary which has been 

strangely receptive to Russian behests, and maybe even financial 

inducements, which has, thus, adopted a stance on the Nabucco 

pipeline, which has been damaging to it. Very recently, we have 

had some financial interests in Austria pointing in the same direction. 

Now, all of these divergent orientations or strands of conduct 

were made more possible by the rift in the Atlantic relationship. 

If that relationship had been closer, it would have been possible to 

maintain a common perspective on global issues. Some of these tendencies would not have manifested themselves. 

6 

The CHAIRMAN. Thank you very much. My time is up. 

Senator Lugar. 

Senator LUGAR. Thank you, Mr. Chairman. 

Dr. Brzezinski, you were present at the Riga summit of NATO 

at a time that I gave a talk about the need for NATO to consider 

cutoffs of energy, or aggression of that sort, as an article V situation in terms of having supplies and a plan, not in the sense of 

sending troops. Now, I don’t know what the reaction was as people 

visited with you; as they came up to me, they pointed out, ‘‘Well, 

you make a lot of sense. But, this is something we don’t talk about 

publicly. This is a private business for each one of us, in an existential way, to work out.’’ Subsequently, EU and NATO conferences 

have been held, but they’ve had the results that you’ve described 

well, country by country. 

I took a trip in January to Kazakhstan and Turkmenistan, to 

name two of the countries that are in the orbit you described. In 

both cases, the leadership understands the desirability of having a 

portfolio of something beyond direct pipelines to Russia so that 

they have diversification. But, in the case of the Kazakhs, they 

have, also, issues with other private oil companies working out the 

Kashagan field problem, which is still daunting. In the case of 

Turkmenistan, our relationship is a very new one, with the new 

government. At the time of my visit, we had no ambassador there, 

and we still do not. 

I mention this because President Putin himself was personally on 

the phone with the Presidents of Kazakhstan and Turkmenistan. 

He personally has been a negotiator, to underline your point of 

strategic importance. At best, our diplomacy with regard to all of 

this has been fledgling. We are thinking about these issues in 

meetings like one with you today, but diplomatic activity has been 

much less than desirable. Our trips to Ukraine have demonstrated 

that point. The point that you’ve made about the lack of development in Ukraine, of energy resources that are in that country, is 

manifest, even though the vulnerability is very clear to President 

Yushchenko. I came away from that trip with the feeling that the 

United States cared more about the energy problems of many European states than the leadership does. Now, that’s an unfair judgment, obviously. They understand their problems, but, at the same 

time, are, really, unwilling to take steps toward unified policy in 

Europe. Maybe the rifts with us—that is, the United States—are 

because they don’t want to talk to us a whole lot about those problems. 

We saw the Czech Foreign Minister yesterday, here at a coffee 

the Foreign Relations Committee had, and I asked about the 

Nabucco pipeline. He said that hopefully something will come of 

the pipeline. It’s been having so many reverses, it’s really not clear. 

But, for the moment, the Czech situation is just as grim as it was 

a year or two ago. 

I raise all of this because I’m wondering where, maybe, as you 

say, the election brings a new President, a new administration, a 

new relationship, somehow either the EU or NATO, one or the 

other, begins to take hold of the problem. But, at this particular 

point, this is a pretty bleak terrain. 

7 

Now, one good point is that the Azeris have been reaching out 

to the new Turkmenistani Government—I think, with some good 

results. And, likewise, they are trying very hard to get the Kazakhs 

more interested in their pipeline. Georgia still is alive and able at 

least to support that part of it. And the Turks could have additional pipelines if our relationship there might improve and we had 

needed dialogue. 

What optimism do you have, as you analyzed the problem so well 

today, that those that we are hoping to help, as the potential victims of this kind of aggression, will take some steps to help themselves and to work with us or to work with others? 

Dr. BRZEZINSKI. Well, first of all, let me note that I was in Riga 

when you gave your speech, and I thought it was a terrific speech 

at the time. And I think it is a well known fact that people like 

yourself, like the chairman and others, have taken more of an interest in this issue than our executive branch at a very high level. 

And there has been a woeful lack of a real strategic involvement 

of our top leaders in this issue, and of their public involvement on 

this issue. 

In addition to it, there have been conflicting signals from the 

United States. We have occasionally signaled to the effect that a 

strategic partnership with Russia was already a reality; whereas, 

at best, it’s only in the process of emerging, and that we have not 

been particularly responsive to some of the concerns of some of the 

European states that wish to take the lead on this issue, but don’t 

have very visible American backing even in their own internal 

intra-European discussions. 

Worse than that, occasionally there are even some signals from 

here, from one of your colleagues, a Senator from New York, who 

recently advocated to deal with Russia on Iran, which would, in effect, leave the former Soviet space to the tender mercies of the 

Kremlin. That also sends a signal to the Europeans that’s perplexing. 

So, I think, ultimately, the issue of leadership in the West still 

depends on what transpires in the United States; how visibly, at 

what level, and how energetically is the United States engaged in 

shaping some sort of response. If we do that, then I think the Europeans are much more likely to begin to diminish their internal differences and begin to take a common stand. 

There is a constituency within the EU, of roughly half the members of the EU, which is quite alarmed over this issue, but there 

are a few key countries that are in a position either to obstruct the 

emergence of a common policy or, in some more extreme cases, to 

make their own deals. 

Senator LUGAR. From your own experience in the administration, 

who should take this initiative? The President the Secretary of 

State, Secretary of Energy, or some special person delegated for 

this? How should we organize ourselves? 

Dr. BRZEZINSKI. Well, I would think that the public leadership 

and signals of real interest in the issue ought to come from the 

President, because these issues involve also the vital interests of 

our key allies, from the Secretary of State, as well. And then I 

think it would be highly desirable if there was some individual who 

had the capacity to set in motion genuine initiatives on an 

8 

intradepartmental basis, because the issue itself is wider than the 

jurisdictions of any particular department, including the Department of State. 

Senator LUGAR. Thank you very much. 

The CHAIRMAN. Thank you. 

Senator Nelson. 

Senator BILL NELSON. Mr. Chairman, thank you. 

And they’ve just called the vote, so I’ll be mindful of that, and 

do it quick so that Senator Hagel— 

What dramatically illustrates to me the threat to Western interests, which is what I want to ask you, is the map that’s been supplied from the Department. You can’t see this from there, but basically this is the existing gas fields and pipelines delivering natural 

gas to Europe, and most of those, in red [slightly darker in black 

and white], are controlled by Russia. And then, this is what is expected in 2020, in 12 years, that Russia still has its ability, but 

then there’s the alternative of the South Caucasus pipeline and its 

extension on into Eastern Europe and into Southern Europe. And 

if that were not to occur, if Russia kept it like this, then doesn’t 

that mean that they’re going to exert political control, not only the 

gas from which they take it in Central Asia, but the gas and oil 

that they are sending it to in Europe? 

Dr. BRZEZINSKI. Well, we know from recent years that when the 

opportunity arises, and particularly when the other party is much 

weaker, as, for example, the Baltic States, the reluctance to succumb to the temptation to use power—energy as political influence 

is very weak. The temptation is overriding. It has happened. So, 

that is precisely why the West has to be concerned. 

I do think that, with some imagination and some initiative, it is 

possible to enhance diversification to obtain more access to Central 

Asia, either through the Caspian, more directly to Turkmenistan. 

And the new President of Turkmenistan seems to be at least interested in that possibility. There is the longer range Afghan possibility, pipelines to the south. And last, but not least, we shouldn’t 

forget that Iran, which I don’t think is going to be forever hostile 

toward us, is potentially a very major supplier of, not only oil, but 

especially of gas. 

Senator BILL NELSON. Frequently, what they will say—and, Senator Hagel, I’ll stop with this question, because I want to hear your 

questions—frequently, they will rebut that, saying, ‘‘Well, no, Russia really isn’t going to have control, because Russia needs Europe 

and their energy market.’’ And what’s the answer to that, that Russia needs the European markets? 

9 


map612.eps
10 

Dr. BRZEZINSKI. Well, it’s true, actually. But, the problem is the 

asymmetry of consequences in the event of crisis. If there’s a crisis 

and a cutoff, the recipients of the energy suffer immediately, the 

beneficiaries of reciprocal FDI suffer much later, which gives the 

aggressive party 6 months to a year during which to really insist 

on accommodation to its demands. And that’s the problem. 

Senator BILL NELSON. Could Putin’s title change from prime 

minister to tsar? 

Dr. BRZEZINSKI. Putin’s title has changed from President to National Leader and Prime Minister—the term ‘‘National Leader’’ is 

quite often used. The National Leader of fascist Italy was the 

Prime Minister, the head of the state was an impotent king. The 

head of the state in the Soviet Union under Stalin was a person 

whose name practically nobody in this room will remember, but the 

effective leader was a person who didn’t have any state position: 

Stalin. 

Senator BILL NELSON. Well said. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Hagel. 

Senator HAGEL. Senator Nelson, thank you. 

Welcome, Doctor. I wanted to make just a brief overview comment on your testimony, and then ask you a specific question. 

I subscribe to your analysis that you have presented; in particular, more direct and complete and wide-lens engagement in this 

part of the world. If there was ever an area that is clearly in our 

interest, and, in fact, our interests intersect from upstream to 

downstream, to use the term you used, the energy term, from Russia through Central Asia and deep into Europe, that intersection 

of interests for America is very clear. Why we have not, evidently, 

understood that, or why we have not framed a reference point and 

implemented policy to address that, I don’t know. But, as you note, 

we will have a new opportunity, come January, with a new President, new administration, new Congress. And I would, like you, 

Doctor, hope that this will be very high on the agenda, because it 

does interconnect all of our interests in a very vivid way. And I 

don’t know of a more vivid way than energy for the world. 

You just noted again, in your response to Senator Nelson, the 

possibility of Iran playing some potential role here. That obviously 

would require a different frame of reference than our current policy 

toward Iran. And I happen to also agree with your thinking, that 

we’ve got to think beyond today and frame the world in what’s possible, and then do that in a strategic context, not compartmentalize, like I think we have been in every country in the Middle 

East and on. But, we are where we are. We have another opportunity coming up. 

Would you define the Iran comments a little more specifically as 

to what you see that could possibly happen, potentially, as you had 

noted in your testimony, as well as your response to Senator Nelson? 

Thank you. 

Dr. BRZEZINSKI. I happen to believe that the present character of 

the Iranian regime is quite transitional, that the large majority of 

younger Iranians—they are now the most significant part of the 

11 

Iranian society—is not sympathetic to their fundamentalist fanaticism, that they want to be, in varying degrees, increasing the part 

of what might be called the Western way of life. This is a very sophisticated country, which, in many respects, is a potentially stabilizing force in the Middle East, as it was in the past. It is a country 

which, at one time, had a very good relationship with Israel, a strategic relationship with Israel, based on the principle that, ‘‘The 

neighbor of my neighbor is my friend.’’ And I think that is a natural geopolitical relationship between Iran and Israel. And hence, 

the longer range prospects, if we’re intelligent about it, and if we 

don’t plunge into some sort of a conflict with Iran which then is 

likely to absorb us for many more years in the current problem in 

Iraq, I think the prospect of real geopolitical change in Iran’s orientation is pretty good in the long run. But, we have to be intelligent and patient about it. 

And if that happens, then all of the energy resources of Iran 

could be part of the answer to what we’re discussing. Part of the 

answer. Not the entire answer, but part of the answer, because 

Iran has enormous gas reserves, probably the second largest in the 

world. It has underutilized oil supply. They have a very retarded 

energy sector. If they became part of the international community, 

so to speak, of the world economy, we would be the beneficiaries, 

in terms of price; the Europeans will be the beneficiaries also, in 

terms of diversification. 

So, there is this additional element in the background of the current crisis which obviously cannot determine our strategy and tactics towards the challenge, the ongoing crisis, but which should not 

be ignored as a later aspect, a beneficial aspect, of a constructive 

resolution of the problem. 

Senator HAGEL. Thank you. 

The CHAIRMAN. Time is up. 

And you’ve been gracious with your time. You can choose not to 

answer this question, but there’s an awful lot of talk in this town— 

we don’t know whether it’s true—that there may be a very shortterm view about Iran between now and the election, and that there 

may be some provocation, either emanating from us or from Israel. 

What would be the consequences, in terms of the issue we’re talking about here, if, in fact, there were a direct confrontation, physical confrontation, a military confrontation, in some way, with Iran 

now? 

Dr. BRZEZINSKI. I think the consequences, in the short run, 

would be extraordinarily destabilizing, insofar as a calm and rational electoral process in this country is concerned. And I think it 

would create public anxiety and anger, both of which will be very 

susceptible to demagogy. And it would make a rational national 

choice more difficult. 

In the longer run, by becoming involved in some sort of a collision precipitated by the hypothetical events that you have mentioned, the United States would become bogged down in an ongoing 

conflict, which would then span Iraq, Iran, Afghanistan, probably 

Pakistan, and we would be bogged down for many, many years to 

come, unable to exercise a constructive global role, with some countries that we have a complicated relationship with clearly benefiting from that, in terms of their influence. Certainly, in terms of 

12 

the issue we have been discussing, it would obviously be adverse 

to our interests, of the interests of the West. And I think we would 

enter a much more chaotic phase in world affairs. 

So, I certainly hope that, in the foreseeable future, common sense 

and rationality will dominate our approach, and that no one seeks 

to exploit what is a very vulnerable situation for very short-term 

national benefits. 

The CHAIRMAN. Doctor, we should have you here more often. I 

appreciate you taking the time. 

We have two distinguished panelists to follow. We’re going to recess to go vote. We’ll be back. At which time, I’m going to make 

an opening statement, and Senator Lugar will make an opening 

statement. We’ve already opened, but we’ll both make a statement, 

and then we’ll invite our panelists to make comments, and then 

we’ll ask questions. 

Again, Dr. Brzezinski, it’s always a pleasure to have you here. 

I always learn something when you are here. 

And we are now recessed to vote. We’ll be back in about 10 minutes. 

Dr. BRZEZINSKI. Thank you, Mr. Chairman. 

[Recess.] 

The CHAIRMAN. We’ll come to order. 

I thank the witnesses for their indulgence. Probably all of you 

know, but I know for sure Leon knows the way this place works; 

we’re like Pavlov’s dog, the bell goes off and we have to respond. 

We have a very distinguished panel: Dr. Leon Fuerth, research 

professor at The Elliot School of International Affairs, George 

Washington University; and Ms. Baran, who’s the director of the 

Center for Eurasian Policy, the Hudson Institute, in Washington, 

DC; and Mr. Kupchinsky—am I pronouncing it correctly? Mr. 

Roman Kupchinsky—I said it right the first time—is a partner in— 

is it pronounced the AZ—— 

Mr. KUPCHINSKY. AZEast. 

The CHAIRMAN.—AZEast Group, from New Jersey. 

And we welcome all of you here. And I think what I’ll do, since 

the chairman got grabbed, as he was getting in the elevator, by a 

group of press people—why don’t we do our statements? I apologize 

to you all having to listen to this, but I’m going to ask unanimous 

consent—and since I’m the only one—no, I’m not the only one here, 

I see Ben Cardin is here—I might be able to get it—to ask that the 

opening statement I’m about to make be placed at the appropriate 

place in the record. 

Senator CARDIN. I was going to object, Mr. Chairman, as I really 

wanted to hear it, but I won’t object. [Laughter.] 

The CHAIRMAN. Well, I’m going to be very brief and put my statement in the record, but I’d like to hear, if he’s back in time, Senator Lugar’s statement. 

The biggest worry for American families today is the state of the 

economy, and the biggest worry of our economy is the explosive rise 

in the price of oil. And, as we all know, it’s hitting family budgets 

every time they fill up their tanks. And, as we heard in a previous 

hearing in this committee, our dependence on oil has weakened our 

economy, driven up our defense expenditures, and put our foreign 

policy in a straightjacket, and that’s why, following the leadership 

13 

of Senator Lugar, this committee has made an issue of energy security and its role in our foreign policy in the focus of many of our 

hearings in recent years, and will continue to be the focus of additional hearings. 

We already heard from Dr. Brzezinski on the game being played 

out in the Caspian Sea region, and, as he pointed out, the stakes 

are very high, they involve hundreds of billions of dollars in oil and 

infrastructure, and the resurgence of Russia and the emergence of 

the issue of energy security in Europe. And it has played out in the 

region, rife with its own historical instabilities, shifting alliances of 

shaky regimes. And this region is one of immense importance to 

our security and the security of our allies. The mostly Muslim nations that are uncertain whether to look East or West are the field 

on which these issues are being played out. Its energy resources 

could offer significant additional supplies to the global market that 

is basically maxed out now. But, there is also opportunities there 

for us to pursue, opportunities for diplomatic and security successes, that could contribute to a more stable region and a more 

stable global energy future. 

