[Senate Hearing 109-811]
[From the U.S. Government Publishing Office]
S. Hrg. 109-811
RUSSIA: BACK TO THE FUTURE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 29, 2006
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
?
C O N T E N T S
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Page
Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening
statement...................................................... 17
Jaffe, Amy Myers, Wallace S. Wilson fellow in Energy Studies,
associate director, Rice University Energy Program, James A.
Baker III Institute for Public Policy, Rice University, Houston
TX............................................................. 19
Prepared statement........................................... 23
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Letters from CEOs of Ford and DaimlerChrysler................ 38
Sestanovich, Hon. Stephen, George F. Kennan senior fellow for
Russian and Eurasian Studies, Council on Foreign Relations,
Washington, DC................................................. 3
Prepared statement........................................... 5
Trenin, Dmitri, deputy director, program cochair, senior
associate, Foreign and Security Policy, Carnegie Moscow Center,
Carnegie Endowment for International Peace, Moscow, Russia..... 9
Prepared statement........................................... 12
(iii)
RUSSIA: BACK TO THE FUTURE?
----------
THURSDAY, JUNE 29, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:07 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Richard G.
Lugar (chairman of the committee) presiding.
Present: Senators Lugar and Biden.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. The Foreign Relations Committee meets to
examine the current status of political developments in Russia
and the future of the United States-Russia relationship.
Today's inquiry builds upon two hearings on Russia that the
committee held last year. At those hearings, I noted that
President Putin's increasingly authoritarian style, his control
of the media, and his retribution against political opponents
have left the fate of the democracy in Russia more ambiguous
than at any time since the collapse of the communist system.
These internal developments, coupled with Russia's increasing
pressure on its neighbors, its resistance to resolute
international action to the proliferation threat in Iran, and
its willingness to use its energy supplies for political
leverage, have complicated United States-Russian relations.
Russia's membership in the G-8 was once a hopeful sign of
its evolution toward a more open society and economy. Now, as
Russia prepares to host the G-8 summit in St. Petersburg, the
other seven G-8 nations are dealing with the incongruous
elements of Russian membership. And while some have called for
the United States to boycott the summit, I support the
administration's decision to participate. Rather than boycott,
we should build cooperation with our allies in challenging
negative trends that we perceive coming out of Moscow.
The United States, Europe, and Japan should show strong
support for Russian civil society, a free and independent
media, the application of the rule of law, and a resolution of
conflicts in the region, while keeping under careful scrutiny
the implementation of Russia's new NGO law.
Russia is an important country with which the United States
must have a working relationship. Attempting to isolate Russia
is likely to be self-defeating and harmful to American
interests. The dilemma for American policymakers is how to
strengthen Russia's respect for democracy while simultaneously
advancing cooperation with Russia on issues that are vital to
American security and prosperity. The United States must take
the long view. Russia is still in the early stages of a
complicated post-Soviet evolution. The United States and Russia
do have many convergent goals. We share a strong interest in
combating terrorism and safeguarding weapons of mass
destruction. Russia's oil and natural gas reserves have
provided it with an economic windfall. But, over the long run,
it will need to achieve economic diversification and greater
integration with Western economies if it is to have more than a
one-dimensional economy.
The Putin government's foreign policy and domestic
political strategy depend heavily on energy revenues. And,
according to the Energy Information Agency, Russia will earn
about $172 billion in 2006 from oil exports. For every one
dollar increase in the value of a barrel of oil, Russia earns
an additional $1.4 billion per year in revenue. In the short
run, this influx of hard currency has eased many structural
problems of the Russian economy and provided the Putin
government with the means to reward supporters. It also gives
Russia enhanced influence over nations in Europe and elsewhere
who are dependent on Russian oil and natural gas.
This was underscored last January, when Russia stopped
pumping natural gas to Ukraine after the two sides had failed
to reach agreement on Russia's proposed quadrupling of the
price of gas. The agreement that resolved the crisis will soon
expire, and President Putin again faces a choice of whether the
world should view him as a reliable and productive energy
security partner. But, even beyond Ukraine's situation, threats
to divert energy supplies eastward and interference in
development of energy resources in Central Asia are
unacceptable.
The United States must engage with Russia on energy
security to send a clear and strong message promoting
principles of transparency, rule of law, and sustainability.
Efforts under the current United States-Russia energy dialog
are an integral part of our diplomatic relationship with Russia
and should be expanded and fully supported.
I've introduced Senate bill 2435, the Energy Diplomacy and
Security Act, which recognizes the new reality of energy as a
national security priority. It enhances United States energy
diplomacy capabilities to support the type of rigorous energy
security dialog we must have with Russia and other important
nations in the global energy equation. Such a dialog must
recognize the long-term mutual interests shared by the United
States and Russia in stable energy markets.
We are joined by a distinguished panel this morning that
will help us examine the trends in Russia and options for
United States policy, particularly as they relate to the G-8
summit. We welcome Ambassador Stephen Sestanovich, the George
F. Kennan senior fellow for Russian and Eurasian Studies at the
Council on Foreign Relations; Dr. Dmitri Trenin, Deputy
Director at the Carnegie Moscow Center, in Moscow; and Ms. Amy
Myers Jaffe, the Wallace S. Wilson fellow at the Baker
Institute Energy Forum at Rice University. And,
parenthetically, I would like to say I am pleased Ms. Jaffe
will be speaking on domestic energy security issues at the
Lugar-Purdue Energy Summit at the end of August. We look
forward to seeing you again on that occasion in Indiana. Now,
we thank our witnesses for joining us today. We look forward to
their insights.
As I have mentioned to our witnesses, we will try to
conclude our hearing sometime in the area of 10:45 to 11
o'clock to make it possible for the committee to have an
important markup of the India nuclear security legislation,
which we will also take up today in an eventful morning. But we
should not be rushed in the process. I ask each of the
witnesses to know that your full statements will be made a part
of the record, and to summarize, as you wish, but to take time,
because we are here to hear you and your counsel today. Then
we'll have a round of questions with members who will be
joining us.
As my colleague, Senator Biden, our distinguished ranking
member, joins us, I will ask him, also, for his opening
statement.
Now, we'll recognize you in the order that I first listed
your presence, and that would start with the Honorable Stephen
Sestanovich. And if you would please proceed, Steve, we'd much
appreciate it.
STATEMENT OF HON. STEPHEN SESTANOVICH, GEORGE F. KENNAN SENIOR
FELLOW FOR RUSSIAN AND EURASIAN STUDIES, COUNCIL ON FOREIGN
RELATIONS, WASHINGTON, DC
Ambassador Sestanovich. Mr. Chairman, thank you. It's an
honor to appear before your committee again with such
distinguished colleagues and to have the opportunity to address
the important policy questions you've sketched in your remarks.
It won't surprise you that I'm armed today with many copies
of the recent report of the Council on Foreign Relations Task
Force on Russia. My hope is that you will instruct committee
staff members to remind you of the report's recommendations on
a daily basis.
The Chairman. And to advise members to read the report,
perhaps.
Ambassador Sestanovich. Let's hope so.
I have prepared a brief written statement, and hope that it
can be entered into the published record of this hearing. It
touches on a series of issues that I'm sure we will address in
the course of our discussion.
First, Russia's economic and social transformation, not
only the surge of economic growth in this decade, but the
gradual emergence of a middle class, with all that that should
mean.
Second, the political transformation that has accompanied
these economic and social changes, a centralization of power
that has undone much of Russia's post-Soviet pluralism.
Third, the persistence of Russian-American cooperation on
first-order security issues, cooperation that is always
incomplete and never problem-free, but that serves the
interests of both sides. We see this most recently, as you
noted, Senator, and most notably, in diplomatic efforts to
check Iran's nuclear activities.
Finally, the fourth theme, the erosion of Russian-American
partnership on other problems. Even issues that were supposed
to involve the clearest examples of common interest, like
energy security or counterterrorism efforts, have been
affected. The most acute disagreements arise from Russia's
relations with its neighbors and from Russia's internal
evolution.
Mr. Chairman, we're entering a new phase of Russian-
American relations, not so tense and dangerous that it should
be thought of as a new cold war--one hears this phrase these
days--but, all the same, one that will confront us with some
unfamiliar choices. For this reason, rather than summarize the
analysis contained in the statement I've submitted, I'd like to
offer a few thoughts about the dilemmas that American
policymakers will face as they try to define this new
relationship.
I see three dilemmas--one having to do with the traditional
goal of integrating Russia into international frameworks, a
second involving the steadily more challenging problem of
Russia's relations with its neighbors, and a third involving
what a colleague of mine has called Russia's ``de-
democratization.''
First, about integration. We're almost at the 15-year
anniversary of the collapse of Soviet communism. Throughout
this period, American policy has tried to increase Russian
participation in multilateral structures--the G-8, APEC, the
OSCE, the WTO, the Council of Europe, even NATO. One could go
on: ASEAN, the Bosnia Contact Group, the Mid-East Quartet. In
this effort, doubts about how well Russia fits in, whether it
has really bought into the group aims and ethos, have generally
been overridden by a desire to have Moscow inside the tent. The
current controversy over President Putin's chairmanship of the
G-8 is just the latest version of this dilemma.
Most people, like the members of the CFR Task Force, I
might add, generally favor inclusiveness. But Russia's internal
evolution makes the choice a less obvious one. After all, a
member that doesn't buy into group norms usually makes the
group work less well. There's much to say on this subject,
whether in connection with WTO accession or with the OSCE's
election monitoring role or with Rosneft's IPO, but let me
simply state the dilemma. If we're entering a period in which
Russia's lack of buy-in is a greater problem, do we come down
on the side of greater inclusiveness or of protecting the
effectiveness and integrity of our institutions?
Second, a dilemma concerning Russia's policy toward
neighbors. For 15 years it has been American policy to try to
develop good relations with almost all the post-Soviet states
and to finesse problems that arose when their relations with
each other were not good. The approach was usually a workable
one, and it particularly served the interests of states that
were hoping to expand their ties to the West without provoking
Moscow's wrath. But Russia's deteriorating relations with
several of its neighbors, and their own readiness to take more
dramatic steps, may make this strategy of finesse harder to
apply. Remember, several states are now talking about quitting
the CIS, the Commonwealth of Independent States, the regional
organization that Russia dominates, for good. And applicants
for NATO membership now include core constituents parts of the
former Soviet Union; for that matter, of the Russian empire.
Here's the dilemma we need to bear in mind. If we value
good relations with all sides among the post-Soviet states,
will we end up giving vulnerable states less support than they
need? If, however, we offer them fuller support, will we only
feed Russia's sense of grievance and stimulate greater
confrontation with states that are hard to help?
Finally, a word about Russia's drift away from democratic
institutions and values. For 15 years, American policymakers
have wanted to see the best in what was happening in Russia. We
have sometimes pulled out punches so as not to weaken
democratic leaders who were, we thought, doing their best under
difficult circumstances. Criticizing them, it was feared, would
undercut them and undermine American influence.
Today, this problem looks a little different to all of us.
It's harder to think of Russia's leaders as well-meaning
democrats simply doing the best they can. And at a time when
anti-American sentiment seems to be on the rise in Russia, the
question of how to have real influence is more acute than ever.
It frames choices for us like the following. Will speaking
out more openly about democracy only identify it as a lever
that Westerners use to weaken Russia? Won't we, thereby, weaken
support for democracy, even among people who should be its
natural advocates? On the other hand, if we confine Russian-
American dealings to narrow, practical matters of what we would
call national interest, won't we confirm, once and for all, for
skeptical Russians, that the United States does not understand,
as one Russian friend put it to me recently, the difference
between good and evil?
Mr. Chairman, these are genuinely hard questions, and there
may be no ``one size fits all'' answers for them. But we're
going to need answers of some kind. Let me venture one
suggestion about how--or, more precisely, where--to start
thinking about these questions. However cleverly we may analyze
these issues in this hearing room, in our government, in the
op-ed pages of our newspapers, we're unlikely to hit on good
answers--and, still less, on good policies--unless we undertake
this effort with our friends and allies in Europe, in both the
European Union and in NATO. And we're unlikely to have the
influence that we want with any of the post-Soviet space--with
the post-Soviet states unless we are pursuing a policy that has
been developed jointly with our allies. There are few policy
problems more worthy of urgent collective thought with our
closest friends than these.
Thank you, and I look forward to this discussion.
[The prepared statement of Ambassador Sestanovich follows:]
Prepared Statement of Hon. Stephen Sestanovich, George F. Kennan Senior
Fellow for Russian and Eurasian Studies, Council on Foreign Relations,
Washington, DC
Mr. Chairman, I want to thank you and your colleagues for the
invitation to join you in today's hearing on Russia and Russian-
American relations.
Your discussion of these questions is important and timely. Not so
long ago, Russia's internal evolution and the state of relations
between Moscow and Washington were hardly topics of public debate. We
can already regret this inattention. Certainly when the leaders of the
G-8 agreed in the summer of 2002 to hold this year's meeting in St.
Petersburg, they did not imagine that 4 years later legislators,
policymakers, and experts might be discussing whether we have entered a
``new cold war'' with Russia.
Has the cold war resumed? My emphatic answer to this question is
no. The interests of neither side would be served by such a conflict,
and there is no serious basis for it. But something does appear to have
gone wrong with the widely-shared expectation of a few years back, that
Russia was rejoining the West. Its internal evolution, its foreign
policy, and the outlook of its leaders were thought to be creating the
basis for a stronger partnership with the United States and the world's
leading democratic states. How differently things have turned out is
suggested by the very title of Dmitri Trenin's article in the current
issue of Foreign Affairs: ``Russia Leaves the West.''
I should note here that, to understand precisely what has gone
wrong, the Council on Foreign Relations last year constituted an
independent task force on U.S. policy toward Russia, under the
cochairmanship of John Edwards and Jack Kemp. Its members included
distinguished scholars, business leaders, representatives of
nongovernmental organizations with long experience in Russia, and
former senior officials from administrations of both parties. My
remarks to you today are shaped by the conclusions and recommendations
of this group, whose report was issued last March under the title,
``Russia's Wrong Direction: What the U.S. Can and Should Do.''
The Task Force began its deliberations with this assumption, to
which it remained committed throughout its work: Russia matters. If one
looks at the big issues that affect the security and well-being of the
United States now and in the future--terrorism, the proliferation of
weapons of mass destruction, tight energy markets, climate change, the
drug trade, infectious diseases, human trafficking--it's hard not to
notice that Russia is a major factor in almost all of them. The United
States will have a better chance of dealing effectively with these
issues if Russia is on our side, sees problems the way we do, and can
contribute to resolving them.
