Forum the us and the Caspian: Crossroads or Barricade Tuesday, October 26, 1999 Chair: Graham Allison

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While I am throwing numbers out, let me talk about the investment required to do that. Maybe this will put it a bit into perspective and tell you why, that as much as we are excited, we are also concerned and cautious, not only for humanitarian reasons but also for business reasons. Some stability is required in the area. In our business we talk about how much it costs per barrel to produce that barrel: to find it, put in the infrastructure, finally get it out of the ground. Worldwide average is around about $4-6 per barrel. If I multiply that times what I believe to be the potential, we are talking about $400-1200 billion in investment over the next 20 years. When we put that in perspective, if in the next 20 years, just on the development side, not on the exploration side or the production side, if we the industry were to put in, in a success case, $300-500 billion of investment, that would require us to put in anywhere from $15-25 billion per year into this area to build the infrastructure.

In the world, adding up all the oil companies and all the money spent on development, we average about $60 billion per year for the world for the last 10 years. The North Sea, which this is equivalent to, spends about $15-16 billion per year. So we are talking about double the amount that is spent in an established, stable region. So for us, this is a considerable investment in anyone’s scope of magnitude. So there is a lot of interest in getting that oil out to world markets, and doing it profitably, economically and in a way that is environmentally sound.

Now, in doing that Azerbaijan will profit. Kazakhstan will profit. Russia will. Turkmenistan will. It is hard for me to even speak of Iran because we are forbidden by US policy to do business in Iran. But, Iran has some volume of oil that may or may not be associated with the Caspian. But, in its country, it has a considerable amount of oil on its own. It is yet to be seen if Iran has any in the Caspian itself. But, the other four countries bordering the Caspian do have potential.

Geology wasn’t equal to each to country. Some will be bigger winners than others. Azerbaijan, we believe, will be one of the biggest winners. I say that as Exxon, but I don’t have to say that just as my company. There are 19 production-sharing agreements that have been signed in the last 5 years involving, I believe, 33 oil companies. There are quite a few others who believe the same fact.

We would question the ability to spend that kind of money that quickly in an area that remote if we were, for example, speaking of West Africa. There is quite a bit of excitement in West Africa in the offshore areas in discovering new oils. We can bring in platforms and construction features from around the world. We can float them in. Use Gulf of Mexico construction yards, North Sea construction yards, even as far away as Japan and Korea. That lowers the cost. The Caspian is landlocked. The entire industry infrastructure will have to be built there in order to make those investments. We are talking on the scale of about $5-30 billion just to build the infrastructure in order to build the platforms and the production facilities.

All these things are going to come at a pace: one, of our ability to spend that money economically and wisely, and two, the stability of the area. Investors will become nervous as the area becomes unstable or more stable. We are on the optimistic side at this time. We have quite a few investments there now and we are very hopeful for the future.

Let me finish up by saying that I have talked about the hard facts and numbers. But the other part of the equation is what I’ll call the social infrastructure, the human side. Eventually, when these investments start to roll in, jobs will be made. People can earn a good living. There will be great economic spin-offs from the oil industry. But, until that time, there are 800,000 refugees in camps in Azerbaijan, there are hospitals and schools that need to be built, people who need work. Somehow, we are going to need to bridge that gap between now and hopefully this pot of gold at the end of the oil rainbow. So Azerbaijan needs, with its partners, to find some ways to bridge that gap. We need to find some other investments in other industries other than oil to give the economy a long-term success.

I mentioned in my introduction that I am a refugee camp worker. We have taken on that task. Visiting the camps has had quite an impact on me. We will continue to do that. Hopefully we can make it through that gap between where there aren’t enough jobs to where there are more than enough jobs.

Graham: Thank you. John Deutch:
John Deutch: Minister Azimov, I noticed you began your remarks by saying what a great privilege and honor it was to be here. I hope that you will understand that as an MIT professor I don’t take quite the same approach. I am here in large part because of the Kennedy School students who are here. I wanted them to hear Graham Allison say “I, Graham Allison and Ash Carter worked for John Deutch in Washington.” That is the right relationship between Harvard and MIT.

The Caspian is important for two reasons. They have been mentioned several times here this evening. One is geopolitical. The other is because of its resources. I want to begin by saying, however, that the Caspian is really defined by a body of water. It is not a community of nations. It does not have a tradition of different countries and different people working together to address the common security, economic, social and environmental problems that they face. All of this we should remember as we talk about the Caspian region. Each one of these countries has a very different history, culture and as we know, this leads to conflict between them.