These opportunities are out there, but only if we seize them and 

only if we give this region and these challenges the attention, resources, and diplomatic skills they need, and, as Dr. Brzezinski 

says, attention at the highest levels of our Government. 

So, the—I would ask unanimous consent the remainder of my 

statement be placed in the record. But, let me end by saying that 

I cannot think of anything that is of a greater consequence to our 

foreign policy right now; and the key, to me at least, is figuring out 

how—and I’m going to ask the witnesses this—how we can form a 

common response by the West to the power of the energy exporters. 

So I hope we’ll explore those issues. And, unless Senator Lugar 

is in the wings here, I don’t want to hold the panel up any longer, 

I would—is he out there? OK. 

[The prepared statement of Senator Biden follows:] 

PREPARED STATEMENT OF SENATOR JOSEPH R. BIDEN, JR. 

The biggest worry for American families today is the state of our economy. And 

the biggest worry for our economy is the explosive rise in the price of oil. It is hitting family budgets every time they fill their tanks—it threatens a new wave of inflation as the price of everything from food to textiles to chemicals is pulled up by 

skyrocketing oil prices. As we have heard in previous hearings before this committee, our dependence on oil has weakened our economy, driven up our defense expenditures, and put our foreign policy in a straitjacket. 

That is why, following the leadership of Senator Lugar, this committee has made 

the issue of energy security and its role in our foreign policy the focus of many hearings in recent years. We will continue that focus with additional hearings. 

Today we will hear from a panel of distinguished witnesses, beginning with Dr. 

Zbigniew Brzezinski, on the Great Came being played out in the Caspian Sea region. The stakes are high. They involve hundreds of billions of dollars in oil and 

infrastructure, the resurgence of Russia, and the energy security of Europe. 

It is played out in a region rife with its own historical instabilities, shifting alliances, and shaky regimes. And this region is one of immense importance to our security and the security of our allies. It is mostly Muslim nations that are uncertain 

whether to look West or East. Its hydrocarbons fuel Europe and could offer additional supply for a global market that is maxed out. 

But there are also opportunities there for us to pursue, opportunities for diplomatic and security success that could contribute to a more stable region and a more 

stable global energy future. These opportunities are there, but only if we seize them, 

14 

only if we give this region and these challenges the attention, resources, and diplomatic skill they need—at the highest level. 

As complicated as the flows of oil and gas into, through, and out of this region 

look on a map, the basic elements we will examine today are clear. 

Russia controls the old, Soviet-era infrastructure for moving oil and gas in the region. That infrastructure reinforces Russian influence because on top of its own oil 

and gas, Russia is the major buyer of its neighbors’ hydrocarbon resources and a 

major seller of those same resources, through its pipelines to Europe. that arrangement suits Russia just fine. As we discussed in our hearing yesterday on Sovereign 

Wealth Funds, Russia has amassed a ‘‘Stabilization Fund’’ of over $127 billion. They 

have used some of that wealth to buy into the parent company of Airbus, and have 

threatened to expand those holdings substantially. That company is a major European defense supplier. 

No wonder the President and Prime Minister of Russia spend more time running 

Gazprom than they do running the country. It is not just the sheer volume of oil 

and money that is enhancing Russia’s power; they have shown that they are willing 

to use their dominance of both ends of most existing pipelines to extract not just 

economic deals, but, increasingly, political influence. 

Russians love chess. Our strategic response on the chess board of Central Asia 

must be to establish a presence on parts of the board they do not yet control. That 

means laying down new pipelines that add alternatives—that introduce real competition—to the monopoly Russia has enjoyed. Giving more choices to both suppliers 

and customers should help wring waste and inefficiency out of the system—bringing 

a situation where supply and demand, not threats and bribes, set prices. 

Those pipelines need not just billions of dollars of investment, but also the rule 

of law, property rights, and predictability that investor demand. Those pipelines require building alliances among the nations they traverse, the suppliers needed to 

fill the pipelines, and the consumers at the other end. 

And we need diplomacy to forge a common strategy among energy consuming 

countries in Europe, a shared effort that can confront Russian dominance. That puts 

diplomacy at the center of our approach to this region. a key question for this hearing must be: Are we deploying the diplomatic resources, the attention, this issue demands? 

Senator Lugar and I are particularly interested to know if our government has 

the right people, in the right positions, to achieve our goals. Do we have the right 

pieces in play to confront the Russian position? 

One way to form a common response to the power of energy exporters is a global 

deal to reduce the threat of climate change by cutting emissions from fossil fuels. 

That will mean global-scale commitment to alternatives and to rules that give investors a predictable future, a smart deal that protects economic growth. The longer 

we delay that deal, the longer we delay our own domestic energy and climate plan, 

the weaker our hand in dealing with Russia, or with OPEC. Our addiction empowers them. 

I have worked with Senator Lugar on a Resolution calling for renewed U.S. leadership in international climate negotiations. Progress on those talks will be part of 

a move away from our dependence on oil, the root of so many of our foreign policy 

issues. 

Senator Lugar is a genuine expert on this region. He has been there more than 

half a dozen times, most recently in January of this year. He’s the most senior U.S. 

official to visit Turkmenistan since their new President took office. 

I can’t think of anything that is more important to our energy policy than the 

issues we will discuss at this hearing. Of particular interest to me, is why we seem 

to have an inability to form a powerful common response and how we can form that 

common response. 

I want to welcome Dr. Brzeznski back to this committee, and I look forward to 

hearing from our panel of distinguished experts on this topic. 

The CHAIRMAN. Why don’t we begin, Dr. Fuerth, with you. And 

the floor is yours. 

STATEMENT OF LEON FUERTH, RESEARCH PROFESSOR, THE 

ELLIOT SCHOOL OF INTERNATIONAL AFFAIRS, THE GEORGE 

WASHINGTON UNIVERSITY, WASHINGTON, DC 

Mr. FUERTH. Thanks, Senator Biden. 

I have to begin my comments with a request to the committee, 

and that is that you expunge the title ‘‘Dr.’’—‘‘Professor’’ will do. 

15 

My grandmother would have been so proud if the Ph.D. were there 

also, but plain ‘‘Mr.’’ will do very well. Thank you. 

The CHAIRMAN. Well, ‘‘Mister’’—— 

Mr. FUERTH. Excellent. 

The CHAIRMAN. The chairman just walked in. 

Would you like to make your opening statement? 

Senator LUGAR. Well, Mr. Chairman, I’ll just ask that my statement be made a part of the record—— 

The CHAIRMAN. All right. 

Senator LUGAR [continuing]. Because I’d like to proceed, as you 

would, with the testimony of our witnesses. 

The prepared statement of Senator Lugar follows:] 

PREPARED STATEMENT OF HON. RICHARD G. LUGAR

Increasingly, access to energy is at the heart of security concerns for nations 

around the world, including the United States. The Foreign Relations Committee 

has undertaken a series of hearings on energy security since 2005. Among other 

conclusions, these hearings have pointed to an urgent need for developing alternative energy sources, expanding the attention given to energy issues in our diplomacy, and improving alliance cohesion on energy matters. 

In 2006, at the NATO summit in Riga, Latvia, I asserted that the Western Alliance must commit itself to preparing a range of options for jointly deterring the use 

of energy as a weapon and responding if such an event occurs. I argued that it 

would be irresponsible for the European Union and NATO to decline involvement 

in energy security, when it is apparent that the jobs, health, and security of our 

modern economies and societies depend on the sufficiency and timely availability of 

diverse energy resources. I noted that energy may seem to be a less lethal weapon 

than military force, but a sustained natural gas shutdown to a European country 

in the middle of winter could cause death and economic loss on the scale of a military attack. Moreover, in such circumstances, nations would become desperate, increasing the chances of armed conflict and terrorism. 

Unfortunately, since Riga, the trend has moved away from European unity on energy supplies. Recently, Russia has concluded energy supply agreements with 

Greece, Bulgaria, Hungary, and Serbia. The Kremlin has an agreement with Germany to construct the Nord Stream pipeline and with Italy’s ENI to construct the 

South Stream pipeline. The current go-it-alone approach by many European nations 

will result in increased European dependence on Gazprom, greater vulnerability to 

supply disruptions, and less alliance cohesion on critical foreign policy issues. 

Meanwhile, the oil and gas rich nations of Central Asia are relying almost exclusively on Russia to transport their energy exports. Undoubtedly, these countries 

have an interest in maintaining productive trade relations with their large northern 

neighbor. But Central Asian nations need only look across the Caspian Sea to Azerbaijan to gain a sense of the potential benefits of maintaining a second option for 

oil and gas exports. 

Gazprom’s monopoly-seeking activities cannot be explained by economic motives 

alone. It is difficult to distinguish where the Russian Government ends and where 

Gazprom begins. Clearly Gazprom has sacrificed profits and needed domestic infrastructure investments to achieve Russian foreign policy goals. The Kremlin and 

Gazprom have shut off energy supplies to six different countries during the last several years. 

The trans-Atlantic community must do more to establish a credible energy security strategy that diversifies energy sources for all of Europe, establishes a collective 

framework to work with Russia, and refuses to tolerate the use of energy as an instrument of coercion. A first priority should be completing the so-called East-West 

energy corridor to bring oil and natural gas across the Caspian from Central Asia 

to distribution points in Central Europe. This will help diversify gas supplies to Europe, thus increasing its collective bargaining position. Success requires leadership 

in three key areas. 

First, the United States Government must bolster its diplomatic engagement with 

Central Asian nations. When I visited leaders in Kazakhstan and Turkmenistan 

earlier this year, they told me that they want more dialogue with the West. The 

willingness of these governments to discuss trans-Caspian alternatives will not be 

converted into investments on the ground without high-level engagement. Former 

President Putin’s personal diplomacy has been critical to Russia’s success. It is time 

16 

for a U.S. President to visit Central Asia. Likewise, I encourage President Bush to 

invite the President of Turkmenistan for his first visit to Washington. 

Second, we cannot take for granted the progress made in Azerbaijan and Georgia. 

To ensure maximum benefit from the Baku-Tbilisi-Ceyhan and South Caucasus 

pipelines, the trans-Atlantic community must continue to support the democratic 

transformations in the Caucasus. An unfortunate result of the recent failure to 

grant Georgia a NATO Membership Action Plan is the appearance that Russian intimidation can affect the alliance’s approach to Caspian security. 

Third, numerous NATO and EU Member States have pursued agreement on the 

critical Nabucco natural gas pipeline—intended to be the final link connecting Caspian energy resources with European consumers—but it is being challenged by the 

Russian-backed South Stream pipeline proposal that would cross the Black Sea. Reluctant European governments must be convinced that their long-term security interests are served by the Nabucco pipeline. 

Chairman Biden and I have urged the administration to appoint a special energy 

envoy to help address these issues. Ambassador C. Boyden Gray’s appointment 

lends significant weight to this initiative by virtue of his close relationship with 

President Bush. United States backing for the BTC and SCP pipelines has been a 

strategic initiative embraced by multiple administrations and undergirded by bipartisan support. The Bush administration must make substantial progress on these 

projects during its last 7 months, and the next administration must hit the ground 

running on this issue. 

I thank the chairman for this hearing and join him in welcoming our distinguished witnesses. 

The CHAIRMAN. Well, Leon, as far as I’m concerned, you’re still 

a ‘‘Dr.’’ We’ll call you ‘‘Professor.’’ 

Professor—— 

Mr. FUERTH. ‘‘Professor’’ will do. 

The CHAIRMAN [continuing]. The floor is yours. 

Mr. FUERTH. Thank you. 

I’m going to try to keep this as close to 7 minutes as I possibly 

can, but I—— 

The CHAIRMAN. We’ve kept you waiting. Don’t worry about keeping us. 

Mr. FUERTH. It’s just that 8 years of being a professor at GW has 

corrupted me; I’m used to a captive audience for 2 hours at a 

stretch. 

You’ve asked me to provide background on how the Clinton-Gore 

administration recognized the significance of Caspian energy and 

how it organized itself to deal with the subject. But, I also understand that your interest in this subject is not simply historical, but 

is forward-looking. That is, you are searching that experience to 

see whether there is something in it that can apply to things that 

are still ahead of us as a country. 

The CHAIRMAN. That’s correct. 

Mr. FUERTH. Well, my narrative on this subject actually has to 

begin 2 years before the Clinton-Gore administration took office, in 

the midst of the collapse of the Soviet Empire, because that collapse destroyed Russia’s control of the Caspian region and created 

circumstances where new rules of the game could be written, and, 

in fact, had to be written, since none existed after the collapse of 

that order of business there. 

So, when the Clinton-Gore administration took office, we were 

doing so in the midst of the wreckage of an old world order; in fact, 

it felt as if pieces of that world order were still falling around our 

heads. And we felt that our predecessors in the Bush administration had handled this collapse with considerable skill, but it was 

up to us to figure out what next, on a field where most of the old 

17 

ideas and rules of thumb had disappeared. It was a particularly 

critical time. We felt that the Russian Federation was at the edge 

of a free-fall and that, for various reasons, you could not exclude 

the possibility of a complete societal collapse in a country which 

still controlled the world’s biggest nuclear arsenal. 

So, at the very most senior levels of the Clinton-Gore administration, we had to confront this, where we also felt that there was a 

huge opportunity in the midst of these difficulties, because the Russian Government was in the hands of reformers who seriously 

wished to create a society based on the rule of law and on market 

economies. They may have had other motivations, but we dealt 

with them often enough and under conditions of duress, such that 

we concluded that that really was their dream. 

We understand that—well, we understood that there was only a 

limited amount that we could do to help this, but we also felt that 

this was a millennial opportunity to reconstruct the world political 

system on a foundation that included a more positive United 

States-Russian relationship. 

So, that is why the United States accepted President Yeltsin’s 

proposal, which he made in April 1993 in the Vancouver summit, 

that both sides should establish a very senior group to help convert 

broad declarations of intent into actual change on the ground. Now, 

this was the point of origin of the United States-Russia Binational 

Commission, otherwise known as Gore-Chernomyrdin, after the 

two individuals who were responsible for it. 

That Commission began its operations in September 1993, and 

its first mutually agreed goals included cooperation in spaceflight 

and energy. There were no precedents for the level of collaboration 

that we both had in mind in this field. They were going to intrude 

almost equally—in equal measure upon areas of policy that both 

we and the Russians would previously never have opened up to 

each other to that extent. 

The Russians accepted our interest in their energy production, 

because they were in a bad way. Their energy fields were no longer 

producing, and, in fact, were producing, but were—at a declining 

rate. And that was because they had failed to invest properly in 

modernization and in good management. They needed foreign investment, they needed foreign technology, if there was going to be 

any hope of avoiding a situation where Russia was going to turn 

into a net importer of energy from the rest of the world. In fact, 

the only thing that prevented that from happening was the general 

condition of the Russian economy, which was so bad that their requirements for energy were, at least for that period of time, greatly 

reduced. If they were operating at a normal level, they would have 

to have been importing already. 

Over time, this commission expanded to include committees that 

covered almost the whole spectrum of societal life on the Russian 

side. When these commissions met in a given room, you had almost 

two-thirds of the U.S. Cabinet and about the same number of the 

Russian ministers present. And the success of this operation depended—if you’re looking for clues to the future, it depended upon 

going way out of our way on both sides to build this on the basis 

of parity of respect and to look for ways to handle inevitable strong 

18 

differences in such a way that both sides would come out feeling 

that their core interests had been protected in the final bargain. 

Well, the second expansion of NATO, in July 1997, is a prime example of that kind of challenge, and Caspian energy was another. 

Both of these cases involved strong objective and psychological 

challenges to core Russian conceptions of territoriality and security. 

The expansion of NATO meant that the loss of Eastern Europe was 

permanent. The presence of the United States asserting that it had 

commercial interests and that its enterprises had commercial 

rights in the Caspian underscored for the Russians the fact that 

they had lost an empire that had been assembled, not in the Soviet 

time, but under the tsars, and it was not an easy thing for them 

to absorb psychologically, not to mention commercially and politically. 

Now, the Caspian chapter actually began in the winter of 1995, 

when a colleague of mine from the National Security Council came 

to see me and said that she felt that the U.S. Government was not 

yet alert enough to the energy potential of the region, and that 

there was not yet a sufficiently good policy in place for dealing with 

it, and that in the absence of such a policy, there was a growing 

risk that Russia and Iran would make themselves the gatekeepers 

to the resources of the Caspian region, which was still in the process of being documented, but what we knew of them suggested that 

they were really quite vast. And if that were to happen, Russia and 

Iran would acquire tremendous geostrategic leverage, including the 

ability to strangle Turkey’s economic growth. So, I had the latitude, 

in the way things were run those days, to check into assertions like 

this, and, for that purpose, I was able to draw upon the expertise 

of every relevant part of the U.S. Government, including the intelligence agencies. 