Of course, it would have been possible to say exactly this at
virtually any point in the past 15 years. During most of this period,
Russia was treated as a major power largely as a matter of courtesy. In
1998, had the other members of the G-8 doubted Russia's fitness to sit
at the same table with them, it would probably have been because Russia
was the only one present in danger of an imminent financial meltdown.
The revival of sustained economic growth has changed all this. In
the 1990s Russia struggled to pass its annual budget, limped from one
unsatisfactory agreement with international lenders to the next, and
attracted less foreign investor interest than tiny countries of Central
and Eastern Europe. In 2006, Russia will record its eighth consecutive
year of growth (a cumulative expansion that has increased GDP by 65
percent), and its fifth consecutive budget surplus. Last week its
finance minister announced that Russia will pay its remaining Paris
Club debt early. Wage and pension arrears--for years a source of
routine hardship for teachers, civil servants, doctors, and millions of
other Russians--have virtually disappeared. The national unemployment
rate has dropped from 10 percent to 7 percent since 2000; and the
number of Russians living below the government's poverty line dropped
from 42 million in 2000 to 26 million in 2004 (and strong growth since
then has surely reduced the number further).
This success story goes beyond the easing of everyday life for the
poorest of Russian society, or the burgeoning number of its
billionaires, or the strength of the government's credit rating. For
the first time in a century, a Russian middle class is emerging.
Measured by many Russian sociologists at approximately a quarter of the
national population, it reflects changing consumption patterns, the
confidence of those who have at last become property owners, the
expansion of small business, higher educational levels, greater travel
opportunities, and a mindset of new attitudes and expectations.
Any political scientist can tell you that such a social and
economic transformation is the essential guarantee of a ``normal''
political system--and should cement a positive Russian-American
partnership. This was the hope and conviction of all who were involved
in U.S. policy toward Russia in the 1990s, and I am sure it remains so
today. Over the long term, the emergence of a Russian middle class may
well play exactly this crucial historical role. But in the short term
it has not done so.
Instead, at every level of Russian politics, the dominant trend of
the past 5 years has been toward the erosion of pluralism and, in its
place, the arbitrary and unregulated exercise of state power. This has
been true of relations between the branches of the Federal Government,
between center and periphery, between the government and the media,
between government and civil society, and between those who wield
political power and those who command economic resources.
The result of this concentration of power is easy to summarize:
Russia's institutions are less transparent, less open, less pluralist,
less subject to the rule of law, and less vulnerable to the criticism
and restraints of a vigorous opposition or independent media. In
today's Russia there are no real counterweights of any kind to the
Kremlin and the state bureaucracy. The most important decisions
concerning the future of the nation are made by a handful of people
exercising power for which they will not in any meaningful sense be
held accountable.
Even where elections continue to take place (and this is for a
shrinking number of offices) they are under very careful and effective
control. Opposition parties can be kept off the ballot by denying them
registration. Once on the ballot, they can be removed in the course of
a campaign if they seem to be building too much popular support. They
can be denied television time and starved of political contributions.
This past spring the leader of one opposition party was actually
removed from his post because he had fallen out of favor with the
Kremlin.
In 1998, then, Russia may have stood out at the G-8 as the only
member on the verge of financial collapse. Today it stands out as the
only member moving away from the modem political mainstream.
It is often said that by the end of the 1990s--a decade that
brought economic privation, fractious politics, bureaucratic corruption
and a seeming breakdown in the effectiveness of state institutions--the
Russian people desired relief from disorder. They do not really mind,
it is thought, a little authoritarianism if that's what it takes to
solve their country's problems. President Putin's centralization of
power, in this view, is exactly what the people want.
It is impossible to question Mr. Putin's popularity--polls
consistently give him a high approval rating, most recently 70 percent.
And if Russians like their President, Americans have no business
second-guessing them. But we should not over-interpret Mr. Putin's
popularity--or equate it with stability and, still less, effective
governance. It is one thing to say that Russians like their leader,
quite another to say that they think he is actually solving their
problems, or that they like bureaucratic authoritarianism, think it
should continue, and would vote for it if presented with serious
alternatives in an open political process. The same polls, after all,
show that 70 percent of Russians disapprove of the performance of Mr.
Putin's government. And although one sometimes hears that he captured
strong support for his populist campaign to exile or imprison a number
of ``oligarchs,'' a recent poll suggests that ordinary Russians have
different priorities: 79 percent answered that it is corrupt state
officials that are harming the country most. (Only 12 percent said rich
businessmen were doing more harm.)
Similarly, while it is very common to hear that Russians do not
understand and are not ready for democracy, polls show that, in fact,
strong popular majorities want a vigorous opposition and independent
media able to criticize public officials. In this, they seem to know
something that President Putin does not. Although he promises to attack
official corruption, he has apparently not made the connection between
this goal and a competitive political system, bureaucratic transparency
and accountability, investigative journalism, and a vigorous
nongovernmental sector. To the extent the Kremlin has a policy on
corruption, it is this: Systematically to weaken the most potent tools
for combatting it.
Mr. Chairman, this reading of Russia's domestic evolution is not a
matter of much dispute among informed observers, either here or in
Russia itself. Specialists may disagree about certain points, such as
how great the differences are between the current situation and that of
the 1990s. There are also disagreements about the likely future
trajectory of Russian politics--about whether things are likely to get
worse before they better, about how unified the current ruling group
is, about the time frame over which a more normal system serving the
interests of the emergent middle class might take shape.
But these disagreements are at the margin. They do not really alter
the basic judgment about the extreme centralization of power in
contemporary Russia or about the absence of checks on its arbitrary
use. There is, however, more room for disagreement about what all of
this means, or should mean, for Russian-American relations.
Let me first focus on what it does not mean. It does not mean that
the United States and Russia cannot or should not cooperate on first-
order problems involving the security interests of both sides. Some of
these issues have lately been a prominent part of the Russian-American
agenda, and the record suggests that Washington and Moscow are not
having any difficulty working together. Iran's effort to develop its
nuclear-weapons options is an outstanding case in point. I doubt that
any other issue has been more frequently discussed between Secretary
Rice and Foreign Minister Lavrov over the past year. During this same
period worries about Russia's internal direction have been more openly
expressed by American officials at all levels--most recently, by the
Vice President. Even so, Russian and American approaches to Iran have
remained broadly convergent. Russia does not refuse to cooperate on
security issues because we refuse to call it a democracy.
The same is true of cooperation on the so-called ``loose nukes''
question. Less than two weeks ago, Russian and American negotiators
were able to finalize an agreement to renew the umbrella agreement
under which ``Nunn-Lugar'' programs to improve the safety and security
of sensitive, especially nuclear-weapons-grade materials have been
conducted. There is no reason to expect this pattern to change. When
cooperation rests on a compelling Russian security interest,
disagreement on other matters is not going to derail it.
The fact that cooperation on such issues is possible does not, of
course, mean that it is automatic or complete. There remain important
differences between the way Russian policymakers view these issues and
the outlook of American and European officials. Moscow, for example,
appears reluctant to associate itself with a strategy of threatening
Iran with international isolation if it continues on its present track.
By the same token, it is Russian policy to assure Tehran that it will
be able to resume an enrichment program once it addresses questions
about past nuclear activities and accepts appropriate safeguards.
Despite these differences, the United States has over the past year
been able to win increased Russian support for measures that isolate
Tehran. Without forgetting the possibility of disagreements in the
future, it should be American policy to create an even stronger
foundation for Russian-American nuclear cooperation in general. (For
this reason, I might note that the Kemp-Edwards CFR Task Force
supported the opening of bilateral negotiations on a so-called ``123
agreement''--which would make possible cooperation on civil nuclear
energy projects. Without such an agreement, the U.S. lacks the legal
and institutional infrastructure to expand cooperation in this field.)
Nonproliferation and nuclear security represent one extreme in
Russian-American relations. They are the issues on which two sides have
retained an ability to work together, largely unaffected by the
negative trends of Russian domestic politics. Unfortunately, these
issues do not represent the whole of the relationship. In other areas,
cooperation has often given way to discord, even in instances where
American policy has until recently taken for granted a strong common
interest.
Counterterrorism provides one of the most striking--and in some
respects, most surprising--examples. Since at least 2001, the threat of
terrorist attacks has been Exhibit A for the argument that in dealing
with the new security challenges of our time Russia and the U.S. have
to stick together. How then to understand the strange Russian
initiative at last year's summit meeting of the Shanghai Cooperation
Organization, calling on Washington to end its use of military bases in
Central Asia? Access to these bases by NATO and American forces has, of
course, only one purpose--to support their operations in Afghanistan.
Russia professes to agree with what we and our allies are doing in
Afghanistan, but for Moscow this interest was apparently trumped by
another factor. Recall that last summer the United States and the
governments of the European Union found themselves in the middle of a
disagreement with the President of Uzbekistan about what kind of an
inquiry there should be into the mass killing of civilians by Uzbek
forces. What President Putin apparently saw in this standoff was an
opportunity--too inviting to resist--for a partial roll back of the
American presence in Central Asia. His stance surely encouraged the
Uzbek government's decision to end Western use of the most important
airfield in the region. More significantly, it demonstrated that a
seemingly strong common interest can easily be subordinated to petty
geopolitical point-scoring.
Moscow's confrontation with Ukraine over gas supplies and prices
teaches a similar lesson. It would be hard to imagine a more
significant Russian interest than its reputation as a reliable supplier
of energy to international, especially European, markets. Nothing has
ever done more to damage this reputation than the unprecedented
decision last January to turn off the gas to Ukraine--and with it, to
the rest of Europe. It is still not easy to make commercial sense of
this action, since neither Ukraine nor Russia's other European
customers (nor for that matter, the United States) disputed the idea
that energy relations should be governed by market pricing. The strange
Russian handling of the affair--in particular, President Putin's
aggressive public role as the lead policy spokesman--made it clear that
for Moscow this was in reality a political confrontation, not simply a
commercial one. Ukraine's new leadership had come to power in one of
the most embarrassing Russian policy debacles of recent years. Now, on
the eve of parliamentary elections, the leadership of the ``Orange
coalition'' was divided, and energy clearly seemed a tool for dealing
it a further political setback.
Mr. Chairman, this affair was deeply shocking for European
policymakers. Subsequent Russian actions and statements--such as the
blunt comment last spring by Gazprom management that Russia might
simply sell its gas elsewhere if European countries are not willing to
cede targeted chunks of their energy infrastructure, or last week's
announcement that Russia has no intention of ratifying the European
Energy Charter--have only deepened this concern.
These two episodes--one involving counterterrorism cooperation; the
other, commercial energy contracts--have a unifying theme. They suggest
that over the next several years Russia's interactions with its
neighbors are likely to play an increasing--and increasingly negative--
role in Russian-American relations. As former prime minister Yegor
Gaidar put it recently, Russia has entered a ``dangerous period of
post-imperial nostalgia.'' Already the apparent desire to assert a
vanished primacy has prompted Russia's leaders to take actions that
other governments find irresponsible. It is important to note that
Russian policymakers have also shown themselves capable of quick
backtracking once they see how deeply counterproductive their actions
really are. This rapid learning has kept conflicts from escalating, but
it too has its costs. In any country, retreating in the face of fierce
international criticism stores up resentments for the future; in Russia
it feeds a conviction that the other major powers consistently treat it
unfairly.
Mr. Chairman, over the next 2 to 3 years, the U.S.-Russian
relationship will sometimes seem like two different relationships,
based on different principles and expectations. Particularly on those
security issues where the interests of the two sides make it easy and
necessary to work together, cooperation will continue. Yet on other
issues--indeed, on a growing number of them--disagreement and discord
seem more likely.
Without dramatizing this transformation, or calling it a ``new cold
war,'' we should recognize that accumulated frictions between Russia
and the United States can over time have consequences that go well
beyond a downturn in bilateral relations. They raise the prospect of a
broader weakening of unity among the leading states of the
international system. If growing consensus among the major powers gives
way to a new line of division between democrats and authoritarians, if
their energy strategies diverge, or if they respond in different ways
to terrorism, America's chances of success in meeting global challenges
will be reduced. At present, the risk that such divisions will emerge
may seem remote, but policymakers in both the Congress and the
Executive Branch should not fail to anticipate the tipping point.
Americans should understand how much Russia's future course--above all,
whether its policies, at home and abroad, move further from the Western
mainstream--can affect the outcome.
Thank you.
The Chairman. Well, thank you very, very much for that
excellent testimony and for your entire paper, which will be
made a part of the record.
Ambassador Sestanovich. Thanks.
The Chairman. Dr. Trenin, we're delighted to have you again
before the committee, and would you please proceed?
STATEMENT OF DMITRI TRENIN, DEPUTY DIRECTOR, PROGRAM COCHAIR,
SENIOR ASSOCIATE, FOREIGN AND SECURITY POLICY, CARNEGIE MOSCOW
CENTER, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE, MOSCOW,
RUSSIA
Dr. Trenin. Thank you very much, Mr. Chairman. It's--is it
working? Yeah. Thank you very much, Mr. Chairman. It's a high
honor and a rare privilege for me to testify before the
committee.
I, too, produced a written statement, which, as you said,
will be made----
The Chairman. Yes.
Dr. Trenin [continuing]. Part of the----
The Chairman. In full.
Dr. Trenin [continuing]. Official record.
Let me highlight some of the things, and expand some of the
things, which form the basis of that statement.
I agree, in many respects, with what my distinguished
colleague and friend Steve Sestanovich has laid out, but let me
add a different dimension to what he has said.
Russia is a country which has what I would call a tsarist
political system, with all major decisions taken, essentially,
by one institution, the Presidency. Over the past 6 years, the
degree of power centralization in Russia has grown
dramatically. While authoritarian and overcentralized, however,
the Russian political system rests on the acquiescence of the
governed. If you like, this is a version of authoritarianism
which is democratically legitimized. Now, this is something
which is occasionally not given proper attention.
Seen historically, I do not think that Russia is heading in
the wrong direction. Whatever the current ups and downs of
Russia's domestic politics are, and Russia's economic
development are. Russia--rather, in my view, it has returned to
the path of natural development which--that she was forced to
abandon by the Bolsheviks. It was never serious to expect
Russia to become a liberal democracy after three-quarters of a
century of communist rule. By the same token, to regard
Yeltsin's Russia as a democracy was wishful thinking. Russia
was freer and more pluralist in Yeltsin's times, but this was
mostly the result of the state being too weak, rather than the
democratic forces assuming a major role in the country's
politics.
In the future, as well, there will be no cutting corners.
For a number of reasons, Russia's modernization cannot proceed
through integration into the European and Euro-Atlantic
institutions, as was the case in Central Europe, and could be
the case in Eastern Europe, as well. Russia would have to
perform the feat of modernization on its own. There are many
factors working against that. However, there are several
important and powerful factors working for that. And one of the
factors is the development of capitalism, and the other one is
the openness of the country to the outside world.