Let me begin by making a remark about the geopolitical character of this region. Both Iran and Russia refer to the Caspian Sea as an internal lake. They believe that it is internal, and as an internal lake it should be shared by all of the countries around it, but in their terms it means that Russia and Iran will indeed call the tune for economic development and for political maturing in the region. It is important to realize that in my judgement the fundamental geopolitical importance of this region is that it draws Russia and Iran together to permit them to exploit the resources and to determine the pace of economic and political development in the region. Russia and Iran have a common interest in determining the pace of economic and political events in the region, and that is something for each one of both Central Asian republics to worry about and it is something that should concern the United States as well.

Let me next turn to a set of remarks about resources. Oil is what has been mentioned here tonight. I would like to add to that some discussion of natural gas as well. If we are to see the tremendous investment made in the region, which Tim has referred to, and which is necessary to produce oil at the level of 2-3 million barrels of oil per day, currently the level, I guess, produced out of that area is maybe 200,000-300,000 barrels of oil per day. Some of it by rail from Kazakhstan across very dangerous parts of Russia. I think there is one operating pipeline. There is a tremendous amount of pipeline construction that has to be done.

But political and security circumstances simply do not support that prospect for the foreseeable future. But it will be necessary in order to gain the benefits of producing that oil and the economic benefits of the region. If we look to the north, there is the inefficient, corrupt, and I might say highly unstable Russian pipeline system that one has to put the oil in. If one is to look to the east, there is a long distance that you need to go to get to Chinese markets. If you look to the west, there is the problem of going through the Black Sea and the expense of taking it through territory. And, so it leaves you to go to the south. In the south you find Iran. The prospects of getting the oil, and very importantly, the natural gas, out of that region really means that you must come to political terms with Iran and effectively do oil and natural gas swapping through Iran to either the Persian Gulf or, for example, Turkey. Anybody who has been to Turkey recently knows about the requirements that they have for the production of electricity to fuel their economic growth and the industry. Right now they are 95% dependent on very expensive highly unreliable Russian natural gas. Maybe a little bit of gas from Algeria. They need to get that gas to fuel their economy. It only makes sense getting there in the short run through swapping with Iran.

So this is a critical part of the world: a world that deserves our attention and our study which is why it is so important to have the program that has been established here at the Kennedy School, despite that it is at Harvard. It is important because it is absolutely key to understanding the geopolitical forces, not only in that region, but which are drawing Russia and Iran together and it is important because oil and natural gas are vital for the economies and the societies in the region.

Thank you very much.

Graham: Well I think that was a terrific start. The Caspian presents such a wonderful nest of problems and opportunities, whether thought of geo-politically or geo-economically or as a problem for government and business in which government has aspirations and business has to do calculations. So the whole array of topics arises, conflict resolution, et al.

To start us in terms of comments and questions, we are fortunate to have two ambassadors here. I want to take advantage of both of them…end of tape

Hafiz Pashayev is the ambassador from Azerbaijan to the United States. And, sitting beside him is our own colleague, Ambassador Bill Courtney, who served as ambassador to Kazakhstan and also to Georgia, before his current assignment with Congress and the OSCE where he has been involved recently in Europe in the efforts to ask questions, as the OSCE is doing, about human rights, democratization, elections and a number of related topics. Let me ask first for the ambassador from Azerbaijan to please pose a question or comment, then Ambassador Courtney, and then we are going to be open for business for especially disagreements and comments and questions from the floor.

Ambassador Pashayev: Thank you very much. First of all let me congratulate Harvard University and you for opening up this program. Before I will ask my question to you Dr. Allison and to you Mr. Deutch, I would like to recall one of my meetings with you at the Pentagon in 1993 or 1994. It was my first official visit to the Pentagon. At that time we were struggling to get attention from the US, from the different agencies including Pentagon, to our region. I remember that you were very polite, but you remained silent. I think that at that time you were among 10% who knew the geography of the region. I have been told privately by some officials in the US Government that there was a US foreign policy and security team that worked very intensively to somehow bring confidence to the Baltic states and to get the Russian troops out of the Baltics. And, I have been told that even among your team, some people agreed to do this at the expense of the Caucasus region.

Is it true or not?

Graham: Thank you. I, uh, I do remember our first meeting. At that time I was working for a Deputy Secretary of Defense who wouldn’t allow us say anything, so that is why I was so silent. But I actually listened very carefully. Whether he had any policies restricting us from doing anything in the Caucasus or in the Caspian region because of his concern about the Baltics, I am not so sure.