It’s interesting to remember—for me to remember—that, at that 

point, you couldn’t find people who had this specialty in the U.S. 

system. In the intelligence community, for example, it was necessary to kluge together groups of analysts who, among them, covered the necessary range. After months of waiting, the first report 

I got back from them on, let’s say, the way in which oil and gas 

might leave the region, began from the Russian border, but excluded China, and it was necessary to send the intelligence people 

back with a reminder that the world energy system was a unity, 

and that for us to understand it at the policy level, they would 

have to go back and present us with something closer to an actual 

working model of what it would be. 

Now, in the course of these discussions, with working people 

from all over the executive branch, the elements of a policy took 

shape. And I can repeat them to you here. 

The United States would favor multiple pipelines to carry oil and 

gas out of the Caspian into world markets. We would welcome a 

Russian role in this system, providing it was organized along commercial patterns rather than the old state-driven patterns. We 

would oppose Iranian involvement in this process until and unless 

Iran took steps to meet us on certain issues, especially the nuclear 

issue. In support of these policies, the United States Government 

would follow the commercial logic of private-sector enterprises and 

19 

be prepared to apply U.S. diplomatic influence in the region to help 

consolidate support of governments that control the rights-of-way. 

In doing this, we had to be careful not to be drawn in to the particular and specific plans of any part of the U.S. private sector, but 

in order to understand how they viewed the decisions in front of 

them, it was necessary to talk. 

The United States Government would, therefore, try to bring to 

bear the resources of the Export-Import Bank, OPIC, and the 

Trade Development Agency. But, again, we would have to do this 

in ways that respected the fact that these are independent agencies 

and are obliged under the law to make their own decisions, after 

due diligence, on any kind of lending to any kind of private venture. 

The stated basic objectives of this proposed policy were: Prevent 

Russia and Iran from successfully imposing a dual-key lock on exploration and transport of oil and gas reserves from the Caspian; 

buttress the independence of the newly emerged states in the Caucus-Caspian region; protect the economic and political stability of 

Turkey; contribute to the long-term stability of the global energy 

system; and a coequal priority was to find a way to do this without 

fracturing the larger United States-Russian relationship that we 

were in the process of trying to build. 

It remained as a next step to convert this sketch of a policy into 

an official statement of American policy. And a way to do that was 

to take it through the formal decisionmaking process, which meant 

a meeting of the Deputies Committee to present it, followed by a 

meeting of the Principals Committee to present it, followed by a decision taken at that meeting, backed by the President, that this is 

the road we were going to follow, followed by announcements to 

concerned governments that the United States had a policy and it 

was thus and so. 

Now, the first accomplishment of this policy and the diplomacy 

that was related to it was to bring about an agreement in September 1995 on the construction of a relatively low-capacity pipeline to move oil from Baku to the Port of Supsa, in Georgia, and 

from there the oil would be loaded onto barges and then ultimately 

shipped to markets by way of the Bosporus. 

This agreement created all the basic precedents that were needed 

to reach agreement later on a full-scale pipeline for oil to run from 

Baku to the Turkish port of Ceyhan. And this was announced at 

a regionwide meeting in Istanbul in June 1998. 

The management of this policy had to be unusual, because the 

policy itself was unusual. And I want to stress, when you think 

about the future, that the design of a policy has to have an echo 

in the design of the system that you create to manage it, which is 

often not the case. 

Caspian policy could not properly be managed from any one part 

of the executive branch or in any single directorate of the National 

Security Council or in the National Economic Council. Every time 

we tried to figure out a conventional placement of this policy, we 

found that some critical element of it would likely be distorted by 

where we were going to put it. So, instead, we decided to convert 

the improvised mechanism that we were using into a sanctioned ad 

hoc arrangement. And what we had was essentially a very large 

20 

rump group of people, sent by every interested executive-branch 

agency, meeting in the Old Executive Office Building about once a 

month or as often as needed, chaired jointly by myself and by a national security director chair, where the diplomacy was in the 

hands of two successive ambassadorial-rank individuals from the 

State Department, and where the lead agency would be the Department of Energy. It was improvised, but it was effective. It gave us 

good situational knowledge of what was happening. We understood, 

in a timely way, where the blockages were, and we could move our 

assets to try to deal with them. 

One of those assets was Vice President Gore, who was chairing 

binational commissions with Kazakhstan, as well as with Russia, 

and who already had gotten to know the heads of government of 

every state in the region. And so, when the system jammed and 

could not go forward, the last recourse would to—would be for the 

system to come and ask the Vice President to use those contacts 

to try to line up the various parts of the chain so that they would 

come into agreement with each other and make the pipeline possible. 

It had many ways to fail as a policy. There could be no guarantee 

that concerned governments would agree to cooperate. They didn’t 

have the tradition of cooperation with each other. The idea of compromise was somewhat alien to a winner-take-all approach to bargaining on their part. 

It wasn’t sure that U.S. energy companies were going to wind up 

picking any routes at all, because they had their reasons for 

doubts, or that if they picked routes, it wasn’t sure that these 

would actually correspond to what we thought were strategically 

valuable approaches. And it wasn’t sure that the lending agencies 

run out of the U.S. Government would think that these were good 

investments either. And in no case were we in a position to simply 

impose our will. It was a question of herding cats, but we succeeded, partly because, I think, the underlying idea was correct and 

had elements that were attractive to each one of the players. 

And so, we—the result of our success is the existence of the 

Baku-Tblisi-Ceyhan Oil Pipeline, and the fact that this was able to 

come into existence without a confrontation between ourselves and 

the Russian Federation. And it took some—and it took some doing 

to make sure that that didn’t happen. 

Now, what does this offer, in terms of considerations for the future? As I mentioned before, there is to every policy an organizational component, and often we ignore the organizational component and treat it after—as an afterthought, but it—how we pick 

the organization may determine greatly whether we will succeed in 

our diplomacy as we move forward on a policy. 

The Clinton-Gore administration was open to new thinking 

across bureaucratic limits. It was open to bureaucratic improvisation in ways that strengthened the underlying interagency machinery. It was inclusive and transparent to its participants. And I 

speak as one who operated at the top of the system, and who would 

have immediately recognized any other mode of operation, as a detriment to my own responsibilities to the Vice President. 

Decisions were developed by open processes, and, once established, policy pretty reliably guided practice. And where practice 

21 

revealed deficiencies in policy, there were easy ways, at least expeditious ways, to develop modifications of the policy to support the 

change we needed. 

We used the intelligence system continuously and purposely. Intelligence personnel did not become advocates for policy, but they 

were invited guests at every discussion of where the United States 

policymakers were trying to go, and so, they understood from the 

beginning what it was that we most needed to know from them in 

order to help us figure out what to do and how to do it. 

We did our best to make sure that the process was buffered 

against political end runs from interests outside. We were ready to 

solicit information and insight from private corporations, but we 

did not give them any reason to think that we would fine-tune our 

approach to match their particular vision of their commercial interests. 

We developed—and this is very important, I think—comprehensive, all-points relationships with the other governments concerned 

so that energy was not the only thing we were coming to talk to 

them about, and not the only reason they had to listen to us. 

We developed and used high-level contacts for the most stubborn 

and urgent of our bilateral issues, but these contacts were used 

sparingly, only when no other approach would work. 

Most importantly—and this is practically a separate subject—we 

were consciously redefining the scope of national security in order 

to include major economic issues, and we redesigned the policymaking machinery to better express priorities and tradeoffs between traditional and new conceptualizations of national security. 

I think one of the reasons why my NSC colleague had to come to 

see me to say that we didn’t have a policy was that, at the very 

beginning, the idea of Caspian energy did not appeal to her other 

colleagues as a national security matter, simply because it was out 

of the ordinary. These are transitions in thinking that have to be 

made carefully, and they have to be made energetically and in 

time. 

Today, I think we face new questions about the proper scope of 

national security, and I think those are going to be just as important to help the country find its opportunities in the future. 

I heard the latter part of Dr. Brzezinski’s presentation, and I 

share his view that the United States is not faring particularly 

well, in terms of efforts to build energy networks that are outside 

of Gazprom’s control. I think they are moving faster and maneuvering better than we are because they have support from the very 

most senior levels of government and the continuous attention of 

the very most senior elements of government. 

And I have the impression, although I am now out of this business—but, I have the impression, from just following it, that the 

U.S. Government has lost its focus on this subject—I mean, because other matters consume its attention, and that’s understandable. But, political freedom is still what we’re all about, and, since 

Colonial times, our leaders have understood that political independence does not coexist with economic servitude. So, it’s getting 

to be time to pick up our socks and pay attention to an important 

part of our economic destiny, which is located in such subjects as 

access to the energy of the Caspian. 

22 

[The prepared statement of Mr. Fuerth follows:] 

PREPARED STATEMENT OF LEON FUERTH, RESEARCH PROFESSOR, THE ELLIOT SCHOOL

OF INTERNATIONAL AFFAIRS, THE GEORGE WASHINGTON UNIVERSITY, WASHINGTON, DC 

The committee has asked me to provide background on how the Clinton-Gore administration recognized the significance of Caspian energy, and how it then organized itself to deal with this subject. As I understand it, however, the committee’s 

interest is prospective rather than historical. It wants to know what elements of this 

experience may be valid, as the United State turns to face the accelerating and multiple strategic challenges arising from energy. This testimony will therefore be structured as a historical account, interspersed with markers to indicate what may be 

lessons of continuing importance, and ending with a brief set of recommendations. 

Caspian energy policy was formed during the second Clinton-Gore administration, 

but it cannot be understood outside the context of events and innovations of the first 

4 years. Those earlier developments conditioned how we came to recognize the importance of Caspian energy, how we formed a policy to deal with it, and how we 

organized internally to manage that policy and to conduct a diplomacy constructed 

upon it. 

The narrative actually begins 2 years before the Clinton-Gore administration 

began its existence, as a consequence of the implosion of the Soviet empire, which 

destroyed Russia’s control of the Caspian region. 

The Clinton-Gore administration took office as the wreckage of the old world order 

was still settling. Our predecessors had handled the collapse of the Soviet Union 

and the Warsaw Pact with great skill, but it was up to us to deal with the aftermath. The Russian Federation was on the edge of free-fall. Its economy was devastated, and its new political institutions were extremely fragile. There were early 

signs of hyperinflation. Public suffering was considerable. There was deep moral dislocation. The military was broken. The Communist Party apparatus was the only 

nationally organized political force in the country, and it was intent on recapturing 

power. Other political forces representing extreme nationalism hovered at the edges. 

One could not exclude a complete societal collapse in a state which still possessed 

the largest nuclear arsenal on the planet. 

We—meaning the senior tier of national security officials in the new administration—also believed that there was a huge opportunity in these circumstances. The 

government of the Russian Federation was in the hands of reformers, whose agenda 

was to create a society based on the rule of law and driven by market economics. 

We recognized that the United States was the only government able to marshal a 

positive international response, on a scale anywhere near what would be needed. 

We understood that our chances of success were not particularly high, but we also 

believed that what was at stake was a millennial chance to create a post-cold-war 

world organized around a collaborative United States-Russian relationship. 

President Boris Yeltsin had serious personal and political weaknesses, and we recognized them. But we also saw in him and in his government a serious interest in 

moving beyond the Soviet experience, domestically and internationally. After a period of deliberation at the outset of the new administration, the decision was made 

for the United States to present itself to the Russians as a potential partner in what 

we hoped would be the birth of a new society. That kind of effort demanded not just 

moral but organizational and material support. It carried substantial political risks. 

But the risks of inaction were assessed as much greater. 

That is why the United States accepted President Yeltsin’s suggestion, made at 

the April 1993 summit in Vancouver, that we needed a new form of bilateral organization to operate at the highest political levels. This was the point of origin of the 

United States-Russia Bi-national Commission, aka the Gore-Chernomyrdin Commission. It was also the point of origin of the Russia Policy Group under the leadership 

of (then-Ambassador, and later Deputy Secretary of State, Strobe Talbot. The objective of the Commission was to make sure that high-level agreements would actually 

be converted into material change on the ground. The objective of the Policy Group 

was to create a venue for coordination that would embrace every major stakeholder 

in the executive branch, and supercharge the NSC interagency process. Together, 

the Commission and the panel were designed to assure constant orchestration and 

followthrough, working across traditional bureaucratic boundaries in both governments. 

The Bi-national Panel began its operations in September 1993. Its first mutually 

agreed goals were to develop new forms of cooperation in two important areas: 

Space flight and energy. There were no precedents for the level of collaboration we 

had in mind. They would intrude almost in equal measure upon areas of policy that 

23 

both we and the Russians would previously never have opened up to each other. The 

Russians accepted joint work in space in the hopes of preventing the dissolution of 

their space industries. We embraced this work, partly to augment U.S. capabilities, 

and partly because we feared that Russian technology would otherwise be up for 

sale to the highest bidder: Notably, Iran. The Russians accepted cooperation in energy because the output of their oil and gas fields was plummeting, and could only 

be restored with infusions of outside capital and technical skill. We viewed the potential collapse of Russian energy production as a threat to the political stability of 

the Federation, and a threat to the stability of the global energy market. We also 

believed that Russian extraction procedures were technologically backward, and 

were causing avoidable environmental damage locally in the form of massive spills, 

and globally through the emission of greenhouse gases. 

Over time, the Commission expanded to include committees in defense conversion; 

energy; environment; health; science and technology; along with various task forces 

on issues ranging from tax law to safe storage of plutonium from Soviet warheads. 

There was also a side agenda in which the Commission’s two principals acted to 

clear the way for what would become a series of summit meetings at the level of 

Presidents. The story of how these processes worked is as much a matter of attitude 

as of substance. Success depended upon going out of the way to build relationships 

based on parity of respect, and to look for ways to handle inevitable differences in 

a manner which would support basic American and Russian interests, yet not rupture underlying forms of cooperation. 

The expansion of NATO is a prime example of such a challenge. Caspian energy 

was another. Both cases involved strong objective and psychological challenges to 

core Russian conceptions of territoriality and security. The expansion of NATO 

marked the permanent liquidation of the Soviet empire in Eastern Europe; and the 

assertion of American economic and strategic interests in the development of Caspian energy, drove home to Russian leaders their loss of dominion over a region that 

had been an integral part of the Soviet Union. Both processes represented objectives 

that the Clinton-Gore administration regarded as vital to the design of a stable postSoviet world, yet each also put at risk the kind of United States-Russian relationship that would be central if the design were to become a reality. 

The difference is that the future role of NATO in Central and Eastern Europe was 

recognized as a crucial issue from the beginning of the administration, and was 

dealt with by well-established processes within the national security apparatus: 

Whereas the question of Caspian energy was not recognized for several years, and 

had to be addressed by an improvised system for which there was no precedent. The 

fact that we were able to succeed owed much to the Gore-Chernomyrdin experiment 

and to the consultative procedures that had evolved to support it. It also depended 

upon extensive operational experience within the U.S. Government, for handling 

policy and organizational issues generated not only by Gore-Chernomyrdin, but by 

a series of other binational commissions: United States-Egypt (chaired by Gore and 

President Mubarak), established in September 1994; United States-Kazakstan 

(chaired by Gore and President Nazerbaev ) established in November 1994; United 

States-South Africa (chaired by Gore and then-Deputy President Mbeki), established 

in March 1995; and United States-Ukraine (chaired by Gore and President 

Kuchma), established in September 1996. 

The Caspian chapter began in the winter of 1995, when a National Security Council office director named Sheila Heslin came to see me to say that she believed that 

the U.S. Government was not alert to the energy potential of the region, and that 

there was no policy for dealing with it. In the absence of such a policy, there was 

a growing risk that Russia and Iran would succeed in making themselves the gatekeepers to what already was established to be an immense new reserve of oil and 

gas. Both governments were already developing juridical claims by which they 

would, in effect, assert dual rights to seabed drilling, and both were moving toward 

an arrangement whereby oil and gas would exit the region either by way of 

GAZPROM’s pipeline system transiting Russia to Europe, or by way of a northsouth pipeline that would run south through Iran, to exit that country by way of 

coastal terminals. Were this plan to succeed, Russia and Iran would acquire tremendous geostrategic leverage, including the ability to strangle Turkey’s economic 

growth. 

I had the latitude to explore these assertions, for which purpose I drew upon the 

knowledge of an ad hoc interagency group that included all pertinent agencies, including the CIA. It was not unusual for the Office of the Vice President to function 

in this manner, as the precedents for it were already established because of the binational commissions. The Vice President, moreover, had by this time established 

personal links to every President in the region, and was in a position to draw upon 

these connections to help establish a new policy designed for regionwide application. 