I would submit to you that Russia's story is not the story
of a failing democracy. I think democracy in Russia is a thing
for the future. But, rather, this is a story of evolving
capitalism. It's not yet market capitalism, but it's a very
real and vibrant, if rough, capitalism.
What I find as a weak point in the criticism of the current
Kremlin policies is the assumption, either stated or not, that
should pressure on the Russian authorities be kept up at a high
level for a sufficiently long period of time, either the
Kremlin will relent or it will be defeated in some version of a
democratic revolution, and a new, better Russia would somehow
emerge. I have been caricaturizing a little bit, but I find
this to be a very dangerous illusion.
Positive changes in Russia will come, and they will come
from within, but they will need time--and, I would say, a long
time--to coalesce. I think that what was highlighted in--at the
very beginning of Ambassador Sestanovich's presentation, the
growth and the future role of the middle class, is the thing
that will ultimately lead Russia on the road to a functioning
democracy.
That does not mean, however, that the outside factor has no
role in how Russia is developing. However, this outside factor
will not be some foreign government's pressure; but, rather,
the general openness of Russia, which I have already mentioned,
to the outside world, and, in particular, its proximity to the
European Union--again, another issue that Ambassador
Sestanovich highlighted in his presentation.
Throughout Russian history, impatience with the pace of
Russia's modernization has been a recurring theme--and, I would
add, a recurring problem. It is understandable, but it is not
necessarily very helpful.
Turning to Russia's foreign policy, one thing I want to
stress from the very beginning, that in contrast to the 1990s
and the early 2000s, the Russian leadership is no longer
practicing accommodation and adjustment par excellence to the
international environment; rather, it is seeking to return to
the world scene as a major independence player. There is a
widespread perception among the Russian leadership that in the
1990s their country was anything but sovereign, that it was
weak and overdependent on others, led by the United States.
Russia's policies today could be seen as a backlash to that
reality or perception, however you choose to look at that.
In this situation, it is a reasonable policy for the United
States to look for that in various areas of common ground, and
those areas have been richly defined in Ambassador
Sestanovich's presentation, and I do not want to go over the
same ground again.
But let me focus on one issue in the remaining few minutes
that I have, and that is the United States-Russian interaction
in the former Soviet Union. Let me state very frankly that the
Putin administration's strategic objective is creating a
Moscow-led power center in the former Soviet Union. They look
at Russia as a great power, and they look at the former Soviet
Republics as areas where Russian business influence, political
influence, security influence, and cultural influence should be
bolstered.
Most of the member states of the still-functioning, still-
existing Commonwealth of Independent States are likely to
respect Russia's interests and will seek, in return, to draw
benefits from their close relations with Russia. However, none
of them is likely to become Russia's satellite. I don't think
that, even today, one can name a single post-Soviet country
that is controlled by Moscow.
Let me address one issue within this context which I think
is extremely important and potentially very dangerous. Over the
past decade and a half, Russia has internalized both Ukraine's
independence and the border that divides the two countries.
More recently, it has learned to live with the consequences of
the Orange Revolution and Ukraine's political pluralism.
However, Ukraine's bid to join NATO and the prospect of a
membership action plan being offered to Ukraine at the next
NATO summit in Riga, in late November this year, puts this
relationship to a very major test. Ironically, the step
designed to finally guarantee Ukraine's territorial integrity
has the potential of reawakening the sleeping issues, such as
the status of the heavily Russian-populated Crimea, home of the
Russian Black Sea fleet. The situation is highly complex due to
the low popularity of NATO accession among the Ukrainian
population, who will need to vote on the issue in the national
referendum. There are differences on the NATO issue even among
the coalition partners and ambivalence within the principal
political parties. The stakes are unusually high, not to be
compared with either the Polish-Czech-Hungarian or the Baltic-
Romanian-Bulgarian accessions to the Atlantic Alliance. Not
only is Ukraine different from Poland or Latvia, the Russia of
2006 is very different from the Russia of 1996, or even the
Russia of 2002.
Shall I continue, Mr. Chairman?
The Chairman. Yes, please.
Dr. Trenin. In the next few months and years, Ukraine can
become a political battleground between the competing domestic
forces and also between Russia and the United States with
important and not yet predictable consequences for all the
parties involved.
To put it very mildly, not everything depends on Russia in
the United States-Russian relationship. Russian cooperation on
the United States agenda items will depend on how the Russian
leadership will judge United States actions on the Russian
agenda priorities. Although many in the Russian policy
establishment today view the situation in the former Soviet
Union in terms of a zero-sum game, and, in their view, with the
United States actively working to undermine Moscow's influence
in the new states, developments in Ukraine and also in Georgia,
which are approaching danger points, call for a serious
thinking and dialog which would help avoid misunderstanding and
even confrontation which would put the United States-Russian
relationship toward a new low.
Let me say, in conclusion, that the title of the hearing,
``Russia: Back to the Future?'' could be read, in my view, as
``Russia returning to the path it quit 90 years ago on its
communist adventure,'' rather than backsliding to Soviet days.
It is tsarist, capitalist, open, relatively free, in many
respects--though not, I emphasize, in the political sphere--
increasingly nationalist, another thing which needs to be
highlighted. And Russia is the last former communist country to
have discovered nationalism, though of a peculiar post-imperial
variety. Russia is also assertive internationally. At this
point, it is neither pro-United States nor anti-United States.
It is a challenge to deal with Russia, but ignoring or
misreading it, as my friend and colleague has said, carries a
price.
Thank you very much.
[The prepared statement of Dr. Trenin follows:]
Prepared Statement of Dr. Dmitri Trenin, Deputy Director, Program
Cochair, Senior Associate, Foreign and Security Policy, Carnegie Moscow
Center, Carnegie Endowment for International Peace, Moscow, Russia
Mr. Chairman, ladies and gentlemen of the committee, it is an honor
and a privilege to be asked to testify before this committee. Let me
address the issues I was asked to comment on in the letter of
invitation signed by Senator Lugar.
developments in russia and their potential impact on the future of the
united states-russia relationship
Political reform
Russia has a tsarist political system, in which all major decisions
are taken by one institution, the Presidency. In fact, this is the only
functioning political institution in the country. Separation of powers,
enshrined in the 1993 Constitution, does not exist in reality. On the
contrary, unity of power and authority has become the new state-
building doctrine. All other federal institutions (i.e., the
parliament, the cabinet, the high courts) are dependent on, and de
facto subordinate to the President and his private office (collectively
referred to as the Kremlin). The tradition is back in the saddle.
Over the last 6 years, the degree of power centralization has grown
dramatically. Regional legislation has been brought in conformity with
the federal Constitution and federal laws. The Federation Council
(upper chamber) has ceased to be the regional leaders' club and has
become a Russian version of the German Bundesrat, with its members (who
proudly call themselves senators) appointed, and recalled, by the
regional authorities. The governors of Russia's 88 regions have lost
their independence rooted in direct elections, and are now hired and
fired by the Kremlin. Single-mandate constituencies in the elections to
the State Duma (lower chamber) are being phased out. From the next
election (December 2007) on, only party lists will compete, with the
entrance bar set very high (7 percent of the popular vote). The reform
of the judiciary has not resulted in expanding its independence. The
courts are even more dependent on the authorities, and the State
Prosecutor's office has become the principal political instrument in
the hands of the Kremlin for dealing with its adversaries.
While authoritarian and over-centralized, the Russian political
system rests on the acquiescence of the governed. Vladimir Putin has
remained popular throughout the 6 years he has been in power. Above
all, he is credited with reinstating stability lacking under both Boris
Yeltsin and Mikhail Gorbachev. For this democratically legitimized
authoritarian system to continue to operate in the current mode,
Putin's successor needs to be genuinely popular.
Managing succession under such conditions is extremely difficult.
All indicators point to Putin's desire to step aside when his term is
up (spring of 2008) and let a new man take over. Yet, both informal
successors (first deputy Prime Minister Dmitri Medvedev and Defense
Minister Sergei Ivanov who is also a deputy PM) have obvious problems
with electoral appeal. Thus, Putin may make an 11th hour surprise
choice in favor of a lesser-known figure who would be able to galvanize
support for the supreme authority and allow it to sail smoothly through
the succession straits.
There can be no guarantee of a smooth sailing, of course. It is
true that political opposition in Russia is no match for the
authorities. The Communist party, Yeltsin's former nemesis, has been
much reduced in influence and effectively locked up in a niche of
elderly nostalgics. The liberals and democrats remain pathetically
disunited and are growing increasingly marginal. Nationalists represent
a more serious challenge. In the past, the Kremlin was been able to
tame them with the help of super-loyal Mr. Zhirinovsky. However, a
recent project to found a pro-Kremlin nationalist party, Rodina
(Motherland), led by Dmitri Rogozin, had to be terminated when the
party threatened to spin out of control and become a real opposition
force. Currently, the Kremlin's strategy is to give a new lease on
political life to Mr. Zhirinovsky; to co-opt the more conformist
nationalist elements within the ruling bloc, United Russia; and to
present extreme nationalists as a ``clear and present danger'' (to
replace the now emasculated Communists) which can only be effectively
dealt with by the Kremlin itself.
It is true that ultranationalism and populism are the biggest
threat to Russia's domestic development and to Russia's relations with
the rest of the world, starting with its neighbors. The problem is the
Kremlin's own political effectiveness.
All the unity of power notwithstanding, the Kremlin itself is far
from united. The constellation of clans, which could be visibly
represented by the many towers of the Kremlin fortress, is never
static. There have always been different interests (including some very
material ones), different instincts (depending on the people's past
experiences), and different views about the way the world goes and the
way Russia should be run. While the President reigns, he acts as an
arbiter. As he is preparing to hand over power, the situation becomes
highly dynamic.
Grosso modo, there are two competing groups whose membership does
not neatly coincide with the popular notions of the siloviks vs the
liberals. Both factions agree on the need for a strong authority at
home and a great-power policy abroad. They differ (apart from their
private business interests) on the degree of bureaucratic control over
the economy and the assertiveness and unilateralism in Russia's foreign
policy. Thus, it is the internal rivalries and clashes, whether within
the Presidential administration, the cabinet, or the ruling bloc as a
whole, rather than open political competition, that is likely to mark
and shape Russia's politics in the near and even medium term.
The implications for the United States and indeed for all other
countries are as follows. One has to accept the reality of a highly
centralized political system with a sole decision maker. One needs to
acknowledge the weakness of the political forces who seek to modernize
the system by bringing the competition into the public domain and
turning the presently undivided ``authority'' into a combination of an
accountable government and a professional civil service. One has to
guard against the (still distant) possibility of ultranationalists and
populists taking over the state machine and pushing Russia down the
path of absolute state domination at home and revanchism abroad.
Yet, Russia, seen historically, is not going in the wrong
direction. Rather, it has returned to the path of natural development
which she was forced to abandon by the Bolsheviks. It was never serious
to expect Russia to emerge as a liberal democracy after three quarters
of a century of Communist rule. By the same token, to regard Yeltsin's
Russia as a democracy was wishful thinking. Russia was freer, and more
pluralist, and the state was very weak, but it was not democratic. In
the future, there will be no cutting corners. For a number of reasons,
Russia's modernization cannot proceed through integration into the
European and Euro-Atlantic institutions, as it did in Central Europe
and can do in Eastern Europe. Russia would have to perform that feat on
its own. There are many factors working against it. There are a few,
however, two working for. One is the factor of money, i.e., indigenous
capitalist development. The other one is the country's openness to the
outside world.
The economy and social affairs
The effect of high energy prices on the Russian economy is twofold:
Robust economic growth has continued for 7 years; but the serious
economic reforms started in 2000 have been stopped for the time being.
The Russian government now wields substantial financial power. Yet, it
has been rather conservative with regard to spending money. The Kremlin
has created a stabilization fund as a cushion against a steep fall in
oil and gas prices. Russia's currency reserves are third-largest in the
world. Moscow has been repaying its foreign debt ahead of schedule.
Russian living standards have been steadily rising since the 1998
financial collapse. In the 2000s, an average annual increase in take-
home pay has been in the range of 10 percent. In fact, most Russians
have never had it so good in their entire history. This, however, is
not how a significant portion of the population view things.
In contrast to Soviet uniformity, Russia's social picture is
characterized by striking inequality. The top 10 percent of the
population have an income 15 times higher than the bottom 10 percent.
The middle class comprises a mere 25 percent, but it shows signs of
growing. The future of the country will depend on whether some two-
fifths of the population immediately beneath it will rise to join the
middle class or finally sink into poverty.
Freedom and independence of the media
Russia's electronic media, a powerful political instrument, are
controlled by the authorities. The printed press is relatively free
still, although this is changing, but their print runs are very small.
The Internet is vibrant and free, with the number of users rapidly
rising. It has to be borne in mind, however, that the former pluralism
of Russian TV was part of the arrangement between the Kremlin and the
oligarchs rather than a result of a genuine development of civil
society.
On civil society itself, let me say that the process of its
formation is clearly linked with the emergence of the middle class, a
long and difficult process. At present, the authorities attempt to
build institutions of civil society ``from above,'' even as they seek
to minimize or eliminate the role of potential political challengers,
such as the former oligarchs, or foreign fenders, who are feared to be
promoters of ``orange-style'' revolutions.
Status of the rule of law in Russia
President Putin's first-term slogan was establishing the
``dictatorship of law.'' He promoted a legal reform, designed by his
close associate, Dmitri Kozak. Among other things, the reform
introduced trial by jury in the more serious cases, and transferred
control over the penitentiary system from the Ministry of Internal
Affairs (i.e., the police) to the Ministry of Justice. Not
surprisingly, reforming the legal system, traditionally but a tool of
the authorities, has proven to be exceedingly difficult. Moreover,
President Putin has been using the Prosecutor General's office as an
instrument of choice to destroy the power of the more ambitious
oligarchs: Berezovsky, Gusinsky, and Khodorkovsky. Since the initial
accumulation of capital in Russia was essentially lawless, virtually
all new capitalists can be plausibly accused of breaking laws. In this
situation, political challengers or business rivals can easily be
subjected to selective application of justice.
Yet, property ownership requires protection. It would not be too
far-fetched to suggest that the Russian elites will be progressively
more interested in establishing a system which would guarantee their
possessions irrespective of which group happens to control the Kremlin.
The emerging Russian middle class, too, is interested in a system that
would protect their rights against both the swindlers in the private
sector and the arbitrariness of the government bureaucracy. Small
public campaigns have already spontaneously risen in defense of a
falsely accused motorist; crooked property developers; and homeowners
evicted from their houses without fair compensation.
What should be on the United States agenda at the G-8 summit
The G-8 summit and the bilateral meeting of United States and
Russian Presidents in St. Petersburg next month offer a chance to
clarify the United States agenda regarding Russia.