But, let me make a slightly more serious comment. I think that it is certainly the case that at the beginning of the Clinton administration, the first set of priorities had to do firstly with the nuclear weapons in Kazakhstan, Ukraine and Belarus. Secondly, with Russia’s adjustment to the fact that the Baltics were becoming independent states, which had been a position of US government policy for many years before. And, thirdly, with the recognition that Russia was no longer its imperial self, and therefore that the newly independent states including the “stans” and the Caspian region were going to be facts of life. So, it was a matter of kind, of working piece by piece. I think that your suggestion is correct, if one were just being historically correct. Not that one was at the expense of the other. But, in terms of the priority list, the nuclear weapons came first, second the Baltics and third the others. I think that was the case at least from the assistant secretary’s point of view. Now in the deputy’s office, it might have looked different.

Deutch: Mr. Ambassador, it was 1993, and if you had a polite reception, it is possible that I was not deputy secretary of defense. I was undersecretary of defense at the time. I will tell you the point that troubled me and still troubles me with respect to defense issues in the area. I do not believe that we have the military to military relationships with each of these countries in Central Asia that we should have. For example, there is no unified commander, I believe, which is responsible for this region. It has been changed. But the development at that time, one of the things which was extremely important was to see a symmetry in the way the normal military to military relationships went with each one of these countries, which of course was not as developed as it was with the Baltics. But I do want to stress that the Caspian was recognized from the earliest time of the Clinton administration as enormously important from a strategic and resource point of view.

Graham: Maybe if I would even ask the minister to make a comment because I think many people in the audience, even those who know something about the Caspian, probably are unaware that Azerbaijan is, I think, the only country of the region to have an active defense cooperation relationship. I think you were actually the architect of that, at least if I remember when I was working on it. Would you like to say something?
Minister: I remember May 4, 1994, the day when Azerbaijan went to Brussels, to headquarters, and signed the framework document of the Partnership for Peace. I remember also the day of May 2nd and 3rd when President Aliev was preparing himself for this trip and the last call from Moscow was at like one hour after midnight, something like that, urging President Aliev not to do this. He did actually, because of his understanding of the situation and full determination. Azerbaijan just made its own choice.

Today Azerbaijan is a troop-contributing nation. Of course our contribution is a modest one. We just provided one platoon of peacekeepers. But I think that this platoon is doing well serving in Kosovo under the NATO command. I think that we do this, realizing that these purposes and developments are in the full interest of Azerbaijan.

Graham: Thank you. Ambassador Bill Courtney, as I have mentioned has served as the US ambassador in Almaty, Kazakhstan and in Georgia. Bill, what would you say that has been left out about any point, or any question you might have?

Courtney: Actually, I would like to ask a question. With regard to energy producers around the world, there are a wide variety of experiences with regard to how countries handle respect for human rights, democratic development, development of rule of law, and controlling corruption. I have the impression based on my time in Georgia and Kazakhstan that because education levels throughout the region are high, that people’s expectations for democratic change are really significant factors. And, looking ahead to seeing whether the benefits of the energy economy accrue to all of the people, so that everyone is a winner, I think I have had the impression that democratic development should be a key part of energy development and economic reform as it goes ahead.

I would be grateful for all of your perspectives. How would you see democratic development throughout the region, and its importance to being sure that energy development benefits everyone?

Minister Azimov: Well first of all, Azerbaijan is trying to establish a proper system, so that when the benefits from oil development come, they will serve the society and its interests. Because, when there is big money, there is the threat of corruption. We know this and we understand that this a threat. We are doing a lot in passing through this transformation period and developing new laws in accordance with the standards of the Council of Europe. We cooperate with this organization more actively today. We are aiming at attaining full membership to this organization. Today the Parliament of Azerbaijan is working hard at adopting laws in accordance with European standards.

The second point I would like to make is that the energy sector should not be the only developed sector of the economy of a country. When we search for new possibilities, we have to look at other fields and other sectors. The major potential for Azerbaijan is its human resources, not the oil, actually. That is why the development of human resources of the society, of the citizenship and the institutions is one of parameter tasks for the Azerbaijani leadership and government.

We do understand by the way that democracy is not something that can come immediately, in one night. It can not be achieved just with a strong desire. So, when you have one million refugees, you should think about them. And you would take urgent steps in order to provide for them first of all. Those other nice things that can be taken care of will come at the second stage. But today Azerbaijan faces a very difficult situation with many troubles and so this process is not going as easy as one would think or demand or expect from Azerbaijan.
Graham: Thank you. Tim.

Tim: I would just tell a story. Later I will put it in the perspective of Azerbaijan. Two comments. In democracy, when people ask me why Azerbaijan hasn’t moved faster to free markets and democracy, I just relate to them US history. Nine years into US history, we were in bad, serious trouble. Our first president was a presidential monarch. So, in comparison, I am not sure that Azerbaijan isn’t exceeding the pace that the US had when it started. Just a philosophical comment.