24 

In this capacity, he provided a political link trusted by the bureaucracy to operate 

accurately and effectively within the bounds of national policy, as established by the 

President. His engagement made U.S. operations more continuous than would 

otherwise have been possible, given that Presidents are intermittently available. 

At a certain moment in my exploratory discussions the basic elements of a potential U.S. strategy took form: 

• The United States would favor multiple pipelines to carry oil and gas out of the 

Caspian into world markets. 

• United States policy would welcome a Russian role in this system, to be organized along normal commercial patterns. 

• The United States would oppose Iranian involvement in this process, until and 

unless Iran took convincing steps to repair its relationship with the United 

States—notably, to meet our concerns about their nuclear program and intentions. 

• In support of these policies, the United States would follow the commercial logic 

of private sector enterprises which were then considering various pipeline concepts. We would be prepared to apply U.S. diplomatic influence in the region 

to help consolidate support of governments controlling rights of way. 

• The United States Government would seek to bring to bear the resources of the 

Export-Import Bank, OPIC, and the Trade Administration Agency (TDA), but 

would take care to do this through consultation, and not by means that would 

abridge their legal independence. 

• The stated basic objectives of the policy were to: Prevent Russia and Iran from 

successfully imposing a dual-key lock on exploration and transport of oil and 

gas reserves from the Caspian; buttress the independence of the newly emerged 

states in the Caucasus/Caspian region; protect the economic/political stability of 

Turkey; and to contribute to the long-term stability of the global energy system. 

A coequal priority would be to find ways to do this without fracturing the larger 

United States-Russian relationship, by making it clear that the objective was 

not to exclude Russian commercial activities. 

It remained to convert this general framework into official policy, and to construct 

a more formal process for managing its many elements in government. Conversion 

to formal policy was a relatively straightforward process, involving a blending of 

well-established informal and formal systems. There already existed multiple informal levels of communication among Cabinet-level officers and deputies. These informal systems did not make policy, but simply provided a way to identify new issues 

and to initiate early thinking. The next step was to schedule a discussion of Caspian 

energy policy at a meeting of the Deputies Committee; and having done that to 

move it—with the imprimatur of the deputies—to the first available Principles Committee meeting. 

The Principles Committee rapidly endorsed the need for a policy and supported 

the proposal I have outlined above. By coincidence, then—Secretary of Energy Pen ̃ a 

was scheduled to have a series of routine meetings with leaders in the region. We 

decided to capitalize on this by making it the occasion to unveil U.S. policy and to 

seek the endorsement of these leaders for it. Their reactions were very supportive. 

The Vice President opened a dialog with the Russian Government in the margins 

of a Gore-Chernomyrdin meeting. Chernomyrdin’s response was polite and not 

confrontational, but showed us that Russian leaders continued to feel a proprietary 

interest in Caspian energy, despite their loss of control over the region. 

The first accomplishment of this policy and its related diplomacy was to bring 

about agreement, in September 1995, on construction of a relatively low-capacity 

pipeline for the transport of oil from Baku to the port of Supsa, in Georgia. From 

there, the oil would be loaded onto barges and ultimately shipped to markets via 

the Bosporus. Although small in scale, this agreement created all the basic precedents needed to reach agreement on a full-scale pipeline for oil, to run from Baku 

to the Turkish port of Ceyhan (announced at a regionwide meeting in Istanbul, in 

June 1998). 

The Caspian policy could not properly be managed from—within any one executive branch agency, or in any single directorate of the National Security Council, 

or in the National Economic Council. Conventional placement of the policy always 

seemed to be at serious cost to one or more of its objectives. Instead, we decided 

to convert the improvised mechanism used during the policy’s formation, into a hybrid management system to coordinate its execution. 

The plenary group of this body was large enough to permit all interested agencies 

to engage. It met more or less monthly, but in any event, as needed in the Old Executive Office Building. It was cochaired by myself and by a senior NSC department 

head. External diplomatic actions were coordinated by the Department of State 

25 

through an individual of ambassadorial rank: Initially Dick Morningstar, and then 

John Wolf. 

The senior Cabinet lead was held by the Secretary of Energy: First Frederico 

Pen ̃ a, and then Bill Richardson. The Vice President could be engaged at the request 

of the group, through me. The President could be engaged at the request of the 

group, through the National Security Adviser. The system fed smoothly into the formal policy system as needed, and it fed into the formal interagency on a constant 

basis. It generated very good situational awareness. There were no rogue actors. 

The Caspian energy policy had many ways to fail. There could be no guarantee 

that concerned governments would find it in their interests to cooperate, that U.S. 

energy companies would pick routes for economic reasons that would overlap the 

strategic interests of the U.S. Government, or that U.S. lending agencies that had 

legal independence in lending decisions, would be convinced of the soundness of any 

resulting proposals. But the policy did succeed, and the Baku-Tbilisi-Ceyhan oil 

pipeline is in operation today as a consequence. We also succeeded in bringing this 

project to fruition without a confrontation with the Russian Federation. 

What lessons, if any, does this history offer for the future? As you know, since 

leaving government in 2000, I have been a research professor at the George Washington University. My subject has been an effort to find ways for democratic forms 

of governance, such as ours, to handle the increasing pace of change that characterizes the modern world. 

I have come to understand that the United States is having to confront policy 

challenges that are not merely complicated but complex in the theoretical meaning 

of that term: They involve the interaction of systems of events within other systems 

of events; they resist permanent resolution because solutions to old problems mutate 

into new challenges; they do not display linear or predictable relationships between 

cause and effect, so that seemingly minor changes of input produce abrupt, and even 

discontinuous changes of output. 

I have also come to believe that the best approach our Government can use in 

its efforts to manage complex issues will be based on networked forms of organization. Networks handle complexity by dispersing authority to act in a structure 

where the distance between ‘‘the field’’ and ‘‘headquarters’’ has been shortened by 

eliminating middle layers of management, and by substituting sophisticated information systems. These systems maintain coherence by using feed-back channels to 

measure performance against expectations, and to generate corrective responses 

based on learning. 

The Caspian energy issue was a complexity phenomenon, although we certainly 

did not recognize it as such at the time. The methods that we improvised to run 

our policy, like the systems that we developed to run the binational commissions, 

were, in fact, examples of networked organization. In hindsight, I see that my colleagues and I were dealing with complexity, without realizing the full implications 

of that fact, and we were experimenting with networked organization without understanding the theory. We were able to do both of these things because the administration offered us the latitude to ask unorthodox questions and to put into place 

equally unorthodox responses. 

The administration was open to new thinking across normal bureaucratic limits. 

It was open to bureaucratic improvisation in ways that strengthened the underlying 

interagency machinery. It was inclusive and unusually transparent to its participants. Decisions were developed by open processes. Once established, policy reliably 

guided practice. Where practice suggested deficiencies in existing policy, changes 

could be made rapidly within the system rather than outside it. The intelligence system was employed continuously and purposefully. Intelligence personnel did not advocate policy, but were present as it was debated and knew what its information 

requirements were. 

We made sure the process was buffered against political end runs, or even the 

appearance of political influence. We were ready to solicit information and insight 

from the private sector, but we did not fine-tune our policies to match their commercial interests. We developed comprehensive, all-points relationship with other governments, such that energy could be approached in terms of even broader concerns. 

We developed and used high-level contacts for the most stubborn or urgent of our 

bilateral problems, but used these relationships sparingly and only if normal government-to-government contacts were stalemated. Most importantly, we were consciously redefining the scope of national security to include major economic issues, 

and we redesigned the policymaking machinery to better express priorities and 

tradeoffs between traditional and new conceptualizations of national security. 

I believe that these are attitudes and concepts lessons that will be helpful as we 

deal with energy issues of exponentially increasing difficulty. Over the last 8 years, 

the United States has fared less well in terms of routes for the transport of gas out 

26 

of the Caspian. Early on, it became apparent that Gazprom intended to make a 

stand on winning this prize, and that to accomplish this, the Russian Federation 

was prepared to fully mobilize its resources. The United States has not done likewise, and the results are evident. 

There is of course, the South Caucasus Pipeline, which connects gas from Azerbaijan’s fields in the Caspian to Turkey. But, in general, my impression is that the 

United States is not doing well in terms of Caspian gas. Under Putin, the Russian 

state has reestablished dominance over the decisionmaking of its oil and gas enterprises, and has effectively merged with Gazprom. We have already seen efforts to 

use that power for blunt political objectives in Eastern Europe. The European 

Union—after ignoring its energy dependency on Russia for a generation, is alert at 

last, but is not responding very effectively. The so-called Nabucco gas pipeline—to 

move gas into Europe through Austria, using routes through Bulgaria and Romania, 

is apparently being overtaken by Russian efforts to block any access except by way 

of the Russian pipeline system. 

As best I can determine, the U.S. Government has lost focus. Other matters consume the attention of our highest officials, and that is understandable. But political 

freedom is still what we are all about, and since colonial times, American statesmen 

have understood that political independence cannot coexist with economic servitude. 

Whoever wins the next election for President, will need to broaden the focus of national security, and proceed accordingly. 

The CHAIRMAN. Thank you very much. 

Ms. Baran. 

STATEMENT OF ZEYNO BARAN, DIRECTOR, CENTER FOR 

EURASIAN POLICY, HUDSON INSTITUTE, WASHINGTON, DC 

Ms. BARAN. Thank you, Mr. Chairman, Senator Lugar. 

I would like to also summarize my statement, and I’ll try to stick 

to my 7 minutes. 

I share Dr. Brzezinski’s geopolitical framework, so I’ll skip to my 

second part, and I will build on Professor Fuerth’s description of 

how policy evolved. 

There’s already a great basis that policy can be built on—in fact, 

is built on—it just needs to be elevated to a higher level. So, I 

think what we really need more than anything else is top-level engagement at the Presidential level so that the next phase of the 

Caspian-Central Asian-European energy corridor can be built. 

We’ve already seen what the Russian increased influence on European foreign policy through its use of energy is leading to divideand-conquer strategy, and how that was used at the NATO summit 

when Georgia and Ukraine were not offered MAP. 

Of course, the main difference from the 1990s, where there was 

great success, is that we have a much stronger and united Kremlin 

currently occupied by a man who used to be the head of Gazprom, 

the state gas monopoly, and the new Gazprom chairman is the 

former Prime Minister. Former President Putin has personally visited each of the relevant European and Eurasian countries, and 

met repeatedly with their top leaderships in order to lure them to 

join his energy projects. 

Clearly, it is not realistic to expect the U.S. President to micromanage these issues, but it is important to make clear our strong 

and bipartisan commitment to the Caspian-Europe energy corridor. 

There is already great work done at the deputy assistant secretary 

level, and now, thanks to Senator Lugar’s initiative, once again we 

have a special envoy for Eurasian energy. But, I think it’s also time 

for reinforcement of all the work that has gone into working with 

European allies, as well as Azerbaijan, Georgia and Central Asian 

allies, from the Secretary of State’s and the President’s level. I 

27 

agree with you, Senator Lugar, I think a visit, by the top leadership to the region would be important. But, I would add, in addition to the President and possibly Secretary of State, a Senate delegation, maybe chaired by you two, would go a long way. 

Now, what are some of the projects, and what is the vision that 

needs to be backed? I won’t talk too much about oil. I believe that 

was discussed earlier. Also because gas is much more geopolitically 

important when we talk about Russia’s influence. And here, the 

Nabucco Pipeline is critically important for Caspian gas reaching 

European markets without Russian control. This pipeline will start 

in Turkey and go through Bulgaria, Romania, and Hungary, terminating in Austria at that country’s Baumgarten gas storage and 

distribution hub. 

Russian leadership does not want Nabucco to break their monopoly, and it is systematically trying to undermine it. At first, the 

Kremlin wanted Gazprom to be included as partner in Nabucco so 

that Russian gas would be transported via this pipeline. Of course, 

it was rejected, since this move would have annulled the raison 

d’etre of these projects. 

Putin was eager for a second pipeline connection, to be built from 

Russia to Turkey, called Blue Stream II in order to reach the Turkish gas market first and keep Caspian gas out. Turkey did not 

want to undermine the Central Asian-European gas corridor and 

said no. When Russia could not derail Nabucco in Turkey, it simply 

moved to bypass this country and came up with a competing 

project, called South Stream Gas Project to send gas to Bulgaria directly and from there to Greece. South Stream targets the same 

markets and utilizes almost identical routes to Nabucco. In fact, 

three of the five countries along Nabucco’s route are also part of 

South Stream’s intended route. You can see the route on the map 

that I’ve distributed. 

Sequencing is key. If South Stream is built first, it will pull 

Turkmen and Azerbaijan gas to its direction and leaving little reason for Nabucco to be built for Caspian gas. From an economic perspective, it is utterly impossible to build a pipeline, over $10 billion—Nabucco—unless investors are confident that the market on 

the consumer side will be sufficiently large. 

The important difference between Nabucco and South Stream is 

ownership. Nabucco will be privately financed, and therefore, needs 

to be commercially viable; whereas, South Stream is backed by 

state-owned Gazprom, which is perfectly willing to finance projects 

that do not make commercial sense, so long as they support the 

strategic goals of Moscow. Unlike Western companies, Gazprom is 

also willing to use pipelines at minimum capacity. It loses money 

in the short term, but in the long term, thanks to having killed all 

competition, it will end up with a web of pipelines in its control. 

Gazprom may actually be unable to meet its supply contracts, according to the International Energy Agency, as soon as 2010. But, 

from Gazprom’s perspective, this surplus capacity it may have with 

all of its pipelines will have no negative effect. If all of Gazprom’s 

pipelines are constructed in the proposed timeframe, then Nabucco 

will most likely not be constructed, and Russia’s dominant market 

position will be enhanced; and so, European consumers will be left 

competing against each other for scarce Russian resources, driving 

28 

up prices and granting Russia ever-greater leverage. Energy prices 

would escalate and Moscow would be able to extract political concessions from consumer countries in exchange for greater gas supplies. 

If South Stream is constructed, Gazprom will actually enjoy this 

surplus of export capacity, and it could use this capacity to transit 

other gas. What Moscow might be anticipating is the formation of 

a cartel-type organization for natural gas, which will be led by Russia, and coordinate supply going to Europe. Reportedly, there is a 

plan in the works to create an international platform for members 

of such an organization to determine a common gas pricing formula 

and to discuss new gas pipeline routes and swap arrangements. 

They would then be able to divide up markets and gain monopoly 

control over prices. 

Now, a lot of it is about European energy security strategy, but 

we know that EU is not able to come together. Already in 2007, 

there is an EU special coordinator appointed for this position, but 

this person has not yet visited Azerbaijan or Turkmenistan. As of 

May, this person began serving as the mayor of The Hague and 

spends only minimum amount of time on this project. The EU cannot be taken seriously in its commitment to Nabucco, at least in 

obtaining Caspian gas for it, if they leave the coordination of this 

project to an occasional presence while the whole Kremlin machinery is working to undermine it. 

Russia and Russian influence groups argue that there’s not 

enough gas in Azerbaijan, Kazakhstan, or Turkmenistan to make 

Nabucco viable. This is the same argument used to sow doubt in 

the investors’ and countries’ commitments to BTC, the BakuTbilisi-Ceyhan pipeline. Then we also heard there was not enough 

oil in Azerbaijan, the pipeline was not commercial, it was merely 

an American political project. 

Of course, if there was, indeed, no large gas volumes in these 

countries, President Medvedev would not have chosen Kazakhstan 

as his first foreign visit and would not be courting his counterparts 

in Azerbaijan and Turkmenistan, which he plans to visit in early 

July. 

In addition to maintaining its monopoly over Kazakh and 

Turkmen gas exports, the Kremlin hopes also to begin exporting 

Azerbaijani gas via its network to Western markets. All three nations are able to provide more than enough gas for Nabucco and 

several other pipeline projects, provided action is taken now. Each 

of the three have shown that they want to send large volumes of 

gas and oil westward, but they are increasingly under Russian 

pressure. They’ve managed to resist, so far, but now they need to 

see political will from the West. And ultimately, if the U.S. would 

not risk the ire of Russia, how can they be expected to do so? 

Now, specifically on the countries, Azerbaijan, as I said, has 

more than enough to supply the first phase of Nabucco Project, but 

to do so, the project in the Shan Deniz field needs to be expedited, 

and that will only happen if the political risk is mitigated, which, 

again, requires U.S. leadership. 

Turkmenistan is believed to possess some of the largest gas fields 

in the world. As far back as the 1990s, Turkmenistan committed 

30 bcm of gas westward. This gas will go first to Turkey and then 

29 

to Europe. Current estimates indicate that there is a lot more gas 

available in Turkmenistan, but unless we move now, Russian and 

Chinese companies will continue to increase their stakes and send 

their gas in their direction. Gazprom has already been able to 

reach some long-term and large-volume contracts. This is the time 

to pull the Turkmen close. 