While Russia is by no means a priority for U.S. foreign policy, it
deserves more attention than she is usually given. Very importantly, to
bring positive results and satisfaction, that attention needs to be
properly focused.
The United States will be best served by a frank, principled, and
realistic attitude toward Russia. American leaders should feel free to
raise any concerns that they have regarding developments in Russia or
in Moscow's foreign policy. Even as they do it, however, they must
realize that their chances of influencing the Kremlin's behavior at
home or abroad are at best very limited. They should also be ready to
hear Russian criticism of U.S. Government's policies, and Russian
dismissal of many U.S. claims as either based on double standards, or
disingenuous, or devalued by America's own imperfect record.
The common weak point of many Russian and Western critics of the
Kremlin is the assumption, either stated or not, that should pressure
on the Russian authorities be kept up at a high level for a
sufficiently long time, either the Kremlin will relent, or it will be
defeated in some version of an democratic revolution, and a new and
better Russia would emerge. This is an illusion. Positive changes in
Russia will come, and they will come from within, but they will need
time to coalesce. The principal outside factor will not be some foreign
government's pressure, but Russia's general openness to the outside
world, in particular, the proximity of the European Union.
Americans need to realize that in contrast to the 1990s and the
early 2000s, the Russian leadership is no longer practicing
accommodation and adjustment par excellence to the international
environment. Rather, it is seeking to return to the world scene as a
major independent player.
In this situation, a reasonable policy by the United States would
be to look for areas of common ground. There are several such clusters.
One is nuclear issues, starting with WMD proliferation. Though Russia
disagrees with some United States policy options regarding Iran and
North Korea, nuclear weapons in the hands of either regime would
adversely affect Russia's national security. United States-Russian,
although understandably not easy, would further United States
nonproliferation goals; a break with Russia on that fundamental issue
would encourage the proliferators. Thus, Iran and North Korea should be
at the top of the list.
Nuclear arms control is another area which needs revisiting. United
States-Russian relations are not as amicable as they should be. Mutual
suspicions are high. As the bilateral treaties governing nuclear
weapons reductions are approaching expiry dates, some thought needs to
be given as to the nature of the nuclear weapons relationship between
the two nuclear superpowers.
Finally, nuclear energy is a potential area of very productive
collaboration. Letting Russia be a significant player in the market
presently dominated by the United States and France would be a major
incentive for a closer overall relationship between Washington and
Moscow. Indeed, it would put a major economic pillar under that
relationship, thus stabilizing it.
Another such pillar would be created through United States
companies' participation in the exploration of the Shtokman gas field
in the Arctic, and the Russian company Gazprom's access to the U.S. LNG
market. While Russia cannot be expected to allow foreigners majority
stakes in its oil and gas fields, its policy of swapping upstream
assets for downstream ones would create real energy interdependence and
thus a much higher degree of security.
One way for the United States to contribute to Russia's
modernization is through sharing with Russia its best business
practices. It is the evolution of Russian capitalism which will push
the evolution of Russian society and eventually also Russian polity. In
the area of education, creating opportunities for many more Russian
students to come to study in the United States would be a major
investment in a better future for Russia and a safer world for the
United States.
Finally, the challenge of international terrorism and related
security threats require closer cooperation in places like Afghanistan.
Russia cannot be interested in a U.S./NATO failure in Afghanistan and
the return of the Taliban whom Moscow regarded only 5 years ago as the
greatest external military threat. The issue of drugs trafficking from
Afghanistan calls for joint action between Russia and the United States
(and others, including NATO states and the neighboring countries).
Dealing with the problems in United States-Russian relations is as
important as exploring the potential of the areas of common ground.
Russia's policies and influence in the former Soviet Union
The Putin administration's strategic objective is creating a
Moscow-led power center in the former Soviet Union. This is not a new
version of the Russian empire of the U.S.S.R. Rather, the goal is to
help Russian companies to acquire lucrative economic assets in the
neighboring states (starting with the energy sector), ensure those
states' general political loyalty to Russia and full cooperation with
it in security matters, and promote the Russian language and culture
across the former Soviet space. The principal instruments of this
policy, alongside the bilateral contacts, and its symbols, are the
Eurasian Economic Community and the Collective Security Treaty
Organization.
Most of their member states are likely to respect Russia's
interests, and will seek in return to draw benefits from their close
relations with Russia. However, they are unlikely to become Russian
satellites. Kazakhstan and Belarus, the two countries that are most
integrated with Russia economically, are good examples. The former is
pursuing a carefully balanced foreign policy, maneuvering among Russia,
China and the United States. The latter, though effectively isolated by
the United States and the European Union, and heavily dependent on
Moscow, refuses to merge into the Russian Federation. Armenia, though
it looks to Russia as its historical protector, seeks to strengthen its
ties to both the United States and Europe. Uzbekistan, which only last
year abruptly turned away from the United States and embraced Moscow,
has a long-standing ambition of a regional power, which complicates
(also Russia's) relations with the smaller countries, such as
Kyrgyzstan and Tajikistan. More ominously, Uzbekistan's Fergana valley
continues to be the hotbed of Islamist extremism.
Not all former Soviet countries belong to the Eurasian Economic
Community or the Collective Security Treaty Organization. Some of them
have come together in alternative communities, supported by the United
States, which challenge Russia's policy goals. Among these countries,
Ukraine and Georgia are of special importance, from the standpoint of
Russia's relations with the United States.
Over the past decade and a half, Russia has internalized both
Ukraine's independence and the border dividing the two countries. More
recently, it has learned to live with the consequences of the Orange
revolution, and Ukraine's political pluralism. However, Ukraine's bid
to join NATO and the prospect of a membership action plan (MAP) being
offered to Ukraine at the next NATO summit in Riga (late November 2006)
puts this relationship to a very major test. Ironically, the step
designed to finally guarantee Ukraine's territorial integrity has the
potential of reawakening the sleeping issues such as the status of the
heavily Russian-populated Crimea, home of the Black Sea Fleet. The
situation is highly complex due to the low popularity of NATO accession
among the Ukrainian population who will need to vote on the issue in a
national referendum. There are differences on the NATO issue even among
the coalition partners, and ambivalence within the principal political
parties. The stakes are unusually high, not to be compared with either
the Polish/Czech/Hungarian or the Baltic/Romanian/Bulgarian accessions.
Not only is Ukraine different from Poland or Latvia; the Russia of 2006
is very different from the Russia of 1996 or even 2002. In the next few
months and years, Ukraine can well become a political battleground
between the competing domestic forces, and also between Russia and the
United States, with important consequences for all the parties
involved.
Georgia's prospects of joining NATO are more remote. Here, as in
Moldova, the relevant issue is the frozen conflicts. Tbilisi's desire
to resolve the conflicts in Abkhazia and South Ossetia by imposing a
solution, if necessary, contrasts with Moscow's references to the
Kosovo model, i.e., promoting a final separation of rebel enclaves. The
solution of the Kosovo problem by means of separation and conditional
independence, expected by the end of the year, will not lead to
Russia's automatic recognition of the breakaway regions, but it would
push the situation closer to the red line: Formally revising post-
Soviet border arrangements.
Although many in the Russian policy establishment view the
situation in terms of a zero-sum game, with the United States actively
working to undermine Moscow's influence in the new states, developments
in Ukraine and Georgia, which are approaching danger points, call for a
serious dialog which would help avoid misunderstanding and avert
confrontation which would push the United States-Russian relationship
toward a new low.
In conclusion, let me say that the title of the hearing, ``Russia:
Back to the Future?'' should be read as ``Russia returning to the path
it quit 90 years ago on its Communist adventure, rather than
backsliding to Soviet days.'' It is tsarist, capitalist, open,
relatively free in many respects (though not in the political sphere),
increasingly nationalist (the last former Communist country to have
discovered nationalism, though of a peculiar post-imperial variety),
and assertive internationally. It is neither pro-U.S. nor anti-U.S. It
is a challenge to deal with, but ignoring or misreading it carries a
price.
Thank you very much.
The Chairman. Well, thank you, Dr. Trenin, once again, for
a very, very thoughtful statement.
I want to recognize, before we come to Ms. Jaffe, the
distinguished ranking member of the committee, Senator Biden,
for his opening statement.
OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR
FROM DELAWARE
Senator Biden. Thank you very much, Mr. Chairman, for
holding this hearing.
And I say to the witnesses, all the flooded tracks along
Amtrak kept me from being here on time. I do apologize.
Mr. Chairman, my time and yours and the Senate has spanned
the years of Brezhnev, Gorbachev, and a few like Andropov in
between, Yeltsin, and Putin. And it's because of that
perspective that I'm so concerned about what's going on in
Russia today. For most of the last 20 years, Russia has been
moving slowly toward Europe, the United States, democracy, and
human rights. Obviously, there were a lot of detours along the
way, but things were generally headed, in my view, in the right
direction.
Since President Putin took office in 2000, Russia has
experienced, in my view, the biggest rollback of democracy
that's occurred anywhere in the world in decades. The Putin
administration has tranquilized the Russian media, muzzled
political opponents, neutered the Duma and regional governors,
and it has cracked down on the civil society groups, and, I
think, to state the obvious, has attempted to undermine the
democracy of neighboring countries.
An essential factor enabling and exacerbating these
disturbing developments is something you've pointed to often,
Mr. Chairman--oil wealth--the oil wealth that Russia possesses.
Bullied by the resurgence in global oil prices, even Russia's
corrupt and capital-short energy sector has been highly
profitable. That wealth has masked fundamental distortions in
an increasingly state-influenced energy sector and purchased
some democratic support--I mean, purchased some domestic
support for Putin and for his administration. That wealth has
also become a weapon to threaten and coerce Russia's neighbors
and energy customers.
Mr. Chairman, I believe the United States has mismanaged
the relationship with Russia over the last 6 years. Many
people, myself included, have been speaking about the Kremlin's
authoritarian impulses for a long time. Unfortunately, until
recently, the administration has not evidenced much interest in
such warnings.
I believe that the Putin administration is dealing with two
conflicting desires. On one hand, it is determined that Russia
be accepted as a great power and respected around the world; on
the other, it wants to continue to bully its neighbors,
suppress political dissent, and use energy as a weapon of mass
disruption.
I hope that President Bush and other leaders of the G-7
will use the summit in St. Petersburg to deliver a simple
message, ``You can't have it both ways. You can't be a revered
great power and a corrupt authoritarian petrol state at the
same time.'' The two categories are mutually exclusive.
Some Russians have become fond of saying that the West
needs them more than they need the West. I'd respectfully
suggest that they're wrong, but I learned a long time ago,
never tell another man his politics or another country what's
in its interest. But, from my perspective, it seems to be
wrong.
Despite its recent energy windfall, Russia is facing huge
problems. The country's population is plummeting by--has
plummeted--is plummeting by over 700,000 each year, mostly due
to epidemics such as AIDS, tuberculosis, and alcoholism.
Pervasive corruption is rotting the people's faith in the
society and its government. And Russia is facing serious
security threats from terrorism and instability in the North
Caucasus.
The Kremlin would do well to realize the magnitude of these
challenges and welcome the assistance of NGOs, civil society
groups, and the West in promoting the rule of law and
transparency. Russia's government won't be able to use oil and
gas money to buy its way out of all this trouble.
Unfortunately, some in Russia view any international criticism
of the Kremlin as part of a broader plot to weaken their
country. If anything, I would argue the reverse is true.
I hope, for Russia, that it's respected--my hope for Russia
is that it become a respected, prosperous, and democratic
state--strong. I believe that the current policies of President
Putin's government work against these goals. They may, in my
view, condemn Russia to a future of weakness and instability
and deny Russia its rightful place as a great power.
I'm hopeful, if not optimistic, that we can change the
dynamics of our relationship with Russia, but, for that to
happen, I believe the United States needs to do at least three
things. And I will conclude, Mr. Chairman.
First, the President should pick up the phone today and
start coordinating with other leaders of the democratic G-7
nations. The Kremlin has been very successful in dividing
democratic nations, many of whom share the blame for glossing
over the negative trends in Russia. It's time for that to
change. The G-7 nations should issue a tough, coordinated
statement in St. Petersburg which would make it clear to the
world that Russia's recent behavior is unacceptable.
Second, the United States should make sure that NATO
provides Ukraine and Georgia with membership action plans by
the end of this year. If those two countries are put on track
to join NATO, it will help consolidate the reforms that have
occurred since the Orange and Rose Revolutions. It would also,
I think, defer--deter future Russian meddling in other nearby
countries. If Georgia and Ukraine are not offered MAP
agreements, I worry Russia will see that as a green light to
continue undermining democratic governments in other states.
It's time to give these countries the security assurances they
need to move ahead with the tough work of building the
democracy.
And, last, I believe that the United States and democracies
everywhere need to be--need to dramatically increase their
support for NGOs and civil society groups working to promote
democratic values in Russia. Despite new laws cracking down on
NGOs in Russia, they are still the best hope for promoting
freedom, transparency, and the rule of law, in my view. If the
West wants democracy to be an issue in Russia's 2008
Presidential elections, we've got to start doing more to help
build the infrastructure of democracy now.
Mr. Chairman, again, I apologize for interrupting the
witnesses' testimony here, but I am pleased that you allowed me
to make my statement at this time, and I'm eager to hear what
our last witness, I guess--or maybe there's two more to go, I
don't know, having come late--what they have to say, and the
recommendations, how we can move forward with these and other
needed changes in our relationship with Russia.
Thank you, Mr. Chairman.
The Chairman. Well, thank you very much, Senator Biden. As
you would know, if you had heard all the testimony, your
statement fits well into the dialog we were having.
Senator Biden. Good.
The Chairman. These are issues on which we are all
expressing opinions before we come into our question-and-
answer.
I'd now like to call upon Ms. Jaffe for your testimony. We
look forward to hearing you.
STATEMENT OF AMY MYERS JAFFE, WALLACE S. WILSON FELLOW IN
ENERGY STUDIES, ASSOCIATE DIRECTOR, RICE UNIVERSITY ENERGY
PROGRAM, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, RICE
UNIVERSITY, HOUSTON, TX
Ms. Jaffe. Thank you very much, Senator.
It's really a great honor to be here today to submit my
verbal, and also written, testimony into the record. I'm very
much looking forward to the Purdue summit, and I'm very pleased
that someone of your stature has taken up the mantle of
focusing on the energy issue. It's such a big challenge for our
Nation. I'm glad to see your leadership and Senator Biden's
leadership on this issue.