In a real term comment, the first time I went there, there were soldiers everywhere. There were guns everywhere. It was actually quite frightening. But today there are no soldiers on the streets, the shops are full of goods, there are new shops and restaurants every time I go. So, small businesses are starting to prosper. Now this is in Baku. Outside Baku it is much more difficult. But, every trip I go I see something new. So a free market is starting to establish itself. Just the visual impact of not having the soldiers everywhere, and the growth, says something is working. Maybe not perfectly, but something is working.

Graham: Let me encourage members of the audience please and students to line up at one of the microphones. Let me ask you to identify yourself, state your comment or question succinctly and then, if it is to any particular member of the panel, please say so.
Igor, a student from Cornell University: Mr. Azimov, a question for you. Is the Azerbaijani government undertaking any steps toward resolution of 907 in the United States?
Graham: Maybe it is worth putting the question in context. This is a question about 907, which is a US government law that prohibits economic and technical assistance to Azerbaijan. From Azerbaijan’s perspective, the law ostracizes Azerbaijan and causes actual hardship, for example, for the 800,000 refugees who are located in Azerbaijan who are there as a consequence of the Nagorno-Karabakh conflict.

Azimov: Well, very briefly. First of all, if you have read the 907 Amendment, it says that official assistance may not be provided to Azerbaijan until it takes demonstrable steps in ceasing the blockade and other hostile acts against Armenia and Nagorno-Karabakh. This was an amendment that was adopted in 1992, and was a result of the strong involvement of Armenian lobbyists in the Congress, andit was a type of recognition by members of the US Congress themselves.

Today Azerbaijan, and not only Azerbaijan but the US government too, share the view that 907 is redundant. It does not reflect the reality and does not actually correspond either to the interests of Azerbaijan or the interests of the US as a state which has properly defined and protracted interests in Azerbaijan and the region. So, I would say that 907 more than anything seriously damages the US national interest, because no cooperation programs can be conducted properly, even in the field of those threatening and most urgent risks in the security field where the US role is very important due to all of those elements and factors that we have already discussed.

As for steps to repeal 907, I would say first of all, that the congress and administration of the United States would take these steps. The president may certify that Azerbaijan is not conducting any hostile acts against Armenia and Nagorno-Karabakh. The territories of Azerbaijan were occupied, not the territories of Armenia.

Second, there has been a cease-fire in place since 1994, so there are no hostile acts at all.

Third, what type of blockade are we talking about when 132 kilometers of the Armenia-Azerbaijani border is occupied by Armenian forces? So it is not a blockade, it is a lack of normal relations as a result of aggression of one country against another.

As for Azerbaijan, whether Azerbaijan is undertaking any measures in order to move from this deadlock, I’ll just give a most recent example, well, there are a lot of them, but I will give one. Azerbaijan has proposed to Armenia a restoration of railroad communication between Azerbaijan and Armenia, and plus, together with the restoration of the railroads, to withdraw forces from those areas that these railroads pass through. Actually it is an interconnected activity. We cannot restore the railroad under conditions of occupation. We cannot restore the railroad where there are minefields. So, people could be given the possibility to return, the railroad could be restored, Armenia could benefit from this, as could Azerbaijan and Russia and even Turkey. Unfortunately, this initiative has been rejected, as have all others in the past. So Azerbaijan is undertaking these steps but nevertheless there is no reply. Thank you.

Ash Carter: I just want to make a quick comment. This seems like a minor legal point, but it really has to do with how free we have been to establish relations with Azerbaijan, including defense relations. The ambassador was kind enough not to include me in his opening broadside, and I hope that is because he remembers that I have been there, and met with President Aliyev in Baku. I didn’t just go there to evade the daily direction and supervision of John Deutch, although that was a motivating factor. And, by the way, it is not at all fair to say that Graham wasn’t paying attention to the Caspian region. Both of us and everybody who was trying to establish a relationship with the new states of the FSU, but importantly with Azerbaijan, were hobbled by this provision.

Now, why is this provision in there? It is largely an artifact of American domestic politics more than it is of geo-strategic vision. I may be unpopular to say that but those were the origins of Section 907. It is discriminatory and it has impeded our ability to establish our bilateral defense relationship and other relationships with Azerbaijan.

Ph.D. Student from Fletcher School of Law and Diplomacy: My question has to do with what Professor Deutch raised, that is the role of natural gas in particular. We must mention that it is more the Eastern shore of the Caspian and Turkmenistan that is particularly well endowed in natural gas. My question is about how warming up of the relationship between the United States and Iran would facilitate the energy exploitation if not integration of the region? And, by the way how the changing relationship between the US and Iran could be affected by the fact, as everybody knows, that the European countries have a very different approach to Iran. Let me just remind you that Italian foreign minister Lamberto Dini went to Tehran last year and this coming Thursday and Friday, President Khatami is on an official visit in France. Thank you.

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