I think it’s also very important to send a clear signal to the 

Turkmen that, regardless of who the next President is, the U.S. 

will remain committed to large quantities of gas reaching European 

markets via the proposed corridor. This means no longer sending 

confusing messages, such as being content with Turkmen gas going 

to China. 

Azerbaijan and Turkmenistan, as we heard from Dr. Brzezinski, 

have had frozen relations for many years, but they have now improved their relations, because they understand the importance of 

the partnership. But, despite the good will, there will be issues that 

will prove difficult for them to resolve on their own, and we need, 

again, U.S. involvement. 

Then, Kazakhstan, of course, has significant gas that can be exported, but I don’t think that country will be able to do so unless 

there is sufficient progress with the other two. 

The United States needs to work closely with Turkey as well, 

which has been very critical country for the European-Caspian Corridor vision. Ankara has not seen a clear and determined U.S. commitment to Nabucco. This has resulted in unnecessary stalling in 

reaching the necessary agreements. What is needed at this point 

is the reestablishment of a consultative mechanism between the 

diplomats on both sides. The Turkish Foreign Ministry views pipeline projects from a strategic perspective, which is precisely what 

is needed, and which is why United States-Caspian envoys have 

been based at the State Department. Such a mechanism needs to 

be formed and begin working immediately, but that alone will not 

be sufficient. Turkey needs to remain committed to the southerncorridor vision. Instead, if it thinks of itself as just a transit country for gas reaching Europe, then there is no reason for it to say 

no to Russian or Iranian gas transiting its territory, especially 

given that many European countries are proposing this. 

It’s also important to recognize Turkey’s fast-growing energy demand and the difficulty for its leadership to continue to say no to 

alternative gas from Iran and Russia. As I said, by rejecting Blue 

Stream II, so far it has only been bypassed and hasn’t increased 

its gas. There is a way for the U.S. to help those in Ankara to 

share the same vision for Nabucco and the gas race. It is also necessary to hold a trilateral working group with Turkey, United 

States, and Iraq, to ensure Iraqi gas production and commitment 

to this pipeline, as well. 

Iraqi gas is important to maintain and build increased momentum for Nabucco. Fully recognizing Iraqi gas’s importance, 

Gazprom has also recently intensified its actions to sign a deal of 

its own. 

Finally, it is important to hold a strategic discussion with European allies on the long-term implications on Russian gas politics. 

But, in the short term, it’s important to impress upon key EuroVerDate Aug 31 2005 14:58 Jan 05, 2009 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 H:\DOCS\46049.TXT MikeBB PsN: MIKEB
30 

1 Both Senator Barack Obama and Senator John McCain have expressed strong support for 

extending MAP to Georgia and Ukraine. 2Germany already imports 40 percent of its gas from Russia, more than any other West European country; by 2020 this figure is expected to reach over 60 percent 

pean allies that the Caspian, indeed, is a realistic option, provided 

that they do not lose focus. 

Thank you. 

[The prepared statement of Ms. Baran follows:] 

PREPARED STATEMENT OF ZEYNO BARAN, SENIOR FELLOW AND DIRECTOR, CENTER

FOR EURASIAN POLICY, HUDSON INSTITUTE, WASHINGTON, DC 

Mr. Chairman, Senator Lugar, and distinguished members of the committee, 

thank you for the opportunity to appear before you today. As diversification away 

from Russian and Russian-controlled energy transportation across Europe and Eurasia is critically important for America’s national security interests, I am honored 

to be able to share my views with you on this critical topic. 

Top-level U.S. engagement is essential for the establishment of the Central AsiaEurope Energy Corridor. At risk is the future of the vast space Russia considers as 

its backyard: The Eurasian, Black Sea, and Baltic Sea regions. European Union solidarity and transatlantic unity are also in danger. 

RUSSIAN CHALLENGE TO THE ALLIANCE

The most recent example of Russia’s increasing influence on European foreign policy and its ‘‘divide and conquer’’ strategy was NATO members’ inability to reach a 

consensus on offering a Membership Action Plan (MAP) to Georgia and Ukraine. 

Most from Northern, Eastern, and Central Europe agreed with the American position that the two countries should receive MAP, whereas many West Europeans 

sided with Germany, which opposed MAP extension largely due to their desire not 

to anger Russia. In the end, a non-NATO member Russia was able to de facto veto 

the American proposal—the first time this has happened in NATO’s history.1

While Georgia and Ukraine have been promised ‘‘eventual’’ NATO membership, 

an emboldened Moscow has since intensified its efforts to undermine Georgia’s territorial integrity by its aggressive actions in separatist Abkhazia. The Russian Government has also begun to challenge Ukraine’s integrity by claiming sovereignty 

over Crimea. 

The split within NATO on issues related to Georgia and Ukraine mirrors the rift 

that has formed on the issue of Europe’s energy diversification. The European countries that have long-term energy partnerships with Russia are often reluctant to 

take foreign policy stances that may irritate Moscow. It is up to the United States 

to support strongly the diversification of Europe’s energy supply away from Russia. 

America’s European allies need to take strategic foreign policy decisions without 

fear of a potential Russian backlash.2

We know that the Russian leadership wants to establish their country as an 

illiberal ‘‘sovereign democracy.’’ Moscow enjoys playing by different rules than the 

West, particularly the United States. Former President and current Prime Minister 

Vladimir Putin clearly stated this vision for Russia during his speech in Munich in 

February 2007. European and American failure to acknowledge the Kremlin’s use 

of energy as its primary tool in achieving this vision has resulted in ineffective policies, which, above all, damage Russia’s chances to evolve in a liberal direction. 

Since Russia cut off gas supplies to Ukraine on January 1, 2006—the same day 

it took over the presidency of the Group of Eight (G–8)—there has been increased 

awareness in Europe of their dependence on Russian gas supplies. There is talk 

about formulating a united external energy policy within the European Union to diversify supply sources and routes, but the 27 countries have been unable to reach 

consensus because of conflicting priorities. 

The EU has so far failed to come together as a single voice partly because the 

issue has not been framed correctly. The unity they need is in negotiations with 

Russia, and specifically its giant gas monopoly Gazprom, which serves as the Kremlin’s leading foreign policy arm. There is simply no other country that poses the 

same political and economic challenge to the EU. 

WANTED: U.S. STRATEGIC ENGAGEMENT

European energy security and supply diversification as a concept is important, but 

this is not an area where direct U.S. involvement is necessary or appropriate. U.S. 

31 

3President Bill Clinton created this position in 1998, and appointed Richard Morningstar as 

‘‘Special Advisor to the U.S. President and Secretary of State for Caspian Energy and Diplomacy.’’ Following the signing of key agreements for the BTC and BTE pipeline projects, this 

position gradually was abolished and key responsibilities transferred to the European and Eurasian Bureau at the State Department. Morningstar served as U.S. Ambassador to the EU following his assignment; newly appointed Special Envoy Boyden Gray is currently serving in this 

position concurrently with his role as U.S. Ambassador to the EU. 

leadership is needed, however, to enable Caspian producers (mainly Azerbaijan, 

Kazakhstan, and Turkmenistan) non-Russian controlled export options to Western 

markets. Europe’s independent access to Caspian hydrocarbons would prevent further Russian control over their energy infrastructure, and thereby their foreign 

policy. 

There is an excellent precedent: The Baku-Tbilisi-Ceyhan (BTC) and Baku-TbilisiErzurum (BTE) pipeline projects. Even though the governments of Azerbaijan, Georgia, and Turkey backed these projects, it was the United States Government’s unequivocal support that allowed these countries to proceed without fear of Russian 

repercussions. Similarly, American leadership gave companies the confidence to invest in a major project like BTC or BTE that might have faltered in light of strong 

opposition from Moscow. In fact, even though the consortia for the BTC and BTE 

pipelines consisted mostly of European companies, European governments relied on 

U.S. diplomacy to shield their companies from Russia. 

Thanks to these two pipeline projects, Azerbaijan and Georgia are now free to develop their future policy without undue foreign pressure. Extending the energy corridor further east to Turkmenistan, Kazakhstan, and Uzbekistan would provide 

these Central Asian countries with such freedom as well. Surrounded by Russia, 

China, and Iran, all three have made clear their desire for a direct Western outlet 

in order to maximize their negotiation power and also to solidify their independence 

from Russian influence. As long as almost all their revenues come from Russia, they 

cannot feel completely independent. 

Unlike in the 1990s, we have a strong and united Kremlin, currently occupied by 

a man who used to be the head of Gazprom. In some ways the switch from Gazprom 

to the Kremlin was not a major change for Medvedev because the policies of 

Gazprom and the Russian Government have been inexorably intertwined. Gazprom 

is the state’s largest source of revenue and the engine that has driven Russia’s economic recovery. The company is primarily state-owned and many of Gazprom’s corporate leadership currently hold—or previously held—high-ranking positions in the 

Russian Government. In addition to the President himself, there is his assistant 

Konstantin Chuychenko, executive director of RosUkrEnergo and head of Gazprom’s 

legal department; and the new Gazprom chairman, former Prime Minister Viktor 

Zubkov. 

Putin has personally visited each of the relevant European and Eurasian countries, and met repeatedly with their top leaderships in order to allure them to join 

his energy projects. The most notable of these gas projects is the Nord Stream gas 

pipeline that will connect Russia and Germany. This politically divisive project is 

headed by Gerhard Schro ̈der, who extended $1.2 billion credit guarantee to this 

pipeline just prior to stepping down as German Chancellor. 

Clearly, it is not realistic to expect the U.S. President to micromanage these 

issues. Yet, it is important to make clear our strong and bipartisan commitment to 

the Caspian-Europe energy corridor. There is already great work done at the deputy 

assistant secretary level, and now, thanks to Senator Lugar’s initiative, there is 

once again a Special Envoy for Eurasian Energy.3 Now is the time for reinforcement 

from the Secretary of State and the President. 

BRINGING NON-OPEC CASPIAN OIL TO WESTERN MARKETS

On oil, there is the BTC, as well as the Baku-Supsa pipeline ending in Georgia’s 

Black Sea coast to transport Caspian (mainly Azerbaijani) oil to Western markets 

via non-Russian controlled routes. Baku-Novorossiysk and CPC pipelines also bring 

Caspian oil westward, but with Russian involvement. Russia has used its shareholder position in CPC to delay the expansion of this pipeline bringing Kazakh oil 

to the Black Sea, thereby hindering production. 

Moreover, Moscow has conditioned the expansion to the commitment of necessary 

volumes of oil for its planned Burgas-Alexandroupolis (B–A) oil pipeline. The B–A 

pipeline will transport oil from the Black Sea via Bulgaria and Greece. In principle, 

the U.S. should be supportive of such a pipeline, but Russia has 51-percent ownership. This may not be the best route for Kazakhstan or for private companies who 

may not want to submit to further control by the Russian Government. The U.S. 

32 

should inquire further about the ownership and structure of this pipeline, which 

would be the first Russian-managed oil pipeline in the EU. 

Diversification from Russian control in the Western direction is a key reason for 

Kazakhstan to commit its oil to BTC. The Kazakh-Azeri connection is critically important to enlarge the East-West energy corridor and to reliably bring significant 

amount of new, non-OPEC oil to world markets. 

Additional Kazakh oil will go westward to Georgian Black Sea ports (Kulevi and 

Supsa). Some will reach markets via tankers crossing the Turkish Straits and some 

via straits bypass routes. A portion of that oil, along with Azerbaijani oil, should 

be sent to European markets via the existing oil pipeline starting in Ukraine’s Black 

Sea port, Odesa, and continuing onward to Brody. Odesa-Brody was actually built 

for that purpose but failed to secure supply commitments from oil producers. As 

such, it has been operating in reverse direction ever since, transporting Russian 

crude from Brody to Odesa. In May, at the Kyiv conference, Azerbaijan, Georgia, 

Ukraine, Poland, and Lithuania not only reached consensus to switching OdesaBrody back to its intended direction, but also to support extending the pipeline to 

the Polish city of Plock. From there, it would connect to the existing Polish network, 

enabling oil to continue to the Baltic Sea oil terminal of Gdan ́ sk. 

The U.S. needs to ensure that Azerbaijan, Kazakhstan, and private oil companies 

would not once again be subverted as this project would connect Ukraine to the 

East-West corridor and strengthen its pro-Western orientation. Now that Ukraine 

has been officially promised NATO membership, it should be firmly anchored in the 

broad Caspian-Europe energy corridor. 

GEOPOLITICS OF GAS: NABUCCO VS. SOUTH STREAM

On gas, the challenge is bigger due to the nature of natural gas as a tradable commodity—there is no global market, and the construction of costly pipelines effectively locks consumers into a prolonged contract with producers. This means that 

Moscow can more easily manipulate dependence into political and economic leverage. Natural gas is vital to the economies of many European nations—and the fuel’s 

primacy is growing. The prospect of being forced to pay a higher price for that gas, 

or even having the supply of that gas curtailed, can exert a powerful influence on 

a country’s domestic and foreign policies. 

Thanks to U.S. support for Caspian-Europe direct gas connection, BTE has 

already been built, and its extension to Greece began operation in November 2007. 

The Turkey-Greece pipeline has enabled gas from Azerbaijan to flow all the way to 

the EU free from Russian control. Construction will soon begin on an extension of 

the Turkey-Greece connection to Italy, named the TGI pipeline. 

Meanwhile, the Nabucco pipeline has become a litmus test for the ability of the 

EU and the U.S. to complete a project that is a stated priority. Nabucco (named 

after Giuseppe Verdi’s opera) is intended to have a capacity of 31 billion cubic meters that will enter Europe through Turkey. The pipeline will traverse Bulgaria, Romania, and Hungary, terminating in Austria at that country’s Baumgarten gas storage and distribution hub. It was originally introduced by Austria to bring mostly 

Iranian gas to European markets; now it is backed by the U.S. to transport Caspian 

and Iraqi gas to European markets. I will briefly discuss Iraqi gas later. Iranian 

gas for Nabucco is still occasionally discussed, especially by Austria, but until relations with Iran settle down, it is all but pointless to even discuss this option. 

After recognizing that Nabucco and TGI would break their monopoly of transporting Caspian gas to Europe, the Russian leadership took several steps to undermine them. At first, the Kremlin wanted Gazprom to be included as a partner to 

have Russian gas transported via these pipelines. However, it faced opposition since 

the move would have annulled the raison d’eˆtre of these projects. Putin was also 

eager for a second gas pipeline connection to be built from Russia to Turkey, called 

Blue Stream II, in order to reach the Turkish market first and keep Caspian gas 

out. 

In other words, there was a race for the Turkish market. Having learned from 

its experience with Blue Stream I, which I will explain shortly, Turkey did not want 

to—once again—undermine the Central Asia-Europe gas vision by reaching another 

major agreement with Russia. Turkey thus made clear its continued commitment 

to the work with the U.S., EU, and its Central Asian partners. 

When it became clear that Nabucco could not be derailed in Turkey, Russia moved 

to bypass it by piping into Bulgaria directly, and from there Greece. So, in June 

2007, Gazprom came up with a massive subsea pipeline project, the South Stream 

pipeline. Although the details of this venture are yet to be solidified, it is clear that 

South Stream, with a planned capacity of 30 bcm, will be one of the world’s largest 

33 

4The pipeline consortium is equally owned (16.67 percent each) by Austria’s OMV, Hungary’s 

MOL, Turkey’s Botas, Bulgaria’s Bulgargaz and Romania’s Transgaz and Germany’s RWE. 

and most expensive pipelines ever built. Estimates of cost vary, but most analysts 

predict it would cost twice as much as Nabucco. 

The signing of the South Stream pipeline project took place in Moscow between 

Greek Prime Minister Kostas Karamanlis and outgoing Russian President Vladimir 

Putin on April 29. Former Italian Prime Minister Romano Prodi was offered the 

chairmanship of the project by Gazprom CEO Alexei Miller and Eni head Paolo 

Scaroni, mirroring former German chancellor Gerhard Schro ̈der’s appointment to direct Gazprom’s Nord Stream pipeline. Prodi was previously head of the European 

Commission, and his support would be essential for the pipeline’s success, given 

that there is growing unease in Brussels and Washington about Gazprom’s expansion into Europe. So far, he has declined to take the position. 

South Stream targets the same markets and utilizes almost identical routes to 

Nabucco. In fact, three of the five countries along Nabucco’s route are also part of 

South Stream’s intended route. The pipeline would cross the Black Sea to Varna, 

Bulgaria. From there, South Stream will split into two smaller spurs: One heading 

West through Greece, beneath the Ionian Sea and into southern Italy; and the 

second heading north through Serbia and Hungary, terminating at Austria’s 

Baumgarten storage facility. There may also be additional lines constructed to 

northern Italy via Austria and/or Slovenia. 