I have this tendency to see everything, everything that my
other distinguished colleagues have talked about, only through
the energy prism, so let me just excuse myself for that myopia,
but I do want to commend your perspective, Senator Lugar,
because we really do need to have a shift in approach to our
energy diplomacy, and it's important to recognize how things
have changed. When, first, Vice President Gore, and, later,
President Bush, through Don Evans, began the energy dialog with
Russia, the approach was very commercial, and that was
appropriate to the time. We did run our approach through the
Commerce Department. The focus was on helping open investment
to United States investment and making a more competitive
energy industry in Russia. And that was a very good goal at the
time. But as oil has become more political, as the market has
tightened, and as oil producers have felt they have more
leverage, the temptation to use oil, and have it become more
politicized, has increased, and that means that the United
States has to have a different strategy. And I would say that
it probably would be not too harsh a criticism to say that, at
this moment in time, we have no strategy. And, recognizing that
as a first step, and thinking about what we would like that
strategy to be--the second step--is a very important debate and
future that we need to take, as a country.
I'll argue, in my written testimony, and a little bit in my
verbal, that we really do need to focus on institution-
building. Ambassador Sestanovich mentioned all the institutions
that are failing with the Russians. I would take a sort of
different point of view. We have failed to try to press Russia
to accept the binding issues related to energy in, say, WTO or
the European Energy Charter, bringing them into the fold of the
International Energy Agency. We've missed the opportunity to
work together with our allies to use these institutions to
demand reciprocity. In other words, Putin and Gazprom and those
institutions want to be able to invest freely in Western
assets, and there's nothing wrong with that. What's wrong with
that is, if we don't insist for the reciprocity in return. And
so, I really do think that the multinational institutional
frameworks that exist today could be better utilized if we did
work with our G-7 allies to really show what we think is
important, in terms of free access to energy for trade and
investment.
And so, just having a rhetorical reaction on every
response, where we just make a declaration about what we don't
like, is not as effective if it's not backed up with something
which is a real program to talk about what we think the
alternative is, what's in it for Russia, what's in it for us,
what's in it for the global community.
So, with that as my, sort of, backdrop of where we need to
go, let me just make four or five points on questions that I
think people are thinking about.
The first thing we have to recognize, in being too
threatening about Russian energy, is that actually today Russia
is the largest exporter of energy in the world. If we think of
Saudi Arabia and some of the other countries as being more
important, but actually, on a volumetric basis, if you combine
the oil that Russia produces--9.3 million barrels a day--and
add to that its gas exports, it's actually larger than Saudi
Arabia, and we need to recognize that, because Russia
recognizes that.
The second thing we need to understand in worrying about
the Ukraine matter is that Russia was going to have a problem
supplying Europe with the gas it's promised, regardless of the
politics of the Ukraine situation. There was going to be a
problem anyway. And in the technical community, people, like
the Baker Institute and the Carnegie Endowment, were having
conferences about this issue, because it's going to be--it's
a--should be--should have been a concern for Europe, and people
were--sort of had blinders on, that even though Gazprom was
buying up oil companies and saying they want to go into nuclear
power and diversifying, that they weren't actually investing in
the assets they were going to need to supply the contracts
they've promised and fill the new undersea pipeline to Germany
and elsewhere, because they weren't really making the kinds of
reforms and investments they needed to, to keep--meet that
rising demand.
The other point that I'd like to make about the Russian
energy sector--and Senator Biden correctly pointed out the
retrenchment to go back to a centrally controlled, centrally
planned system, and there is that trendline backwards--is that
we cannot ever forget that Gazprom is a monopolist. And, in
respect to my colleague, Dr. Trenin, who talked about Russia
moving in a capitalist direction, in the energy sector that is
not true. There's this shift back to the monopolies really
reasserting themselves. When we think about how--what Gazprom's
goal is in Europe, and what their ultimate strategies are in
the Caspian, we need to go back to Economics 101 and reread the
little chapter on monopoly behavior, because Gazprom has been,
for decades, a monopoly, and that's all they know. They want to
capture the supply, and then they want to control who--that
only they get to sell it. And that's their strategy. And it's
why, after there was a conflict with Europe, they went right to
Algeria to talk to Algeria about forgiving their loans and
making a friendship, because they think like a monopolist.
Now that allows me to sort of wrap in the Caspian. We have
a fundamental complex situation with energy and the Caspian and
the Russians. It's really fundamentally too complicated to be
simplistic. On one hand, we understand Russia's monopolistic
behavior. I block all the export routes for Caspian countries.
That forces them to sell the natural gas to me at a very low
price. And then, I make a huge amount of money selling their
gas, or my own gas, on to Europe at a huge profit. Like I said,
we always need to remember that Gazprom was--you know--started
its life as a monopoly.
So, the question is--when we think about the Caspian,
fundamentally, we're asking the Russians, ``If we go in as a
United States policy''--and that has been the traditional
United States policy, which is to come up with extra routes,
whether it's through Greece, in Bulgaria, whether it's allowing
the Caspian countries to get to China on their own, as
Turkmenistan is now trying, right?--that means that the
fundamental question is, ``Are we going to let Russia grab the
premium for that gas, or is our foreign policy to let that gas
come to market without letting the Russians take a cut?''
Because that's--really, it's a just a business proposition. You
can--we can make it complicated, about the extension of the
Soviet empire and their desire to be a superpower, and that
might be what the foreign policy establishment's thinking
about, but that's not what Gazprom's thinking about. And when
they lever themselves into the domestic scene, they're just
thinking as businessmen.
So, the problem that we face, as the United States, is, we
have these two desires. One is to make sure that Europe gets
reliable supply, and the second one is to make sure that the
Caspian countries can sell their energy in a free and
unfettered way in a competitive market. The problem is, the
logistics of those two goals somewhat conflict with each other,
because the Russians can definitely meet their European
contracts if they have the Caspian supply. Right? But if the
Caspian supply goes to China, or if it's going to other
customers in Russia through a different route, then the
Russians, if they don't shore up their own sector and don't
make their own investments in the Yamal Peninsula, they may
actually come up short to supply Europe with the gas that's
been promised. So, as I say, it's a very complex game of who's
got the barrels and who's going to deliver the barrels. And it
really does require some serious thought of strategy on the
part of the United States to really think about what's our top
priority and how do we want to order the priorities regarding
this question of gas? And it's not just as simple as to declare
that it shouldn't be used as a weapon. We need to understand
the complexities of the choices that face Gazprom and face the
Kremlin, and then also all the different allies whose needs we
want to support.
The other thing I guess I should mention is this whole
question of the China threat or not the China threat. We tend
to start to think about China as a competitive factor. I do
like to think about the oil market like a swimming pool. If you
put water in, in one end, there's more water in the pool for
the whole swimming pool. And so, having the Chinese get supply
from somewhere is not necessarily a bad thing, as long as
there's enough supply for the global community.
In the latest deal, where the Chinese company, Sinopec,
purchased assets from BP-TNK, and even in the negotiations
about whether China is going to buy natural gas from east
Siberia, the thing we need to remember in thinking about
Russian gas exports is that Russia is not an LNG seller. And by
that I mean they're not putting the gas on a tanker, liquified,
and they can't shift where the tanker goes. They have
pipelines. And if the pipeline goes to Europe--and that's the
only physical pipeline that exists today--their choice is to
either leave the gas in the ground or sell it to Europe. And
that is really on--right at this moment--that is really their
fundamental choice. And when we look out past 2010, they have
more choices, but the economics of taking the gas that's now
going to Germany and moving that to China is not as attractive
as building new infrastructure to go from east Siberia to
China, which would never--that east-Siberian gas would never
have gone to Europe anyway. So, the Russians are really, in my
opinion, making a bit of a rhetorical statement when they say,
``Well, if we don't like the way you behave, and you don't let
us buy this or that in Europe, we're shifting our gas to
China,'' because, in the end, the projects that they're talking
about doing to China were fields that were never slated to
deliver natural gas to Europe. So, we need to understand the
bluff. We need to think about what's creating the bluff. And
then, we need to not be, sort of, overreactive to it. We need
to think about, again, what are our goals, and we need to--I
mean, to me, what's interesting in all the rhetoric is that the
rhetoric isn't focused on the Caspian, when actually the
Caspian probably is the critical conflict point in this whole
question of Ukraine and European gas and whether Russia is or
isn't a monopoly when it comes to thinking about routes for
gas.
At the end of my written testimony, I talk about some
things that we've learned since the 1970s about how to deal
with monopolies. Right? It is in our interest, and, I do
believe, in the long-term interest of the developing middle
class of Russia, to have competition in the market. Certainly,
it's important to have competition in the global market. But
it's also very important to have competition inside the Russian
market. And that is our best defense against the kind of
concerns we have about the politicization of oil and gas.
And competition can come directly from different suppliers.
It can come directly by having more privatization. It can
come--competition--our Strategic Petroleum Reserve, in effect,
is a means of competition, because if somebody cuts supply
purposefully, we can add supply by having our strategic
petroleum reserve. The United States and Europe need to think
about whether it's necessary, at this point, to have natural
gas stockpiles in storage. And--but, also, alternative energy
is also a means of bringing competition in the market, and we
also need to be thinking about getting together with our known
allies, like Europe and Japan, but also our emerging trade
partners, like China and India, and thinking together about
these issues.
Thank you very much.
[The prepared statement of Ms. Jaffe follows:]
Prepared Statement of Amy Myers Jaffe, Wallace S. Wilson Fellow for
Energy Studies, Associate Director, Rice University Energy Program,
James A. Baker III Institute for Public Policy, Rice University,
Houston, TX
Russia's status as a current and future energy producer is close to
unrivaled. It holds the eighth-largest proven oil reserves in the
world, but ranks a close second in oil production to Saudi Arabia (at
9.3 million barrels a day), far ahead of most other world suppliers and
well ahead of the United States (at 5.1 million b/d) and Mexico (3.4
million b/d). In fact, when both oil and natural gas exports are
considered, Russia exports more hydrocarbons than Saudi Arabia.
Thus, Russia's position as a major energy supplier has great
significance not only for its own foreign policy development but also
for its relationships with major energy consuming countries. During
President Putin's first administration, in the aftermath of the
September 11, 2001 terrorist attacks on the United States, Moscow
responded to its geopolitical circumstances as a growing supplier of
hydrocarbons by initiating high-level energy cooperation dialogs with
important oil consuming countries, including the United States, China,
Japan and the European Union. Breathtaking reorganization and
privatization in the Russia industry, while creating growing pains and
financial inequities inside Russia's economy, opened the promise to a
steady expansion in Russian energy supply and a great opportunity for
Moscow to tap its new position as a world energy superpower to build
constructive and important links with other world powers.
By President Putin's second term, however, a retrenchment back
towards fuller state control and centralization of investment and
export policy has aggravated political, bureaucratic, commercial and
regulatory barriers that could plague Moscow's ability to deliver
secure and expanding supply. Indeed, Russian oil production has been
relatively stagnant over the past year, after showing rapid gains
between 1991 and 2003 (recovering from a low of 6 million b/d to 9
million b/d). There is still huge potential, with some analysts
projecting that identified projects could contribute a further 2
million b/d or more to Russia's oil export rates over the next 5 years.
But it remains unclear whether internal conflicts over ownership and
control will adversely impact Russia's production rates, ongoing
stability of supply, and future export availability. It happens that
the areas with the greatest expansion potential are production areas
previously controlled by Yukos--whose assets' ownership has been under
a disruptive reorganization--as well as prolific areas currently
controlled by Lukoil, BP-TNK, and Sugutneftegas, the latter two who are
currently fending off interference and investigations by the Kremlin.
The insecure nature of competitive and tense relations between the
Russian government, the Russian government-controlled oil and gas
monopolies, domestic private industry, and foreign investors remains a
barrier to stability of Russian energy supply--both oil and natural
gas. It is an area where creative American or multilateral diplomacy
(say, under the framework of G-8 cross investment protocols or the
European Energy Charter) could perhaps ease pressures on some key
projects. But the current trend towards the ``politization'' of energy,
culminating in the short but unexpected cut-off of Russia gas supplies
by Russian state gas monopoly Gazprom last January during a conflict
between Russia and the Ukraine over pricing and politics, has left a
bad taste in everyone's mouth and bodes poorly for Russia's potential
status as an energy superpower whose supplier bona fides are willingly
and comfortably accepted in the West. To quote Ambassador Keith Smith,
``Gazprom's January 1 cutoff of natural gas to the Ukraine was a much
delayed wake-up call for Western Europe and the United States regarding
Moscow's willingness not only to use its energy resources as political
leverage in Europe, but also to undermine the new democracies that most
recently emerged from decades of Kremlin control.''\1\
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\1\ Testimony before the House Government Reform Subcommittee on
Energy and Resources and the Subcommittee on National Security,
Emerging Threats, and International Relations.
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As energy markets have tightened in recent years, the issue of
energy security has risen to a higher order concern among major
economies. At the same time, key oil producing nations have recognized
their enhanced geopolitical position, increasing the leverage of these
key suppliers in markets and opening the possibility for greater
politization of oil as a commodity as seen in the rhetorical statements
of leaders such as Venezuelan President, Hugo Chavez, and in new
concerns about Russian energy politics. U.S. foreign policy has not yet
adjusted to this new reality of politization. A hint emerged on the
United States political scene with the debate whether China's national
oil company, CNOOC, should be allowed to purchase United States oil
from UNOCAL. But the United States is not fully preparing to deal
diplomatically with the emerging challenges of the politization of oil
and the Energy Diplomacy and Security Act (S. 2435) recognizes this
deficit. There are multilateral institutions and trade and investment
protocols that can be tapped to optimize U.S. energy diplomacy to
address the politization of oil by large oil exporters and the United
States could do a great deal more to enhance energy security by
developing a more coherent, less reactive diplomatic strategy.
Attempts to politicize oil are not new. Indeed, even the United
States itself is guilty of politicizing oil through its use of economic
sanctions against oil exports and investment in countries of concern
such as Iran, and previously, Iraq and Libya. But the impact of
politically motivated linkages between geopolitical goals and oil were
muted in the past because market supply alternatives were abundant
enough to prevent any large supplier from gaining much leverage.
Indeed, as history showed, Saudi Arabia's King tried to organize the
use of the so-called oil weapon against United States support for
Israel in 1967 but failed due to plentiful market conditions and lack
of consensus among a group of suppliers. It wasn't until market
conditions changed in 1973 that a boycott was able to be implemented in
a more effective fashion. So it is today. Political actions tied to oil
will have more impact because of the greater likelihood of creating a
large price swing and the greater difficulty of shifting to alternative
supplies.
During the Bush administration's first term, oil market conditions
facilitated the possibility of a commercially oriented strategy towards
Russian energy. Indeed, a high-level dialog was begun, led in the
United States by our Secretary of Commerce, Donald Evans. The dialog
was even labeled as ``commercial'' with bilateral sessions entitled
the`` United States-Russia Commercial Energy Summit.'' But as the
trendline on United States-Russian relations has worsened and on oil
and even natural gas to be viewed more in political terms, the U.S.
commercial strategy towards energy dialogs has become less effective. A
new strategy is needed that rests more with institution building in the
international energy arena and taps the strategic and economic
interests of key suppliers while simultaneously protecting the
interests of major consumers.
It is in this broader context that the United States needs to
consider its evolving relationship with Russia and the question of
Russia's geopolitical motivations in setting its international energy
policies.
The security concerns of our European allies with regard to the
supply of natural gas from Russia has come front and center since the
brief tangle with Gazprom last January. However, in the technical
community, even prior to the January conflict with Ukraine, questions
were being raised about whether Russia was making the kind of
investments needed to meet rising European demand for natural gas.
European demand for natural gas currently totals more than 18
trillion cubic feet (tcf) per year. As natural gas production in the
United Kingdom North Sea declines, Russian market share could rise from
around 28 percent in 2005 to 40 percent in 2015, according to some
analyst projections. The Russian state-monopoly, Gazprom, supplied
European countries with 4.8 tcf of gas in 2003, and contractual
obligations portend an increase to 6.6 tcf by 2010. To meet rising
European demand for gas, it was projected that Russia would need to
expand development of natural gas fields and associated export routes
on the Yamal peninsula and Shtokmanovskoye region, but Gazprom was
showing no inclination to press forward with these needed investments.
Instead, the state gas monopoly was resisting needed reforms and
liberalization in the Russian gas industry and embarking on a new
strategy to diversify its asset base to include oil, power generation,
and now even a discussion of investment in nuclear power. Gas
production has been relatively flat in Russia in recent years, and many
analysts were already predicting that Russian gas production could
actually decline in the coming years. Some believe that without an
influx of private capital, new exploration and transportation
construction activities will fall short of both domestic and export
market requirements. Major projects such as field development in the
Yamal peninsula take as much as 10 years to implement and discussion of
such projects has not progressed in recent years. Instead, Gazprom has
spent hundreds of millions of dollars acquiring new diversified assets
such as Sibneft, a Russian independent oil and gas producer. The
purchase raised new questions about how revenue constrained Gazprom
will be able to raise financing for important gas export projects such
as the $35 to $40 billion Bovanenskoye and Kharasaveiskoye fields of
the Yamal Peninsula and the $20 billion Stockman LNG project.
Thus, the question of the security of Russian gas supply to Europe
goes beyond President Putin's near abroad policies towards Central
Europe. It also rests with the state of internal policy of reform in
the Russian gas industry where independent producers would be able to
supplement production by Gazprom were the industry to be properly
restructured.
Problematically, Russia is biding its time by grabbing trapped gas
resources in Central Asia at very reduced prices, and using those to
supplement its own higher priced, lucrative gas sales to Europe.
Negotiations between China and Turkmenistan, to conclude an elaborate
gas export plan that would create an export grid from Turkmenistan, and
including Uzbekistan and Kazakhstan to pipe natural gas to Western
China and into China's existing West-East pipeline would throw a monkey
wrench in Gazprom's ability to control Central Asian supply. Were the
Central Asian states to find an independent outlet for their gas, it
would reduce Gazprom's flexibility to meet European demand with its
purchases from these Caspian producers. The geopolitics of such
machinations is complicated by Russia's own gas sales dialog with
Beijing that includes a planned sale of 80 billion cubic meters of
Russian gas per year to China via two pipelines. The sale of BP-TNK's
Udmurtneft subsidiary to China's Sinopec is the first step in this
process, and senior Russian officials linked the sale, which involved
the vast majority of the asset to be retransferred back to Russian
state monopoly Rosneft, to a demonstration that the Kremlin was serious
in its threat that it could shift its supplies to Asia, were Europe to
be too belligerent to growing tensions over the Ukraine incident and
Russian aspirations to buy into key gas and power companies in Europe.
In analyzing the real impact of Russia's contention that it can
shift its sales East, it is important to recognize that this is not an
immediate threat. Since Russia does not sell seaborne cargoes of
natural gas in the form of LNG, it has little flexibility to change
suddenly the flow of its gas exports which are wedded to European
markets by pipe. Pipeline connections to China will take years to
build, with even the Udmurtneft gas a few years away from delivery. The
more ambitious gas pipeline from East Siberia fields to China and Japan
remains to be negotiated and would unlikely impact European supplies
because supplies from those distant fields were never slated to
traverse Russia westwardly. Even if a final deal with China for East
Siberia were to move forward this year, which is still questionable, it
would be difficult, given the magnitude of the construction entailed,
for deliveries to commence before 2009, if even that early. Thus, the
United States should not focus its attention on whether Europe's gas is
about to be redirected to China because the reality is that for Russia
to cut off its sales to Europe, it must spend billions of dollars
constructing new infrastructure. In the short term, Russia's only
option would be to forego gas exports altogether. The larger risk may
well be that Russia cannot meet European needs due to its inability to
reform and reorganize its sector in a manner that promotes commercial
investment in the supplies needed to fill the new undersea Northern
Europe Gas Pipeline (NEGP). There are good reasons to question whether
Russia's sector will have the managerial skills, financing, and
wherewithal necessary to meet Russia's export goals, even without any
interference of intimidation strategies.
There has been no coordinated push by the United States and
European Union together to require that Russia reform and open its
energy market to foreign investors as a response to the Kremlin's
insistence that it can only meet Europe's growing energy demand if it
be allowed to buy large stakes in key Western energy assets. We should
be using the leverage of international institutions to press Russia to
play by the same transparent, competitive rules that guide energy
investment and trade in the West. The pipeline monopolies of Transneft
and Gazprom are contrary to the European Energy Charter (signed by
Russia) and few countries are pressing the Kremlin on the subject of
full reciprocity in investment policies even as the Kremlin is yelling
for attention to its acquisition aspirations.
Gazprom is a monopolist and thus we shouldn't be surprised when it
behaves like one, protecting its interests. Moreover, Russian leaders
are responding to the popular sentiments of its locals. A recent poll
taken in Russia as part of an academic study on energy and
environmental issues by the Russian Academy of Science shows that 38
percent of Russians surveyed believe that keeping the status of
superpower for Russia best meets their individual and family interests
than strengthening democracy and freedom of speech (12 percent), with
only economic growth mattering more. Less than 10 percent of those
surveyed thought continued privatization was important while at least a
third favor state regulation and support of basic industries. Over 68
percent felt foreign investment in the oil and gas sector was ``not
acceptable at all.'' The dismantlement of Yukos and its competitive
market principles were highly popular in Russia as are policies that
show that Russia remains a great country on par with other superpower
nations. Thus, the temptation to use energy to assert itself, when
other avenues are so clearly lacking, will be strong.
The extent to which Russia or any small group of gas exporters will
be able to exercise monopoly power or utilize a gas weapon effectively
will be determined, among other factors, by technological improvements
that will affect the cost and attractiveness of other competing fuels
such as coal, nuclear, or renewable energy. Moreover, privatization of
gas reserves and gas transport networks present an impediment to the
formation of a successful gas cartel and blocks the monopoly power of a
state actor such as Gazprom. It will be easier for national, state-
owned producers like Gazprom to participate in a cartel than for
privately held firms that might have different objectives from the
state. Indeed, already, Gazprom responded to pressures on it from
Europe by soliciting coordinated strategies with another major European
supplier, Algeria, which has long argued for a Gas OPEC.
If a number of private Russia gas producers emerge, it will be more
difficult to reconcile their conflicting corporate ambitions, as the
Putin administration has so keenly experienced in recent years. Thus,
the retrenchment away from privatization and market competition in
Russia's energy sector runs against U.S. and global interests and
should remain a target for the United States-Russia dialog and the
European Union-Russia dialog.
Options available to consumer countries are well known.
Deregulating their own energy sectors, to permit utilities more freedom
in setting prices, in choice of technology and in contracting with fuel
suppliers will have the effect of increasing the elasticity of their
demand for gas and limiting the market power of gas sellers. Consuming
countries can also actively promote the technologies that will increase
competition between gas and alternative energy sources. Also, as the
European Union is discussing, strategic inventories of natural gas will
help limit the impact of any supply cutoff, reducing the incentive for
an ambitious supplier to try to assert its market leverage.
The Chairman. Well, thank you very much, Ms. Jaffe.
We'll have a 10-minute round of questions.
Let me just begin the questioning by noting, Dr. Trenin,
that your colleague, Andrew Kuchins, was with Members of
Congress this morning at the Aspen Institute breakfast. It was
a wonderful warm-up for our hearing today, because he is just
back from an extraordinary trip from the caucasus with the
Chinese delegation, observing all the problems that are there.
He brought a chart. You will not be able to see it from here,
but this is the chart he has. Now, essentially, this is oil in
Russia. There is a huge peak, about 1981, and then it comes
down rather abruptly, by 1986-1987. Things are getting pretty
thin. Certainly, by the time the Soviet Union came to an end,
in 1991, we're at a nadir point. But now, the spike goes up. He
would not predict that it will continue to spike in quite that
way, although who knows precisely what the price of oil will be
in the world. He makes the point that you've made today--that
the largest exporter is the largest factor in the oil trade, by
far. He cites a figure that I hadn't heard before, an estimate
that in the last 7 years the gross national product of Russia
may have climbed from somewhere around $200 billion a year to
$900 billion a year. That is a four-and-a-half-fold increase in
the income of the country in 7\1/2\ years. That illustrates
what a startling development we are looking at, in terms of the
amount of income that is available, but it'll also track some
charts that Tom Friedman has been showing. There was a great
difference between all of the ferment that was going on in
Russia or in other places, for that matter, and when suddenly
that oil prosperity changes as people accept stability that
comes from being able to pay your debts, to say to the rest of
the world, ``We're rich, and we're back,'' and so forth. Thus,
the popularity of Vladimir Putin. If we wanted to look at this
in a democratic way and have a referendum on Vladimir Putin,
the odds are that he would win, with a fairly good plurality, I
suspect. And even Mr. Kutchins suggests that the transition in
2008 may be a reasonably smooth one, given what now is called
``controlled democracy''--that is, that you pretty well
extinguish the hopes of anybody else that is not really on
track. The problem for Russia, he would suggest, is after 2008,
because, as some of you suggested, of the strategies that the
United States plus Europe and the G-7 partners, and other
people, may use. They may get brighter about this whole
business, as opposed to being all over the place, maybe
characterizing current policies, not only in our own country,
but elsewhere.
This does explain a part of why things have changed in
Russia, and maybe our relationship to this. I don't attribute
this to Mr. Kutchins, but others have suggested that Russians
see our bantering about democracy as a thought, first of all,
that we simply don't have sufficient respect for whatever they
are doing, and, second, that it represents a different period,
really a sort of a failed period, when there was no oil, there
were no prospects; there was indebtedness, supplicants. As
Russians come over now, that's one of the first things they say
to Joe and to me, ``We're not supplicants. We're rich. We're
back. We would love to visit with you, cooperate a bit in
international relations. We don't want to kick the can down the
road into isolationism, but you have to understand, this is
different.'' This is not the case of whether our Nunn-Lugar
program goes over and they need contractors. We just signed
another umbrella liability agreement, but they indicated that
they would be calling more of the shots from now on.
Vice President Cheney's testimony over in the Baltics
criticizing Russia was one thing, but then, combined with
extolling the virtues of Kazakhstan the next day, and our
entertainment of the Azeri President, they made the point, at
least in the Kremlin, that, once again, we are harping about
democracy and the lack of self-respect and so forth. On the
other hand, we're fully prepared to deal with people who are
not very democratic. You have all pointed out the dilemma posed
by governments in the Caspian region. They have strategically
important pipelines running through their territory. And their
commitment to democratic values is not yet assured.
Nevertheless, the United States must develop strong relations
with each of them.
This probably is a good time for the G-8 to meet. We're
going to be in Russia. It's going to be Russia-centralized and
focused. Many people abhor that thought, but the fact is that
the energy agenda was supposed to be uppermost. For Europeans,
this is extremely important, because they feel, still, very
uneasy after their visit from President Putin. And, as you
point out, Ms. Jaffe, it may be an empty threat to send the gas
out to the East. But, at the same time, we note the fact that
it was even a suggestion that there are alternatives, as
opposed to making good the promises to Europe, the stability
that comes to Europe, having that great dependence, the anxiety
that comes with President Putin going to Algeria, visiting with
President Bouteflika about what the two of them can do, vis-a-
vis Europe or each other. This is an opportunity for a much
more secure situation, giving more self-respect to the
Russians, more certainty to Europeans, and, once again, the
United States entering with the Europeans and the Russians into
this dialog. We have something constructive to come out with.
Can you suggest some signal points for our U.S. agenda,
with that in mind? Please talk about energy, self-respect, the
enhancement of the United States-European relationship. Do any
of you want to have a try at that?
Yes, Ms. Jaffe.
Ms. Jaffe. I'll take a short stab at that.
There was a time in history when Algeria, with their
pipelines to Europe, and also their LNG shipments to the United
States East Coast, took this step that Putin is trying to take.
In other words, they saw they had a captive market--it's very
hard to switch off of gas once you decide to go to gas--so, the
Algerians just said, ``Hey, we've got you captive, we're
raising the price.''
And the result of that effort--which maybe people can read
up, we just have a book coming out from the Baker Institute
that's a case study on it--was that Algeria lost their markets,
both on the East Coast--they lost their markets to Trinidad--
and in southern Europe, they lost their markets to other
suppliers, partly as a result of suddenly being seen as an
unreliable supplier.
So, I think that we need to go into this conversation with
the Russians, especially taking into account the things that
Ambassador Sestanovich and Dr. Trenin have said, where we have
to treat them as an equal partner, because this whole question
of self-respect and being a superpower is not only just coming
from the administration in Russia, it's coming from the public
in Russia.
But, also, we have to know what our options are. In other
words, if you come in and you say, ``Well, you can't act this
way,'' even if we're willing to offer the carrot, like, ``Well,
let's talk more about reciprocal investments,'' you have to
know what you would do if they're going to continue to take a
belligerent stance. We need to actually, unfortunately--because
I know the meeting is coming up--we need to know what Europe is
proposing, or we are proposing with Europe, to do as the
alternative. So, maybe we needed to have flown over to Algeria,
as well. Maybe we need to have a plan with European and the
United States collaboration on building natural gas stockpiles.