Baumgarten is critically important in Russian strategy as it will make Austria its 

partner in serving as the clearinghouse for gas coming to Europe. Austria is involved in both Nabucco and South Stream, and both pipelines will bring gas to 

Baumgarten. In January, Austria’s partially state-owned energy company OMV 

signed a deal giving Gazprom 50 percent ownership in Baumgarten. As we know 

by now from other such partnerships Gazprom has formed over the years, the 50 

percent would not mean equal partnership—Gazprom, and thus the Russian state, 

would in reality have a much bigger say. Furthermore, Gazprom just last week announced that an intergovernmental agreement will soon be signed to appoint OMV 

as South Stream coordinator for Austria. The growing OMV-Gazprom partnership 

is important, especially in light of OMV’s desire to take over Hungarian MOL, 

which is the only privately owned company in the Nabucco consortium.4

Gazprom is making sure it has maximum flexibility in extracting the best deal 

for itself by having several options to get to its key markets. For example, even with 

strong Austrian partnership, Gazprom will likely construct a South Stream spur to 

Slovenia, and thus negate the possibility of Austrian leverage over the gas route. 

If problems were to emerge in Austrian-Russian relations, Gazprom could then reroute exports to northern Italy via Slovenia. 

No Western company has the kind of partnership with its state as Gazprom has 

with the Kremlin. No Western country or company would build pipelines with such 

political calculations. None would undertake commercially unviable projects. We are 

dealing with a situation where normal competitive market principles simply do not 

work. It is imperative the Europeans recognize it and start taking steps accordingly; 

we are invariably dealing with a state-sponsored organization that has turned gas 

pipelines into a geopolitical tool. 

RACE IS ON: SEQUENCING MATTERS

For Russia, the main purpose of the South Stream gas pipeline project is to prevent Nabucco and TGI lines from transporting Caspian gas independent from Russian control to European markets. How? Via two interdependent moves: First, by 

locking up the markets and keeping out potential competition—which, as I explained earlier, is not capable of competing when Gazprom sets the rules. And second, by assuring long-term and large-volume gas commitment from Turkmenistan, 

as well as Azerbaijan and Kazakhstan to its pipelines, thereby preventing direct 

Caspian-Europe connection. 

Therefore, sequencing is vital. The fortunes of the two pipelines are inversely related; if South Stream is built first, it will pull Turkmen and Azerbaijani gas to its 

direction, leaving little reason for Nabucco to be built for Caspian gas. 

From an economic perspective, it is utterly impossible to build a pipeline such as 

Nabucco—which will cost upward of $12.3 billion—unless investors are confident 

that the market on the consumer side will be sufficiently large. The important difference between Nabucco and South Stream is in ownership; Nabucco will be privately financed and therefore needs to be commercially viable, whereas South 

Stream is backed by state-owned Gazprom, which is perfectly willing to finance 

projects that do not make commercial sense so long as they support the strategic 

34 

5 However, supply cutoffs have been employed by Russia against smaller Eastern European 

countries like Latvia (2003) and Lithuania (2006). 

goals of Moscow. Unlike Western companies, Gazprom is also willing to use pipelines at minimum capacity—it loses money in the short term, but in the long term, 

thanks to having killed all competition, it will end up with a web of pipelines in 

its control. I will discuss potential implications of this shortly. 

Nabucco faces a number of financing hurdles even without South Stream’s competition. Investors are uncertain of Azerbaijan’s ability to supply Nabucco and even 

more uncertain that a trans-Caspian pipeline will be constructed to bring in the 

Turkmen gas that many view as necessary for Nabucco to succeed. Still, the largest 

obstacle for Nabucco is South Stream; the potential of South Stream filling a portion 

of Europe’s expected short- to mid-term demand will likely be enough to scare investors away from Nabucco. 

So it is interesting that all the countries potentially joining South Stream speak 

with one voice, insisting that that Nabucco and the Russian pipeline are ‘‘complimentary not contradictory.’’ This brings to mind the gas race to the Turkish 

market in the late 1990s. 

Turkey, Turkmenistan, and the United States were eager to construct a transCaspian pipeline that would carry gas from Central Asia via the Caucasus to Turkey. Russia did not want to see its monopoly in Central Asia eroded by the construction of additional export routes and proposed a pipeline from Novorossiysk beneath 

the Black Sea to Turkey. Supporters of the Russian pipeline, which is now called 

Blue Stream, insisted that current and future Turkish gas demand was large 

enough to support both projects; that the two lines were, in fact, ‘‘complimentary.’’ 

Those who thought otherwise were reluctant to challenge Russia and went along— 

mainly because they did not think it would actually be built. They referred to this 

project as ‘‘Blue Dream’’ because of its lack of market viability and the use of neverbefore-used technology to construct a pipeline deep underwater. These assertions 

were quickly proven false. As soon as Ankara signed an agreement to build Blue 

Stream, interest in the trans-Caspian project dried up. Blue Stream not only prevented Turkey from having direct access to Turkmen gas, but increased its dependence on Russian gas to over two-thirds of its demand. Since its beginning, Blue 

Stream has operated at less than half of its 16 bcm capacity and provided the most 

expensive gas to Turkish consumers. Blue Stream is the product of the GazpromEni strategic partnership that is now promoting South Stream. 

OTHER RISKS OF SOUTH STREAM

Gazprom may not have enough gas to fill Nord Stream, South Stream, and its 

two preexisting pipeline networks through Ukraine and Belarus. The International 

Energy Agency has already warned that Gazprom may be unable to meet its supply 

contracts by 2010. Yet from Gazprom’s perspective, this surplus capacity will have 

no negative effects. If both Nord Stream and South Stream are constructed in the 

proposed timeframe, Nabucco will likely disappear. Russia’s dominant market position will be enhanced. Thus, European consumers will be left competing against 

each other for scarce Russian resources, driving up prices and granting Russia evergreater leverage. Energy prices would escalate and Moscow would be able to extract 

political concessions from consumer countries in exchange for greater gas supplies. 

This leverage is typically not exercised through dramatic supply cutoffs, but instead 

through subtle and protracted pressure.5

If South Stream (and its sister Nord Stream) is constructed, Gazprom will actually enjoy a surplus of export capacity while Europe will face a deficit of supply options. This is potentially very troubling. Having a strong monopoly on transit routes 

into Europe, even if underutilized, still gives Russia significant influence vis-a-vis 

its ability to grant other producers access to these routes. Moscow may be anticipating the formation of a cartel-type organization for natural gas—with Russia assuming the leadership role—that will coordinate European supply. Reportedly, there 

is a plan in the works to create an international platform for members to determine 

a common gas pricing formula and to discuss new gas pipeline routes and swap arrangements. They would then be able to divide up markets and gain monopoly control over prices. 

South Stream also poses a very real threat to Ukraine, as it would give Moscow 

the option to decouple the country from its gas supply exports to the EU. This would 

leave Ukraine exceedingly vulnerable to Russian political pressure. Ukraine’s position as the transit route for around 80 percent of Russia’s gas exports to Europe 

currently gives it a degree of leverage over Moscow. Were these supplies rerouted 

via South Stream, Ukraine would lose this leverage. It is no secret that Moscow 

35 

does not want to see Ukraine align itself with the West, and has strongly opposed 

the country’s efforts to do so. Ukraine is in a precarious position between East and 

West. There are many in its government that wish to abandon Ukraine’s current 

political orientation and turn toward Russia—and to its corresponding political and 

social values. Whether or not Ukraine continues its progress toward Western values 

has much to do with its energy security, with South Stream as the cornerstone of 

the issue. 

WHAT SHOULD THE U.S. DO?

The most important next step is to make credible, unequivocal, and bipartisan 

commitment to the Caspian-Europe energy corridor. First, the President needs to 

reinforce this vision by traveling to the region, namely Azerbaijan, Kazakhstan, and 

Turkmenistan. Second, the Secretary of State needs to be directly engaged. Third, 

a bipartisan congressional delegation needs to show its commitment as well. A Senate delegation led by Senator Lugar, who is highly regarded in the Caspian region, 

would have the best chance to make a positive impact. 

If the U.S. wants non-Russian pipelines such as Nabucco and TGI to become pipelines for Caspian gas transport to Europe, then Washington needs to provide political support to encourage exploration and development. It is important to recognize 

that U.S. vision for these two pipelines, especially Nabucco, is not the same as that 

of Brussels—hence the lack of political backing from the EU. In September 2007 the 

European Commission appointed former Dutch Foreign Minister Jozias Van Aartsen 

as ‘‘EU Coordinator for the Caspian Sea-Middle East-European Union Gas Route,’’ 

including Nabucco, which it considers a ‘‘priority project.’’ Yet Van Aartsen has not 

yet visited Azerbaijan or Turkmenistan. As of May, he began serving as mayor of 

The Hague and spends only minimal time on this project. The EU cannot be taken 

seriously in its commitment to Nabucco (at least not in obtaining Caspian gas for 

it) if they leave the coordination of this project to an occasional presence because 

the whole Kremlin machinery is working to undermine it. 

Now is not the time for hesitation but for immediate action. Russia and Russianinfluenced groups argue there is not enough gas in Azerbaijan, Kazakhstan, or 

Turkmenistan to make Nabucco viable. This is the same argument used to sow 

doubt in the investors’ and countries’ commitment to BTC: There was not enough 

oil in Azerbaijan, it was not commercial, and it was merely an American political 

project. 

Of course, if there were indeed no large gas volumes in these countries, Medvedev 

would not have chosen Kazakhstan as his first foreign visit and would not be courting his counterparts in Azerbaijan and Turkmenistan, which he plans to visit in 

early July. In addition to maintaining its monopoly over Kazakh and Turkmen gas 

export, he hopes to also begin exporting Azeri gas as well. 

All three nations are able to provide more than enough gas for Nabucco and several other projects—provided action is taken now. Each nation has shown they want 

to send large volumes of energy resources westward, but they are increasingly under 

Russian pressure. They managed to resist thus far, but now they need to see political will from the West. If the U.S. would not risk the ire of Russia, how can they 

be expected to do so? 

Azerbaijan has already shown its strategic vision by promising gas to Nabucco. 

In November 2007, the Azerbaijani Government and the Western producers operating in its Shah Deniz offshore gas fields announced that there were significantly 

more reserves than initially thought—more than enough to supply the first phase 

of the Nabucco project. More recently, at the Caspian Oil and Gas—2008 [conference] in early June, Azerbaijan’s Minister of Industry and Energy Natiq Aliyev 

announced that the reserves exceed 1.2 trillion cubic meters, and production could 

soon reach 30 bcm. Some of this gas will be consumed in Azerbaijan, Georgia, and 

Turkey; about 15 bcm could be sent to EU markets. For that, the stage-2 of the 

Shah Deniz field development needs to be expedited. And that will only take place 

if the political risk is mitigated—which only U.S. action can do. There are other very 

promising fields in Azerbaijan, development of which will also depend on the success 

with Nabucco development and the pace of reduction of transportation risks to EU 

markets. 

Turkmenistan is believed to possess some of the largest gas fields in the world. 

In 1999 it committed 30 bcm gas westward—16 bcm for Turkey and 14 for Europe. 

Now that current estimates range from 22 to 30 trillion cubic metres, that amount 

can easily be increased. In fact, gas from Turkmenistan will flow West directly only 

if the amount is large enough—otherwise Western producers may not invest the billions necessary. Instead, Russian and Chinese companies will continue to increase 

their stakes and send gas their way. 

36 

It has been U.S. policy since late 1990s not to engage Turkmenistan until its 

human rights record improves. For many years the mantra was to wait out the authoritarian President Saparmurat Niyazov and then start working on the gas 

project. During this time, Niyazov wanted to move away from the grip of the Kremlin (and its foreign policy instrument Gazprom), but was unable to do so given the 

West’s reluctance to work with him. Yet he was nonetheless able to take advantage 

of Vice President Dick Cheney’s trip to Kazakhstan in May 2006, during which Cheney advocated a trans-Caspian gas pipeline which would allow the two countries to 

receive a much higher price for their gas compared to what Gazprom was paying 

them. Armed with the prospect of diversification, Niyazov was able to negotiate on 

more favorable terms, and agreed only to a 3-year deal, rather than a much longer 

term commitment that would harm the prospects of a trans-Caspian gas pipeline. 

After Niyazov died in December 2006, U.S. policy shifted to wait and see if the 

new President would be more democratic. This policy not only cost the U.S. valuable 

time and access to gas fields as the Russians moved in, but is also totally inconsistent with how Washington works with other countries with less than stellar 

democratic credentials on issues of mutual interest, such as Russia, Saudi Arabia, 

and China. Moreover, not engaging actually made democratic evolution less possible 

as increased engagement with Russia and China has provided Turkmenistan (and 

other Central Asian countries) with an alternative model: Economic liberality coupled with political repression. 

Once gas deals are reached and infrastructure is established, it is difficult to 

change course. Gazprom has already reached some long-term and large-volume 

deals. This is time to pull the Turkmen closer—just as the Russians and Chinese 

are doing. Washington needs to send a clear message that the U.S.—regardless of 

who is the next President—is committed to large quantities of gas reaching European markets via the proposed corridor. That means no longer sending confusing 

messages, such as being content with Turkmen gas going to China. 

Azerbaijan and Turkmenistan had frozen relations for many years; now the two 

Presidents recognize the importance of their partnership in realizing the EuropeCaspian vision. Despite the goodwill, there are issues that will prove difficult for 

them to resolve on their own; the U.S. needs to be willing and able to serve as an 

honest broker and offer assistance if and when needed. Kazakhstan also has significant gas that can be exported, but it will not be able to do so unless there is sufficient progress with the other two. 

In addition to these three nations, the U.S. also needs to work closer with Turkey, 

which is critically important for the Europe-Caspian corridor vision. There was excellent cooperation in the realization of the BTC and BTE pipelines, the first phase 

of this corridor. In fact, the two sides could have used each other’s talking points. 

Relations suffered due to the Iraq war, but are once again on an upswing. Turkish 

Foreign Minister Ali Babacan was in Washington last week, and energy was an important item on the agenda. Yet Ankara has not seen a clear and determined U.S. 

commitment to Nabucco; this has resulted in unnecessary stalling in reaching the 

necessary agreements. What is needed at this point is the reestablishment of a consultative mechanism between diplomats on both sides. The Turkish Foreign Ministry views pipeline projects from a strategic perspective, which is precisely what is 

needed—and which is why U.S. Caspian envoys have been based at the State 

Department. 

Such a mechanism needs to be formed and begin working immediately. But that 

alone is not sufficient. Turkey needs to remain committed to the Southern corridor 

vision; if it instead thinks of itself just as a transit country for gas to Europe, then 

there is no reason for it to say no to Russian or Iranian gas transiting its territory 

either—especially since many EU countries propose this. 

The U.S. needs to recognize Turkey’s fast-growing energy demand and the difficulty for its leadership to say no to Iranian gas or to Blue Stream II. Rejecting 

Blue Stream II so far has only led to it being bypassed. The best way for the U.S. 

to help those in Ankara who share the same vision for Nabucco and the gas race 

is to hold a trilateral working group of the U.S., Turkey, and Iraq to ensure timely 

Iraqi gas production and commitment to this pipeline as well as to Turkey’s domestic market. 

Iraqi gas is important to maintain and build increased momentum for Nabucco. 

The first phase of Nabucco is designed to run from Ankara to Baumgarten. The first 

phase is expected to become operational in 2013, with an initial capacity of up to 

8 bcm a year. The second phase would be completed a year later to increase capacity 

to 31 bcm. Turkmen gas will be ready for the second phase; investors will want to 

see not only an Azerbaijani commitment but also an Iraqi commitment in order to 

be confident that supply will be there when the pipeline is ready. In April, the EU 

announced that starting 2009 it would begin receiving Iraqi gas—mainly from the 

37 

Akkas field in the Anbar province. Fully recognizing the importance of this gas, 

Gazprom has recently intensified its actions to sign a deal of its own. 

United States-Turkey-Iraqi cooperation on gas is also critically important for 

broader regional stability and cooperation. The EU has suggested that Akkas gas 

could reach Turkey via the Arab Gas Pipeline through Syria. But Turkey wants a 

direct route, and believes keeping Syria out of this project would also be in line with 

U.S. policy. It is not clear what U.S. policy is on Syrian transit; it would be important to clarify this in order not to send confusing signals to Ankara. 

Another important country for the corridor is Ukraine. Its future is closely linked 

to integration with European markets for both oil and gas. The answer to corruption 

in Ukraine energy sector is not to leave them out but to use mechanisms to bring 

it under manageable control: Transit pipe can be separated; borders can be metered; 

full transparency can be achieved—even when an American company is involved. 