Maybe we need to have a plan of what fuels we would use in the
future, besides natural gas, if we can't--and an initiative, if
we say we're going to have to wean off of Russian gas--that,
really, we need to show, not so much, I think, even the
administration in Russia, but Gazprom--right?--that there is a
plan that might involve our own companies' investments in other
countries or an initiative so that we know what we would do to
wean ourselves off, because we're in just the same situation as
they are. It takes several years to change suppliers when
you're coming from a pipeline route. It takes them several
years to shift material to Asia. Right? And, really, it's in
their best interest to try to at least get some entry into--
some better entry into Europe, if that's what they want, in
exchange for what it is that we want, which is to see them
actually doing more reform and more investment and having a
more competitive marketplace in Russia. And I think the dialog
has to come, but, again, we have to get our own ducks in order
and know what our alternative would be so that we're coming in
from a stronger position.
The Chairman. Dr. Trenin.
Dr. Trenin. Let me say--thank you--let me say, Mr.
Chairman, that I believe it's a fallacy to regard energy as a
weapon. There is no one-side dependencies in energy business.
Russia is as dependent on Europe as Europe is dependent on
Russia. And that's the way it's going to be.
I think one of the problems of the United States-Russian
relationship is that that relationship lacks a solid economic
foundation. There's a lot that's going on economically between
Russia and the European Union, but not nearly enough between
Russia and the United States. So, if some of the projects that
are currently being talked about--like Stockman gas field in
the Arctic--if those projects become developed and lead to
interdependency between the United States and Russia, that
would lead to a much healthier political relationship between
the two countries and a much stabler--much more stable
strategic relationship between Russia and the United States.
Let me also add that the Russian leadership is--as you
mentioned, Mr. Chairman--is extremely confident today. And this
confidence needs to be taken into account. As you, yourself,
said, sir, they will be looking for a coequal relationship, and
this is something which is becoming a sine qua non for the
Russian leadership.
Let me also say, in all frankness, that in the view of the
Russian leadership, the discussion of Russian democracy is--I
don't think that they are right, but the way they seem to
believe what it is--they think it's a reaction of the United
States to Russia emerging as a more independent and more
important power internationally. And it's up to the United
States policy to disabuse the Russian leadership of that
notion.
Let me also add that I do not suggest that there is an
automatic Marxist link between increase in the GDP and the
formation of the middle class. And clearly this is a long,
drawn-out process in Russia.
I do not believe that the oil wealth has much to do, at the
lower level, at the--in the middle level--with what I call
capitalist development in Russia. Rather, it's property
becoming the issue that people are talking about, worrying
about, are concerned about. Property is becoming real. The
property that people own, not the property that the government
owns--the money that's been stashed away in all those
stabilization funds and the gold reserves and currency
reserves, what have you. But the money that people own. And
that's revolutionizing Russia from below.
I think that's what I wanted to say.
The Chairman. Thank you.
Steve.
Ambassador Sestanovich. There's no doubt that the essential
precondition of having an effective energy dialog with Russia
is an effective energy policy of our own. And, as Amy properly
points out, if we don't have our ducks in a row, we shouldn't
expect the Russians to put them in a row for us.
Second point. This is an issue where the rubber really does
meet the road when one talks about cooperation with Europeans.
Over the past several months, the Europeans have continued to
express their shock about what happened in January between
Russia and Ukraine. And they have pushed for Russia's
ratification of the European Energy Charter. If we believe in
strong American-European cooperation on energy issues, I think
we have to ask what kind of support we have given to this
proposal by the Europeans. How should we respond to the Russian
dismissal of the idea last week? Are we going to keep pushing
this, or not? Because it has real implications for how the
Russian energy sector operates.
Let me mention a couple of those implications. It is a pipe
dream to think that we're never going to--that we can end our
energy relations with Russia. We wouldn't want to. These
relations are mutually beneficial. Yet it is an important
objective of the United States, and of all energy consumers,
that energy producers act like commercial entities rather than
like arms of the state.
If you look at the board of directors of the monopolies
that Amy has talked about, you'll discover that they're Mr.
Putin's assistants. This is not just a matter of corporate
governance. These monopolies are managed by, directed by Mr.
Putin's staff. And that's an arrangement that is unlike what
you have in any other G-8 country.
If the European Energy Charter were to be ratified, it
would have implications for the monopoly not only that Gazprom
exercises, but for other monopolies in the Russian energy
sector--pipelines, in particular.
We should, as part of a reinvigorated energy dialog with
Russia, address the question of the access to our capital
markets of these Russian energy companies. Are we satisfied
with the kind of transparency that we see when those companies
bring large share offerings to market?
I might add a final point about energy efficiency. To my
mind, the single most staggering sentence in the Council on
Foreign Relations task force report, which I have invoked many
times, is the following, ``If Russia used natural gas as
efficiently as Canada, it would save three times the total
amount of gas it exports to the European Union.'' Russia is not
just the world's greatest energy producer, it's the world's
greatest energy waster.
Thank you.
The Chairman. Well, thank you very much.
Senator Biden.
Senator Biden. I thank you all.
You know, when you listen to three qualified and
experienced people like yourself, there's certain things that
just come through that are self-evident, that we don't talk
about, really, up here very much, and policymakers don't talk
about much downtown, and that is that there is no energy
producer that's not a monopoly, other than us, and a few
others. But, I mean, look, let's face it, you know, you don't
have anything remotely approaching democracy in Saudi Arabia or
in the gulf region or in Venezuela--that's technically a
democracy, but it's become a--I think it's become difficult--
Nigeria--I mean, you look around, and we talk about the--you
know, the G-8, and we should talk to them. Well, none of the G-
8, except one, has, really, energy that they can export. And
so, that this really does come down to energy. It's more than
energy, but it's energy. You know, ``It's energy, stupid, it's
energy.'' And it has--it has many, many complicating
ramifications. It's not a straight line. But we would be in a
very different circumstance if Russia were China, in terms of
energy resources. It would be a completely different world,
just as it would be a completely different world if China was a
net exporter of energy. And so, I mean, I--it's so simple, but
it's so profound.
The second thing is that the whole notion that we are going
to deal with not just Russia, but--and Russia, obviously, is
the biggest not only producer, but the most consequential
nation that possesses that kind of energy, without a clear
understanding of what their options really are.
I went through--we went through the whole cold war assuming
options Russia had that they never had, but we assumed they had
them. We assumed they had capacities they never possessed. And
we didn't look--we always looked at it in the--at least in my--
I realize all generalizations are false, including this one, as
Clemens--Samuel Clemens once said--but we basically looked at
them like they were 12 feet tall all the time, and we were
probably 6 feet 1 inch, when, in fact, they were really, like
4\1/2\ feet tall.
And so, the thing that I'm most impressed with so far
today--and I need to know a lot more about, and the question-
and-answer period doesn't lend itself to doing it--is with--Ms.
Jaffe, I would love to have the most realpolitik look at what
are the real options Russia has, what threats are ones that
they are able to, relative to the energy sector, actually
deliver on, and what timeframe can they deliver them on, so
that we don't look at this in a way that--because we have
agendas here in the United States. Everybody--the--politically,
there are agendas here. And, you know, depending on how you
perceive the amount of leverage Russia has today--impacts
significantly on what you think your options are and what
responses the United States can institute.
One of the things I find--and I don't have as much
interaction with Russian officials as my friend--matter of
fact, I don't know anybody that has more interaction than the
chairman--is that when we start talking about democracy and
energy, all they do is point to the gulf, and they say, ``OK,
great, wonderful. You guys are telling us about being a
democracy. I mean, when is the last time you had a conversation
with the Saudis about that?'' It may have nothing to do with
anything, but it's an interesting talking point.
And I guess what I'm getting--the third point here is, it
seems it all comes down to one minimum--what you said, Mr.
Ambassador--one minimum requirement to be able to arrive at a
rational policy from our perspective, and that is, we have to
have an energy policy. We don't have an energy policy. We do
not have an energy policy. The swimming pool metaphor is a good
one. We go ahead and pump all the oil in the--up in the Arctic
area, all the oil in the gulf, all the oil in the Atlantic and
Pacific. We fill the pool about 2 inches. It's--it affects it,
but it doesn't affect price very much. You don't have them
saying, ``Look, we've got all this oil, we're keeping it
home.'' It's--goes into the pool. It doesn't get as much
flexibility, it doesn't give the world much flexibility when
you have a disparity of only two percent between supply and
demand out there right now. Not a lot of cushion. So, it's sure
in the hell not an answer. It may be useful to do. Forget the
polemic arguments about--and the discussions about the
environment and all that. Let's assume there was no
environmental impact all, everybody said, ``Let's do it.'' Does
anybody think you're going to turn to the American people or
the Europeans and say, ``By the way, now your problem with
Russia is really diminished a great deal here,'' or that we're
really going to see gas prices or oil prices drop at all, of
any consequence here, or give us more flexibility?
And so, I guess what I'm saying is that the three things I
come away with are, we don't know--I've not, at least--I don't
know--how real the Russian threats of the use of their energy
are relative to their ability to deliver on them, number one.
Number two, how almost--how frightening myopic we are. I
thought you said something very interesting, Ms. Jaffe. I was
impressed with your testimony. You said, ``Maybe we should get
in a plane and fly to Algeria.'' We don't do--I mean, you know,
what the heck are we doing? What is the extent of our oil
diplomacy? What is the extent to which we've actually had--I
mean, I've not had anybody come up and say to me that, you
know, at the State Department or at the White House they've set
up a high-level group that is meeting on a regular basis with
all our European allies to determine whether or not there is a
possibility of us arriving at some sort of emerging consensus
on how we deal with energy. It comes up in the G-8, it comes up
in certain summits. But the idea there is not an absolute
dialog that is totally continuous, that is--that's a poor way
of saying it--that is ongoing, as fundamental as the dialog
that took place in 1953, in terms of our physical security and
NATO--I mean, it seems to me it's that basic, I mean, you know,
for everybody. When are we going to wake up?
So, I guess what I'm--you know, it's obviously not a
question, but it is a clarification for me of my thinking--and
all of you have suggested that--that no matter what's--how
you--how you decide to proceed, one, it's pretty darn important
to know what Russia's options really are, and--as hard baked an
analysis, we could--as if we are making a judgment, as we were
so used to doing for the last 30 years of sitting in the
Situation Room, making a judgment of, ``What are the real
options Russia has with all their nuclear weapons in a war?''
We sat down and thought through that in incredible detail. We
may have been right, we may have been wrong. But it seems to me
we have to be as hard baked about it as it relates to energy,
not to use it as a--just to know what our options are.
And, second, it seems to me that if we don't start talking
with our allies about our mutual dependence--I mean, I think of
it, Mr. Chairman, in terms of, what are our grandkids, when
they write their senior thesis at Oxford, as Rhodes Scholars
like you were, and hopefully not like I was--what are they
going to be writing when they look back and say, ``Didn't these
guys figure this out? Wasn't it self-evident, in the year 2006,
that there were no good guys in the oil business?'' I don't
mean--I'm not talking about American companies. ``There's no
good guys in the oil business?'' [Laughter.]
I'm not trying to be--I really--I mean it--I mean, you have
Saudi Arabia and Venezuela and Nicaragua and Russia and maybe
Canada, maybe Mexico, who knows? But I mean, ``There weren't a
whole lot of good guys, and they sat there while the bad guys,
or bad''--wrong word--``by the guys who didn't know how to
shoot straight, screwed the world up. And they figured they had
to respond by going, `mea culpa, mea culpa, mea maxima culpa.'
'' ``Please send the pipeline to me, I will give you what you
want.''
I mean, it's kind of bizarre, when you think about it.
Difficult. Difficult, difficult. But it's like, you know--I'll
end, Mr. Chairman--you've heard me quote it before, allegedly,
although I just read a new book, where I found out that half
the quotes Kennedy gave as his weren't his, and who knows whose
what quotes, I mean--but this is attributed to G.K. Chesterton,
and it may not be accurate, but I've always heard it saying--
Chesterton said, ``It's not that Christianity has been tried
and found wanting; it's been found difficult and left
untried.'' I kind of think that's where we are on this whole
relationship with Russia and our allies and our mutual
dependents and our needs. We don't seem, in this--our
unilateral thinking--we don't seem to quite understand that we
can't do this alone. We can't figure this out alone, unless we
decide to--just to become totally energy independent, if that
were able to be done, if you could wave a wand. But what does
that do for us, in terms of our alliances and our--I mean, it
doesn't do a whole lot. I mean, it's--I'd like to have it. You
give me the choice, I'd take it.
So--and the one question, for the record, I won't even ask
you to do it now, because I'm supposed to--I have to leave for
20 minutes before I come back for our meeting--is, Doctor,
other than oil, you--you made a very, very important point. You
said that we have--we should base our relationship more on a
solid international footing relation to--in relation to
economic dependent--and mutual dependency. Is there anything
other than oil or gas? I can't figure any out. And if there is,
if that's the only one, we've got to do a lot of antecedent
things to figure out how to get to there first. Because if
they--if there's a pipeline coming across the Bering Straits,
that's a great thing, except if they get angry and decide--and
tell us--and watch everybody, like Nervous Nellies here,
saying, ``No, no, we're going to divert that pipeline. We're
going to go down through northern China.'' They can't, but we'd
sure the hell go, ``Oh, my God. I guess they're going to do
that, just like all that Siberian gas is going to go to China
now, when it would have gone to Europe,'' when it couldn't have
gone to Europe.
End of my comments. Anybody who wants to respond, I invite
it, but it's not necessary.
Yes.
Dr. Trenin. Senator Biden, I was talking more about
Stockman, not about Bering. I was talking more about the
project for liquified natural gas reaching the U.S. market.
Senator Biden. Still energy, right?
Dr. Trenin. It's still energy, that's right. But you talk
as if energy were, today, a basis for the relationship. It's
not. In fact, energy and--oil and gas are absent from the
United States-Russian economic relationship.
Senator Biden. No, I--please don't misunderstand me. Energy
is the basis for Putin's ability to act in the way he's acting,
which is contrary to the interests of the United States,
Western world, the whole world, and his world, in my humble
opinion. That's the basis for it. Were he not, were he energy
deficient, were he China--we just switch the resources. God
wakes--we wake up the next morning, and all the oil and energy
that's in Russia is now in China, and all the energy, the lack
of it, in China, is in Russia. It's a different world, Jack. It
is a fundamentally different world. And old Vladimir's got a
problem.
Ms. Jaffe. Let me just respond, Senator Biden, to something
that I've said in our dialog, our informal dialog, between the
Baker Institute and Chinese think tanks. Fundamentally, you've
hit the nail on the head. We have the same strategic interests
as China. China is a net importer, they have to worry about the
stability of the flow of energy from the Middle East, the same
as we. Russia is a net energy exporter, their economy, as
Senator Lugar has so correctly pointed out, is tied to the
health of the energy market, from a producer-seller point of
view. So, I'm not saying we shouldn't have good relations with
Russia; they're the most important supplier. But we need to
understand and recognize, especially in thinking about our
foreign policy, that we have this strategic alignment actually
with China, not Russia, when it comes to this issue, because
the Russians are on the other side of the issue, and the
Chinese are on the same side of the issue as we are, as a major
consumer that has to worry about the future of growth of its
economy, based on energy supply.