One project that is gaining increasing momentum, and would benefit from U.S. 

support, is White Stream. White Stream would bring Caspian gas to Georgian Black 

Sea coast. From there, gas would flow via a pipeline with an initial yearly capacity 

of 8 bcm along the seabed to Romania (either though Ukraine or directly) where it 

would then connect with existing infrastructure. It may also connect with the 

Ukrainian transit system leading to Poland and Slovakia. Alternatively, gas could 

be liquefied and transported via LNG tanker across the Black Sea. Further studies 

are required to determine which method—pipeline or LNG—is more feasible. The 

U.S. Trade and Development Agency (TDA) has already commissioned a study to 

assess the commercial viability of this option, while European Commission is cofunding the feasibility study of deep water pipeline version of White Stream through 

Trans European Network scheme. 

White Stream is useful not only because it represents a means for Europe to diversify its energy supply, but also by encouraging further upstream investment in 

the Caspian. As the Caspian region with its vast recourses should become an important source of diversification for Europe’s increasing supply needs (much in excess 

Nabucco can handle), establishment of another transportation route in the same corridor with Nabucco would contribute significantly toward needed reduction of the 

transportation risks. And this in turn would encourage large scale exploration production investments in Caspian gas, thereby stimulating progress on Nabucco and 

the trans-Caspian gas pipeline. 

Finally, Washington needs to hold a strategic discussion with the EU on the longterm implications on Russian gas politics. But in the short term, it needs to impress 

upon key European allies that the Caspian indeed is a realistic option—provided 

that they do not lose focus. 

The CHAIRMAN. Thank you very much. 

Mr. Kupchinsky. 

STATEMENT OF ROMAN KUPCHINSKY, PARTNER, AZEAST 

GROUP, MAHWAH, NJ 

Mr. KUPCHINSKY. Mr. Chairman, today I’d like to address the 

question of criminality and the lack of transparency in the Russian 

energy sector. 

As a former editor of Radio Free Europe’s publication, ‘‘Organized Crime and Corruption,’’ I came across numerous opaque 

schemes in the Russian energy business, schemes which lowered 

Russia’s business reputation to the point where many Western 

companies are now loathe to trust the Russian partners, and deal 

with them only out of necessity. 

A great deal of evidence suggests that Russian organized crime 

has been involved in the Russian energy business with the full 

knowledge and quiet approval of the Russian leadership, both past 

and present. Gazprom, though Russia’s state-owned gas monopoly, 

has—with the active support of the Kremlin, has set up 50 or so 

middlemen companies located throughout Europe. Among them are 

the Centrex group of companies, the Gazprom Germania network, 

none of which—none of these companies add any value to the price 

of Russian gas being sold on European markets, yet they earn 

38 

enormous amounts of money, money which seems to disappear, 

simply vanish through shell companies in Cyprus and in 

Lichtenstein. 

Last year, the CEO of Germany’s largest gas company, E.ON 

Ruhrgas, Burghard Bergmann, was the only Westerner on the 

board of Gazprom, told the chairman of the board, told—who is 

now president—Dmitry Medvedev, that Gazprom Germania and a 

Swiss-based middleman, RosUkrEnergo, should be disbanded, that 

they served no purpose, as far as he can see. Bergmann also wrote, 

complained that Russian state-backed gas schemes of Hungary 

were opaque and tarnished Russia’s reputation. The Gazprom 

board ignored all his requests. Part of the reason for that being 

that Russia does not have a Foreign Corrupt Practices Act. The 

Kremlin and Russian law enforcement agencies tend to close their 

eyes on how Russian energy companies—be it the private company 

Lukoil or the state-owned oil company Rosneft, or Gazprom—how 

they conduct business both inside and outside of Russia. 

One gas trading company, a new company, called RosUkrEnergo, 

based in Switzerland, is 50 percent owned by Gazprom and 50 percent by two Ukrainian—private Ukrainian businessmen who hid 

their identities for years and who are alleged to be linked to Russian organized crime. This is a classic study of how the Kremlin 

and Gazprom could conspire to protect what many believe to be a 

criminal enterprise. 

Russian President—former Russian President Vladimir Putin, 

was directly involved in creating this company, along with former 

Ukrainian President Leonid Kuchma, in July 2004. And Putin has 

publicly defended this company on a number of occasions by saying, ‘‘Believe me, we don’t know the identities of the Ukrainian 

owners of RosUkrEnergo.’’ Now, President Putin’s statement raises 

an important question. Is it common practice for Gazprom, the 

world’s largest gas company, to sign multibillion-dollar contracts 

with individuals whose names they do not know, as what their 

president says? How can Gazprom conduct due diligence, not knowing who their partners are? 

To make matters worse, Gazprom denied—strongly denied allegations in the world press that their partners in RosUkrEnergo, 

whose names they claim not to have known, were in league with 

Russian organized crime figures. Later, when the public evidence 

became overwhelming, Gazprom and Putin accused the Ukrainian 

Government of forcing the Russian side to accept this Swiss-registered company into the agreements signed in Ukraine in January 

2006. 

Now, I don’t know, I’ve never seen any other examples of Ukrainians forcing Russia to do anything, so this is a—this is a first time 

in history, according to what they are saying. 

In order to maintain this middleman company in the gas contract 

with Ukraine, Gazprom shut off gas deliveries to Ukraine and to 

Europe until their terms were met. The then-Ukrainian Prime 

Minister Yuriy Yekhanurov stated that one of Gazprom’s main demands during those negotiations in the winter of 2006, in January, 

was that this company, this murky Swiss-based company, that it 

be included in the contract. They went out of their way to stop the 

gas just so this company would be included in this thing. Why? 

39 

Some American experts downplay the lack of transparency and 

the dubious methods used by Russian state-owned companies, saying, ‘‘Well, look, companies in the U.S. and Europe also do crooked 

things.’’ They point to the Enron affair and the recent accusations 

of wide-scale bribery by the German company, Siemens. Their argument is that American Russophobes are holding Russia to a 

higher standard. 

The difference, however, is that in the United States and Germany—the United States and Germany arrest and prosecute criminal behavior, while in Russia the crooks not only go scot-free, they 

are awarded state medals for their actions, while individuals like 

Mikhail Khodorkovsky, who opted to run a clean shop and refused 

to bow to Putin, wound up in prison. And a few days ago, Robert 

Dudley, the CEO of BP–TNK, the joint British-Russian oil company, was questioned for—was questioned by the Russian police for 

5 hours. This is part of a brazen attempt by Gazprom to take over 

the assets of BP–0TNK. 

As you know, Gazprom is seeking to list on the New York Stock 

Exchange. This is something Congress should support, in principle. 

It makes economic sense to have the world’s largest gas company 

listed on the New York Stock Exchange. However, it is not enough 

for the New York Stock Exchange to state that everything is on 

order with Gazprom without a thorough due-diligence investigation 

into its operations and its strong-arm tactics within Russia. I believe the Department of Justice should oversee this investigation in 

order to ensure its accuracy. 

In the long run, Congress must take all appropriate measures it 

can to assure that the U.S. energy—United States-Russia energy 

relationship is free of uncertainty and questionable practices in 

order to protect the national security of the United States. 

Thank you. 

[The prepared statement of Mr. Kupchinsky follows:] 

PREPARED STATEMENT OF ROMAN KUPCHINSKY, PARTNER, AZEAST GROUP, 

MAHWAH, NJ 

Mr. Chairman, honorable members of the committee, I ask that my full written 

statement be included in the record. 

Today I want to address the question of criminality and the lack of transparency 

in the Russian energy sector. 

The reason for this is that in the near future the United States will become more 

dependent on LNG (Liquefied Natural Gas) imports from Russia. Last year 

Gazprom executives stated that they intend to supply up to 20 percent of the U.S. 

LNG market by 2015. And while this will help America meet its energy needs, the 

LNG business needs to be fully transparent and in compliance with American law. 

Unfortunately, persistent opaqueness in the Russian oil and gas sectors along 

with a number of murky schemes created by Gazprom, the Russian state-owned gas 

monopoly, has lowered Russia’s business reputation to the point where many Western companies are loath to trust their Russian partners, and are forced to deal with 

them mostly out of necessity. 

There is a great deal of evidence which suggests that Russian organized crime has 

been involved in the Russian energy business—with the full knowledge and quiet 

approval of the Russian leadership—both past and present. I will describe some of 

these schemes in my testimony. 

Prior to his election, Dmitry Medvedev, the new President of Russia, was the 

chairman of the Board of Gazprom, which supplies 25 percent of Europe’s natural 

gas. Was Medvedev aware of Gazprom’s alleged links to organized crime? Many observers believe that he was and chose to remain silent about it. 

I also believe that it is inconceivable for him not to have known the facts. 

40 

The nexus of organized crime and government in Russia is not a new phenomenon, but today it has taken on an important geopolitical role. 

Russian organized crime, with the tacit support of the Kremlin, is playing a significant role in expanding the Kremlin’s economic hegemony throughout the former 

U.S.S.R. and the Warsaw Pact countries. 

In Romania the aluminum business was taken over by Russian-owned companies 

using suspect means and there are serious questions about how that country’s 

gold mining industry is being bought up by companies from Central Asia who are 

friendly to the Kremlin and who appear to have a working arrangement with some 

high level Romanian officials. 

In the Baltic States, the Kremlin has deliberately done everything in its power 

to isolate and punish the Lithuanians, Latvians, and Estonians for standing up to 

Russia by spending billions of dollars in order to insure that energy supplies destined for Europe circumvent these countries via the Nordstream pipeline. 

In Hungary, shady companies with suspected links to organized crime and to 

Gazprom seek to control large segments of the domestic gas distribution and power 

generation business. 

Within the Kremlin there are competing clans who want to maintain the flow of 

cash through little-known middleman companies in the gas trade in order to finance 

various political projects (many of which spout stridently anti-American propaganda) as well as provide for their own personal needs. 

Gazprom, with the silent support of the Kremlin has set up 50 or so middlemen 

companies, silently linked to Gazprom and scattered throughout Europe—such as 

the Centrex group of companies and the Gazprom Germania network—which do not 

add any value to the price of Russian gas being sold on European markets; yet they 

earn enormous sums of money which appears to simply vanish through shell companies in Cyprus and in Lichtenstein. 

Last year, the CEO of Germany’s largest gas company E–ON Ruhrgas, Burghard 

Bergmann, who is the only Westerner on the Board of Directors of Gazprom, told 

the chairman of the board, Dmitry Medvedev (now the President of Russia), that 

Gazprom Germania and a Swiss-based middleman, RosUkrEnergo, should be disbanded. Bergmann also complained that Russian state-backed gas schemes in Hungary were opaque and tarnished Russia’s reputation. 

The Gazprom board rejected Bergmann’s request. Part of the reason could well 

be that Russia does not have a Foreign Corrupt Practices Act—the Kremlin and 

Russian law enforcement agencies tend to close their eyes on how Russian energy 

companies—be it the private oil company Lukoil or the state-owned oil company 

Rosneft or Gazprom—conduct business abroad. 

These energy deals are closely linked to Russian foreign policy. 

‘‘Pipeline diplomacy’’ practiced by the Kremlin is dominated by a small group of 

individuals and what we are in fact witnessing is the large-scale privatization of foreign policy by the Russian elite. 

Some American experts downplay the lack of transparency and the dubious methods used by Russian state-owned companies to conduct business by saying ‘‘Companies in the U.S. and Europe also do crooked things’’ and point to the Enron affair 

and recent accusations of wide scale bribery by the German company Siemens. The 

argument is that American ‘‘Russophobe’s’’ are holding Russia to a higher standard. 

The difference however, is that the U.S. and Germany arrests and prosecutes 

criminal behavior while in Russia the crooks not only go scot free—they are 

awarded state medals for their actions, while individuals like Mikhail 

Khordokovsky, who opted to run a clean shop and refused to bow to Putin’s will, 

wind up prison. 

One gas trading intermediary company, RosUkrEnergo, based in Zug, Switzerland, is owned 50 percent by Gazprom and 50 percent by two Ukrainian businessmen who hid their identities for years and who are alleged to be linked to Russian 

organized crime. This is a classic case study of how the Kremlin and Gazprom conspired to protect what was believed to be a criminal enterprise. 

Russian President Vladimir Putin, was directly involved in creating this company 

along with former Ukrainian President Leonid Kuchma in July 2004, and has publically defended RosUkrEnergo on a number of occasions saying: ‘‘Believe me; we 

don’t know the identities of the hidden Ukrainian owners [of RosUkrEnergo].’’ 

Putin’s statement raises an important issue. Is it common practice for Gazprom, 

the world’s largest gas company, to sign multibillion dollar contracts with individuals whose names they do not know? How can this state-owned company possibly 

conduct due diligence? 

To make matters worse, Gazprom vehemently denied allegations in the world 

press that its partners, whose names they claimed not to know, were in league with 

Russian organized crime figures. Later when the public evidence became overVerDate Aug 31 2005 14:58 Jan 05, 2009 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 H:\DOCS\46049.TXT MikeBB PsN: MIKEB
41 

whelming, Gazprom and Putin accused the Ukrainian Government of ‘‘forcing’’ the 

Russian side to accept the Swiss-registered company into the Ukrainian-Russian gas 

contract signed in 2006. 

Who can believe that Ukraine can force Russia to do whatever it wants. 

To achieve their ends, Gazprom shut off gas supplies to Ukraine in January 

2006—and to Europe—until their terms were met. The then-Ukrainian Prime Minister Yuriy Yekhanurov stated that one of Gazprom’s main demands during the negotiations was that the Swiss-based RosUkrEnergo be included in the contract. 

One of the managing directors of RosUkrEnergo was Konstantin Chuychenko; 3 

weeks ago Russian President Dmitry Medvedev made him a key advisor in his new 

administration. 

Can any of Gazprom’s statements be taken at face value? 

What next? 

As you might know, Gazprom is seeking to list on the NYSE. This is something 

Congress should support in principle—it makes economic sense to have the world’s 

largest gas company listed on the NYSE. 

At the same time, it is imperative that we do not reward Gazprom management, 

which often acts as a tool for Russian foreign policy, for its opaque ways of conducting business. 

It is not enough for the NYSE to state that everything is in order with Gazprom’s 

bid to list without a thorough due-diligence investigation into its European operations and its strong-arm tactics within Russia. I believe the Department of Justice 

should oversee this due diligence investigation in order to insure its accuracy. 

In the long run Congress must take all appropriate measures it can to assure the 

nation that the United States-Russia energy relationship is free of uncertainty and 

questionable practices in order to protect the energy security of the United States. 

The CHAIRMAN. Thank you very much. 

I’ve kept you a long time. I have several questions. 

I apologize—Senator Lugar had to leave, because he and Senator 

Kennedy share an annual reception relating to a dialogue with 

Muslim leaders, and Senator Kennedy is obviously not able to be 

there, and Senator Lugar had to open this conference. So, I, on his 

behalf, apologize. 

And, with your permission, he and others may have a few questions. I’ll not burden you, as they say, a lot of homework here, 

but—let me ask a few relatively straightforward questions. 

Ms. Baran, in layman’s terms, so average Americans can understand it, talk to me about how much gas is needed to fill the 

Nabucco gas pipeline to make it economically feasible. In other 

words, is there enough gas available in the near term coming out 

of the Caspian Basin, to be able to make it economically feasible, 

or is it necessary to have Iranian or Iraqi or any other—or Russian—gas in order to make it economically feasible? 

Ms. BARAN. OK, thank you very much for this question, because 

this is what is the big question, Is there enough gas to make 

Nabucco work? There is enough gas. Of course, it’s not ready, waiting for the pipeline; it needs to be explored, and that gas needs to 

be committed. 

Nabucco requires, in the first phase, about 8 bcm of gas, in layman’s term, and that gas exists in Azerbaijan. The producers, the 

BP-Statoil consortium, the Azerbaijani government, and, I believe, 

the U.S. Government’s own estimates indicated that Azerbaijan 

alone will be able to start Nabucco’s first phase. So, it can start 

going—— 

The CHAIRMAN. And when you say ‘‘start its first phase,’’ you 

mean the construction of the first phase or—— 

Ms. BARAN. It can fill—— 

The CHAIRMAN. Fill. 

Ms. BARAN [continuing]. While the construction—— 

42 

The CHAIRMAN. Gotcha. 

Ms. BARAN [continuing]. Is going on this—yes, on the second 

part, as well. Because the timing is about 2010–2011, and by that 

time the gas will be ready. 

The CHAIRMAN. What is the total cost, if you know, from the Caspian to Austria? I mean, that’s the route of the pipeline, correct? 

Ms. BARAN. Correct. 

The CHAIRMAN. And, I mean, in terms of total construction cost, 

what is the estimated cost, and what are the sources of the capital 

to actually construct it? 

Ms. BARAN. Well, the cost keeps increasing for all the pipelines, 

because of rising steel and oil prices. The pipeline is not going to 

be constructed from start to end; the main construction has to be 

from Turkey to certain parts, so there’s not an ongoing—one single 

pipeline that’s going to be constructed. And—— 

The CHAIRMAN. That’s why I asked the question. Again—— 

Ms. BARAN. Yeah. 

The CHAIRMAN [continuing]. For my colleagues, it’s a useful thing 

to know, that—what would be the short-term, medium-term, and 

long-term impact of the beginning of, and to the end of, the construction of the pipeline—in order for them to understand the political ramifications that are at play here? You talked about Turkey. 

I was recently in Turkey. There is a great deal of pressure on Turkey, indirectly from its citizenry, saying, basically, ‘‘I don’t care 

where the devil you get the gas from, get us some more gas.’’ And 

therefore, it becomes difficult for any political leadership. And the 

political leadership now is having its own difficulties, not only with 

the Supreme Court there, but its difficulties in terms of the economy. 

So, if you could—and I don’t want to drag this out, and I apologize for being so, maybe, overly pragmatic about how to talk about 

this—but, talk to us about the phases of the construction and the 

beneficiaries in each of those phases if the Nabucco line is underway, being funded, consistent with the gas coming online in order 

to fill it. 

Ms. BARAN. Well, first, it’s important to mention that Nabucco 

was originally proposed by Austria to transport Iranian gas to Europe. When that option was no longer there, the U.S. was interested in finding alternative routes to get Caspian gas to European 

markets, Nabucco emerged as a very good pipeline project. 

Turkey and many other European countries just want the gas, 

and it doesn’t matter to them where it comes from. And that’s how 

Russia is able to win this gas race, because whoever gets to the 

market first is going to keep everyone else out. Looking at Turkey, 

we’ve seen a similar development in the late 1990s. Again, there 

was huge interest, and President Clinton was personally involved, 

in getting gas from Turkmenistan and Azerbaijan to Turkey. Like 

Nabucco and like the Trans-Caspian Gas Pipeline that hopefully 

will be built now, it was going to be financed by the private sector, 

and it was considered to be commercially viable and making, potentially, a lot of profit. What happened was, when the Russians realized that this corridor could happen, and then it would interrupt 

their monopoly control—because what Russia has been doing is, 

when Russia supplies gas to Europe, it’s not Russian gas, but it’s 

43 

the gas it has been able to buy from Turkmenistan and 

Kazakhstan, and use cheaply internally, and then sell some of its 

own gas much more expensively. So, when Russia understood that 

if Turkmen gas has a way of reaching Turkey without its control, 

it was going to lose its monopoly, and along with it a lot of the 

money, and most important, influence. So, that’s when the Russian 

leadership proposed the Blue Stream gas pipeline to send gas from 

Russia to Turkey directly. 

At the time, Europeans and Americans did not want to pick a 

fight with the Russians, and most people did not want to understand that it’s a race. Like with Nabucco, the rhetoric was, ‘‘The 

two of them are not competitive, they complement each other. 

There’s so much gas demand in Turkey that you can do both at the 

same time.’’ But that logic, of course, doesn’t make sense for private investors, and we have seen that it didn’t make sense because 

as soon as the agreements were reached on Blue Stream pipeline, 

which is the same partnership as South Stream, Gazprom-Eni, 

then—— 

The CHAIRMAN. Blue Stream cuts across—— 

Ms. BARAN. The Black Sea—— 

The CHAIRMAN [continuing]. The Black Sea—— 

Ms. BARAN [continuing]. Directly. 

The CHAIRMAN [continuing]. In the—— 

Ms. BARAN. Going to the—— 

The CHAIRMAN [continuing]. In the most eastern quadrant of 

the—is that correct? 

Ms. BARAN. Correct. 

The CHAIRMAN. OK. 

Ms. BARAN. Yeah. And so, as soon as the agreements were 

reached on Blue Stream, then the consortium, which included GE, 

Bechtel, and Shell, could no longer make a bankable case for the 

Trans-Caspian Gas Pipeline. Yes, the Turkish market will eventually be big enough to receive both of the supplies, but the timing 

and sequencing is the important issue here. 

So, with Nabucco now, coming to your question, same dynamics 

are at play. The companies who would build Nabucco want to do 

it, believe it’s commercially feasible because, as I said, since they 

don’t operate as their country’s foreign policy arm, they need to, 

and want to, make money, and they think that it will be commercially profitable for them to do Nabucco. 

But, the same Central Asian gas might be going via the Gazprom 

system to European markets, then they will not have the confidence to put their money down. 

The CHAIRMAN. Gotcha. 

Ms. BARAN. The U.S. leadership was essential in the early 1990s 

to provide the necessary framework and the political stability in 

saying, basically, ‘‘If Russians were to try to intimidate you, we are 

with you’’; the east-west energy corridor is not an anti-Russian 

project or vision; it is a way to enable those countries direct access 

to Europe for their own gas. What is ultimately at stake is what 

sovereign, independent countries should be able to do with their 

own energy reserves. 

The CHAIRMAN. Leon, if you were heading up the same committee within the present administration, what would you be talkVerDate Aug 31 2005 14:58 Jan 05, 2009 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 H:\DOCS\46049.TXT MikeBB PsN: MIKEB
44 

ing about doing now? Let’s assume the same apparatus existed, 

and all of a sudden, in the last months of this administration, there 

was an epiphany that something should change, or in a McCain or 

an Obama administration, what would be the—and I’m being a bit 

pedantic here—what would be the initial suggestions you would 

make? I realize—I’m not asking you to lay out a 4-year plan, but 

what—how do you kick-start the reengagement, if you will—because we’ve been—you know, that—you know, the book about absent or present at the creation, we’ve been absent at the creation 

here, it seems to me. And so, what would be the initial things you’d 

do to sort of get this back, no pun intended, on-stream here? 

Mr. FUERTH. I could picture what I could do in the opening period of the next administration. I can’t imagine what would be doable—— 

The CHAIRMAN. Well, let’s just skip to the next administration. 

Mr. FUERTH. Right, let’s go—let’s go there. 

The CHAIRMAN. Let’s—it’s—— 

Mr. FUERTH. One of the interesting things here is that I don’t 

think this thing has to have a Democratic or a Republican label to 

be credible. 

The CHAIRMAN. Neither do I. That’s why I asked the question. 

Mr. FUERTH. Right. What is—what it has to have is the imprimatur of the President of the United States, based on a clear understanding, emanating from there, about where the strategic direction and interests of the United States really are, and how, step 

by step, the United States is going to pursue them, a message that 

can be taken by our diplomats and envoys to wherever we need it 

to be taken. 

The second thing that’s important is that there has to be an organizational system to back that up, because there’s no shortage of 

statements for the press or statements for the record. What we 

need is an organization in the United States Government which 

doesn’t go to sleep in between summit meetings, but which, instead, exists to make sure that the connections that are required 

for success are identified, thought through, and the resources for 

these are found. So, that—you know, that, in 2 paragraphs, is what 

I’d be recommending. 

The CHAIRMAN. Look, one of the things that was mentioned at 

the outset of both your testimonies was the differences between 

today and 1992 and 1994 and 1996. I would argue—and I don’t 

think you disagree, but one of the gigantic differences is that the 

realization, not only on the part of government officials—Democrats, Republicans, House, Senate, administration people—not the 

President, but administration people—and, I might add, the average American—that energy has become an important strategic 

question. For example, about 10 months ago a poll came out. They 

asked the American people, What is more in the long-term interest, 

in terms of concern for the United States, the war in Iraq or the 

failure to have an energy policy and energy dependence? Seventytwo percent said energy. The American people are a heck of a lot 

smarter than both political parties are. I really, truly believe this 

is a place where the public is way ahead of the political leadership 

in both parties. 

45 

And so, I—this is a statement, but also a question, to see whether you agree with my statement. I really think there is a really palpable appreciation of the security dimension of our energy dependence and that of our allies, and a willingness for us to take—a desire to take a much more assertive position on energy issues as it 

relates to our national security interests. I don’t mean war, I mean 

the kind of engagement you’re talking about. 

I’m of the view that whether or not John or Barrack are the next 

President, that on this issue there ought to be some consensus. 

But, here’s my problem, and I’ll cease and let you go after this 

point. It seems to me, as long as we are—‘‘bogged down’’ is the 

wrong word—as long as we fail to have a coherent strategy as to 

how to leave Iraq without leaving chaos behind, and as long as we 

have a—no strategy to engage Iran, that the ability to take advantage of the public consensus, as it relates to this and other issues, 

is pretty well checked. I kind of view—I kind of view Iraq as not— 

I think our grandchildren, when asked, ‘‘What is the most significant dilemma, internationally, America faced in the first decade of 

the 20th century?’’ they will not say Iraq, because, by that time, 

other of the greater issues will have emerged—generically, energy, 

Russia, China, India—you know. But, I kind of view Iraq as a big 

boulder sitting in the middle of the road, that it significantly diminishes our credibility to be able to generate consensus on issues 

from this to many others, and it erodes our flexibility financially 

in being able to deal with the tremendous economic imperatives we 

have here at home, spending $3 billion a week. 

So, I’d like you to briefly comment on this: Is it your view that 

our lack of flexibility and initiative—and thereby, lack of success— 

are at all related to our lack of a policy on Iran and our lack of 

a strategy with regard to Iraq, in terms of being able to figure out 

how we get out eventually without leaving chaos behind? Would 

you be—and maybe it’s—I’m way off, here—would you comment on 

those for me? 

Mr. FUERTH. In which order would you like for—— 

The CHAIRMAN. Either way. 

Mr. FUERTH [continuing]. Us to do that? 

The CHAIRMAN. Doesn’t matter. 

Mr. FUERTH. To go back to the scenario that you presented, if 

you—if I were in that situation, I would at once acknowledge that 

these things have tremendously limited our scope for action in 

every way, politically and financially and so on. And then I’d pray 

for a brainstorm about how to do workarounds so that we could, 

nevertheless, make some progress, because time is passing. 

The CHAIRMAN. Absolutely. 

Mr. FUERTH. And with its passing, there are opportunities that 

are going by us that cannot be retrieved. That’s—— 

The CHAIRMAN. Exactly. 

Mr. FUERTH [continuing]. The thing that’s so scary. And so, one 

of the things that I would say is that, while we struggle to figure 

a decent way to end the war in Iraq, and while we struggle to figure out a way to get the Iranians to talk sense with us, there are 

other things that would establish our bona fides again. For example, in energy policy. But, I’d also say that the game has gotten 

46 

much more complicated, because now energy policy is linked to environmental policy—— 

The CHAIRMAN. Yes. 

Mr. FUERTH [continuing]. And now energy policy has all of a sudden become linked to the price of food and hunger in the world, so 

that, again, what was complicated enough in the 1990s has now expanded exponentially in terms of its difficulty. 

But, the final thing that I would say is, just because it’s complicated doesn’t mean it can’t be done. 

Ms. BARAN. Briefly, if we think about Russia, I think Russia’s position at the U.N. Security Council has been very important, in 

terms of not taking certain steps in that part of the world, because 

we needed Russia in Iraq, and now we need them on Iran. So, that 

has some limiting influence. 

From the regional perspective, I travel to the region a lot, and, 

right after this hearing, I’m flying to Kazakhstan, and I know if I 

meet with the senior leadership, they will say, ‘‘Why isn’t the U.S. 

paying more attention to us?’’ And the next question is going to be, 

‘‘What’s going to happen in Iraq?’’ There are different possibilities 

for Iraq’s future. You, Senator Biden, have a vision. There are 

other visions out there. People in that part of the world need to 

know, and right now there is confusion. 

And then, of course, the big elephant in the middle of the room 

is Iran. If there is going to be, as some speculate, some sort of a 

military confrontation, this would have huge consequences to everything going on in and across Europe and Eurasia, because Iran 

is right next to those countries. It’s a stereotypical thing to say, but 

Iran really is not Iraq, and having a destabilized Iraq and Iran at 

the same time would make matters very, very complicated. 

So, I am afraid, until there is a little bit more clarity about 

where the U.S. is headed, there is not going to be much more traction. 

The CHAIRMAN. I thank you both. 

Now, the question I have for you, sir, is going to sound like I’m 

being facetious, but I’m not. What is the difference between 

Gazprom having an organized criminal element to it and having 

Putin? You laid out—which I think is accurate—the degree of influence of organized crime within the largest state-owned gas facility 

in the world. And my question is, ‘‘Yeah. So, what?’’ What would 

be the difference if organized crime wasn’t there, and the way in 

which Putin operates with regard to the use of that significant monopoly? I’m being deadly earnest. What would the geopolitical 

ramifications be if there was no organized crime, but Putin was 

running it in the way in which he has essentially run it? 

Mr. KUPCHINSKY. I believe there would be no difference, to be 

very honest. 

The CHAIRMAN. That’s my point. 

Mr. KUPCHINSKY. Well, what is illustrates, however, is that in 

the Kremlin, beginning in the mid-1990s, a nexus was formed between organized crime and the government. The government—the 

Russian Government—some would say the Russian Government, 

the ruling elite in the Kremlin, the handful of people who actually, 

not own Russia, but control its destiny, they came to an agreement 

with organized crime. They saw that—how to use it for their own 

47 

benefits, I believe. When I look at all these schemes that I talked 

about, this Gazprom-Germania scheme, which—the Germans don’t 

understand why it’s there. I mean, it—look, it serves no purpose, 

they can see no reason for it. And yet, that company has branched 

out into 30 other companies, and has a branch right now in Houston, Texas. Yeah. 

So, I mean, it’s—it’s not for the good of the Russian people, these 

things. They’re not being done for the Russian treasury or for the 

Russian people. It’s what the Russians call—I mean, the—a lot of 

people in Russia that I know and I meet with feel the Gazprom 

leadership, in Russian the word is ‘‘vremenshchiki,’’ people who 

want to grab everything at the moment when they can, ‘‘This is the 

time to steal it, let’s steal it now. You know, forget about the 

grandchildren, the future, that’s not important. This is when we 

can do it. We’re in power. Let’s take as much as we can.’’ And 

that’s—unfortunately, has shown itself to be true. 

The CHAIRMAN. Well, I thank you. I thank you all. 

With your permission, I have one more question for you—I’ll submit it in writing, Leon, if I may; and a couple for you, unfortunately. I know I’m making work for you, but I’d appreciate it very 

much. 

Your testimony has been very useful. I look, where I am, and I’ll 

just be blunt about it—I think, quite frankly, the role of this committee has very little influence on the remainder of this administration, but hopefully it can begin to lay out a larger matrix for the 

next administration, whomever it is, to maybe view, through a different prism, a number of these real and glaring dilemmas. 

You know, I—I’ll conclude by saying that we are at an inflection 

point here where it’s either going to go up, down, left or right, and 

the trajectory’s going to be set for some time to come. That’s an inflection point. 

We’re at that point. And it is not hyperbole to suggest that if we 

miss the opportunity to be able to influence, in this one narrow 

subject we’re discussing today, the construction of these pipelines 

that do not allow for monopoly, it will be created; the other pipelines will be built, they will—it’ll be there. It’s not like you can 

undo it, it’s not like you say, ‘‘Well, you know, now we have—it’s 

clear that Russia is controlling, in a monopolistic way, the totality 

of what’s coming out of, not only Russia, but the Caspian Sea, and, 

by the way, that’s a bad thing for Europe, it has used’’—I think 

there’s a—there’s a clear reason why Putin’s gone to these countries: it is their foreign policy. It is their—it is their national strategic doctrine. I mean—and to say, ‘‘Well, you know, why don’t we 

dismantle those other pipelines now and build new ones.’’ 

So, I just think there’s such an urgency here. You’ve added to 

that, to help us add to that sense of urgency. I certainly do not 

have the answers, all the answers, but I do know one thing, it better be addressed up front very quickly by the next administration, 

and make some very hard, tough choices. As you point out, Leon, 

there’s tradeoffs here, man. There’s the environment, there’s food— 

I mean, on a much broader scale, but regionally there’s real tradeoffs. 

Mr. FUERTH. Well, what’s happening, Senator, is, now we are 

writing the history of the future, as you’re pointing out. 

48 

The CHAIRMAN. Well, safe travels. And I hope, when you come 

back, you’ll be willing—I mean this sincerely—to—if you have the 

time, to be willing to—either on the telephone or in person, to debrief our staff, it would be very useful for us. 

And I thank you all. I thank you for your patience. 

And we are adjourned. 

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

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