And so, when we think about our diplomacy, we have to have
not only diplomacy to deal with our producer-ally-friends
relationships, superpowers, whatever, we also have to consider
who's in the buyer club. It's not just the European Union and
Japan or South Korea. We have to think about India and China
and Brazil and those who are in the buyer club, as well.
So--but you're right, you know, quirk of fate, what's under
the ground matters. And you cannot get away from the strategic
nature of the fact that we are a net buyer, and some countries
are net sellers.
Ambassador Sestanovich. If I could add two cents, Senator.
One, I think it's important to bear in mind that energy
wealth doesn't always keep corrupt regimes in power. And if
there's any doubt about that, I suggest President Putin talk to
the Shah of Iran.
Senator Biden. By the way, it doesn't keep him in power,
but what it brings about may not be more beneficial.
Ambassador Sestanovich. Excellent point.
You also asked what Russia can do with its energy in the
way of coercion, what its options are. It's useful here to
compare the use of energy to the way in which nuclear weapons
add to a country's power. What was shocking about what Russia
did in its confrontation with Ukraine in January was that it
was the equivalent of actually using nuclear weapons, as
opposed to merely having them in your back pocket as a reminder
of how important you were. That got the Europeans' attention.
Nobody had used energy as a weapon in that way in a very, very
long time.
There's a related question here which is not how big a
problem Russian energy is, but how much can Russia contribute
to the solution of global energy problems? And, here, I think
it's important to pay attention to the limit on its energy
production imposed by Russia's political and economic system.
For years Russian gas production growth has lagged the
international averages. Why? Because Gazprom is a monopoly.
It's as simple as that.
Senator Biden. Well, I--my observation is that nations
usually don't spontaneously recognize those deficiencies,
especially coming from those in power who control the
monopolies. That has not been historically the case.
I want to make it clear. I do not believe our relationship
with Russia should be, or is primarily, based upon energy. The
fact of the matter is, Russia forming a more democratic nation
is critically important to our security interest and to the
development of western Europe and the entire region than almost
anything else I can think of. All I'm suggesting is,
ironically, the oil has become the impediment, in the short
term. It has all--it's the--if you had an enlightened leader in
Russia, you could see how the use of energy could be an
incredible tool for democratization. It could be a phenomenal--
a phenomenal tool. In the hands of an autocrat, who comes out
of a system that is--well, anyway, without going--it is a very
different tool. It is a very different tool. In the hands of a
President of the United States, in the hands of the Prime
Minister of Great Britain, in the hands of the President of
France, it may be a very different thing. It may not, but I
suspect it would be. But I don't want anybody to misread here.
I--the point I made was, energy independence on our part would
not--would not solve larger problems relating to Iran going
nuclear and Russia's implication in, or cooperation or
opposition to it. It would not solve the situation, in terms of
European unity and how it views its relative strengths or
weaknesses. It would not affect a whole range of things that
are vitally important to us in the 21st century. It just
happens to be the 800-pound gorilla sitting in the middle of
the discussion right now, and our failure to understand its
impact--not your failure--our failure, as a government, to
understand its impact--or, if not understand it, act upon--act
upon rational alternatives, seems to me to be not in our
interest, not in Europe's interest, and, I would argue, not in
Russia's interest. This is not about, in my view--I don't want
anybody to misread--this is not about how you keep Russia in a
box, how you keep Russia--we are better off if Russia is a
thriving economy that has democratic rules. We are better off
if it becomes a major economic power in a democratic mold. This
isn't about, in my view, keeping Russia in a box. It's about
allowing Russia to flourish. If it flourished, we're better
off. We're better off. Competitor? Yeah. We're better off.
And so, I just don't want anybody--not the three of you,
but anybody listening--thinking that I think we've got to
figure out how to, you know, keep Russia from reemerging as a
major power. I'd like it to reemerge as a major power, as a
major democratic power. That's a good thing, not a bad thing,
in my view. I don't think it's a zero-sum game.
The Chairman. Yes, Dr. Trenin.
Dr. Trenin. If I may, I think you're absolutely right,
Senator Biden. And this is really the fundamental thing that we
should be concerned with.
And, of course, we also realize that there is no shortcut
to democracy. An enlightened leader--if one transplants an
enlightened leader to the position that Mr. Putin occupies
today--would probably have to deal with the same elites around
him, with the same people who vote for Mr. Putin, and who are
constantly supporting Mr. Putin at a pretty high rate. In other
words, the problems of Russia are not only confined to the
Kremlin.
Senator Biden. I agree.
Dr. Trenin. They are everywhere. And I think that it's the
development of a new society. If you like, call it capitalism--
it's not market capitalism, but capitalism, still--that is
transforming the country and eventually taking it closer to
democracy. But we should disabuse ourselves of the notions,
which were very popular back in the early 1990s, that somehow
Russia could make a great leap forward and become a democracy.
It is--it was possible, and it is possible, in some central and
eastern European countries, because their modernization was
linked to integration into NATO, the European Union, and other
Euro--Atlantic European structures. For a variety of reasons,
this is not the way that Russia is likely to go.
So, I think that even as we wish Russia to become a
democracy, we need to be aware of the current realities of
Russia and that this is going to be a long and arduous path.
And there's an--yet there's another thing which I think I
would need to highlight. Democracy is--which--when they are in
the process of becoming such, the process of democratization,
could be accompanied by some pretty ugly things or some
difficult things, like nationalism. I referred to nationalism.
A more democratic Russia will not necessarily be--I mean, if
you just turn the power to the people today, it may not
necessarily be a nicer, friendlier whatever. So, I think that
it's a complex reality. And as--even as we wish Russia well,
wish Russia becoming a democracy as soon as she can make it, we
need to realize that this path is going to be a very, very
difficult and long one.
Senator Biden. I couldn't agree with you more. I don't
disagree with a thing you said.
Ambassador Sestanovich. Can I just cast a vote for the
great-man theory of history instead of the sociological
analysis that you've heard from Mr. Trenin? I completely agree
that the long-term development of Russia is going to depend on
broad social trends of the kind that he's describing, but we
shouldn't forget how important specific decisions are that are
made by Mr. Putin and his associates in the Kremlin for the
answer to this question: Will Russia, in the next couple of
years, take steps forward toward----
Senator Biden. Transition?
Ambassador Sestanovich [continuing]. Modernizing itself in
the way that Mr. Trenin has described, or will it take steps
backward? The question of whether or not opposition parties are
able to participate freely in elections is completely up to
people in the Kremlin. The question of whether or not
opposition parties are able to get financial contributions for
their campaigns from Russians who support them is completely up
to people in the Kremlin. The question of whether opposition
parties are taken off the ballot days before an election is
completely up to people in the Kremlin. The question of whether
they're even allowed to register is completely up to people in
the Kremlin. This is not a matter of broad sociological trends;
it's a question of who signs the memo authorizing this or that
restrictive policy to be implemented.
So, I think we shouldn't take too long a view, when we can
see how specific decisions are made in the Kremlin that block
Russia's development.
Senator Biden. It would be nice if they had a Madison and a
Washington and a Jefferson, but I would agree with the
professor that it would still take a helluva lot longer than it
took here. I think you're both right, these--this makes--you
know, individual leadership matters, that the great-man theory
does have--in this country, the great-man and great-woman
theory has some relevance, but you have to admit, it would be
more difficult. It is necessary, and it's a shame, and it makes
me realize--and it sounds somewhat chauvinistic about our
country--but, damn, we were lucky in 1776. We were awful lucky
to have some pretty damn smart people committed to a completely
new notion of governance. And--but even if you had 'em all
sitting in Moscow, I think it's going to be a little bit
harder.
The Chairman. Thank you, Senator Biden.
Let me just make a summary comment, and then we'll bring
this hearing to a conclusion, although you may have some final
comment after my thoughts.
It seems to me constructively this morning that we've had
some agreement between the Senators and the panel that our
country needs a more well-defined energy policy. I suppose if
those who are responsible for our energy policy were here, they
would say, ``Well, we do have various elements of this,''
perhaps. But, nevertheless, there appears to be some consensus
that it needs to be more sharply defined and understandable to
the American people, as well as to Russians, Europeans,
Chinese, or whoever; and, as a subset of that, the suggestion
that we need a natural-gas plan.
Ms. Jaffe has provided some excellent charts which show all
the routes of natural gas to Europe and to Asia, as well as
prospective routes, with a red line heading out to China, for
example--and this is very helpful, in a geographical sense. We
discussed the various countries. Unless each one of us has a
photographic memory of the map of Europe or Asia, it may be
difficult to transpose where all these lines are and who is
intersecting whom, or evading whom. We talk about the Caspian
problem, and so forth. So, I commend, to Senators, staff, and,
likewise, those observing this hearing, these remarkable
charts, just as a basis for getting some grasp of the options
that are available to countries that are involved in this.
Now, let me just mention, also, that the thought has been
expressed that the United States has an affinity with China
with regard to the Russian energy situation. I would indicate
that that, likewise, is the case with India for, obviously,
some of the same reasons: The dynamic growth of these
populations, and huge new demands for energy, now and for the
foreseeable future.
Likewise, in our country, we express the thought we need to
have energy conservation. Most experts who have written about
this subject have made the point that some of you have made
about Russian use of energy--in the case of natural gas, that's
the misuse, waste. It goes well beyond the amount that's being
exported to Europe or elsewhere, where there seem to be
contractual difficulties.
I mention, once again, our legislation in Senate bill 2435.
It's not the be-all and end-all, but it expresses the thought
that energy policy has to be a cardinal point of our American
diplomacy. We need to have, in our State Department, or
elsewhere, if the President so desires, people who are actively
involved in diplomacy on all of these subjects. In other words,
people that might be working with the Europeans with regard to
the European charter. As some of you have said, this is really
a cardinal point, even as we approach the G-8. Even without the
G-8, it is very important. I'm not certain I see that kind of
diplomacy going on, nor diplomacy with China, with India, with
other energy users, on either substitutes, or more efficient
use of energy.
Some Americans would say, ``Why should we work with other
countries to help them become more efficient in using BTUs?''
Well, for the very reasons we're talking about today. On the
supply side, the misuse of BTUs, or antiquated machinery or
procedures, is extremely costly to them, and they have to
become more aggressive in trying to overcome those
deficiencies.
In the Corinthia Hotel, in Tripoli, in Libya, where I was
in August, I saw many, many people from India and China--in
fact, the hotel appeared to be filled with persons from those
countries--and as I was visiting with them, and asking them
their mission. It was identical--namely, to identify acreage in
Libya for areas of dominance, preemptive work. There were a few
Americans in the hotel, but they were outnumbered in the
process, although they had the same mission. In other words,
there was an alliance of sorts. Now, we might have seen it as
competitive, and the world may say, ``Well, this simply
indicates that we're all headed toward collision,'' but not
necessarily so if we identify the mutual interests that we have
in this.
This calls for an extraordinary amount of new diplomacy in
our Government now, or in any one that may follow this
administration. So, our committee's hope is, by having these
hearings, inviting experts such as yourselves, taking advantage
of a situation like the G-8 meeting, which is a focal point on
Russia, on energy, to try to make some points in our own dialog
in this country.
Let me just mention one small success story. I was not the
only Senator who received letters, but I'll make them a part of
the record. These came from the chief executives of Ford and
Chrysler.
[The information previously referred to follows:]
Ford World Headquarters,
Dearborn, MI, December 14, 2006.
Hon. Richard G. Lugar,
U.S. Senate, Hart Senate Office Building,
Washington, DC.
Dear Senator Lugar: Thank you for your letter of encouragement for
our efforts to help transition away from foreign oil dependence.
Innovative gasoline-saving technologies are leading the way forward in
our product development plans. As you know, we have committed to
produce 50 percent of the vehicles we make each year as flexible fuel
vehicles capable of running on a renewable fuel by 2012, provided the
fuel is available to consumers and sufficient incentives are in place
to encourage the production of these vehicles.
Our commitment to put more flexible fuel vehicles on the road, by
itself, will not reduce the nation's dependence on foreign oil. Fuel
providers, retailers, and consumers are key elements of any
transportation policy equation and must be part of the solution. We
need a strong, long-term focus on policies that increase ethanol
production, accelerate E85 infrastructure development, and ensure
competitive E85 pricing to consumers. Competitively priced renewable
fuels and a nationwide refueling network are essential market drivers
required to encourage active consumer participation in the federal
fight for energy independence. An aggressive energy security strategy
of federal tax incentives and loan guarantees for ethanol producers,
distributors, and retailers would increase the supply of renewable
fuels, accelerate the installation of refueling systems, expand the
availability of renewable fuels, and reduce transportation fuel costs
for consumers.
Unfortunately, roadblocks to E85 infrastructure continue to arise.
Recently, Underwriters' Laboratories (UL) have informed us they do not
have a certification protocol for E85 pumps--this has halted
development of several new stations and has raised questions about
existing stations. Prompt resolution of this issue is necessary to
continue the positive momentum.
Ford shares many of the goals in your proposed National Fuels
Initiative. We both recognize the need for dramatically increasing the
production, distribution, and use of cellulosic renewable fuels. In
fact, Ford's Vice President of Environmental and Safety Engineering,
Sue Cischke, highlighted a few of our efforts and shared perspectives
on a variety of renewable fuel issues as she participated in your
August 2006, Energy Security Summit at Purdue University.
Energy security concerns are driving significant investments in all
areas of advanced technology vehicles including energy-efficient hybrid
electric, clean diesel, and advanced internal combustion technologies.
We plan an expanded application of hybrid electric technologies into
the Ford Fusion and Mercury Milan in the next few years. We continue to
research plug-in hybrids and the associated battery challenges. Our
hybrid electric and flexible fuel vehicles represent the best of
American ingenuity and engineering excellence.
Ford Motor Company is committed to employing gasoline-saving
vehicle technologies, enabling consumers to reduce the nation's
dependence on foreign oil. I look forward to continuing our
correspondence on these and other important public policy challenges
facing our great Nation and the 110th Congress. Thank you for all your
leadership in the Senate.
Sincerely,
Alan Mulally,
President and CEO.
______
DaimlerChrysler Corporation,
Auburn Hills, MI, May 12, 2006.
Hon. Tom Harkin,
Hon. Dick Lugar,
U.S. Senate,
Washington, DC.
Dear Senators Harkin and Lugar: This is in response to your letter
of April 24, 2006, to Dr. Dieter Zetsche, requesting that
DaimlerChrysler increase its production of flexible fuel vehicles
(FFVs) as quickly as possible to reduce our consumption of petroleum.
DaimlerChrysler shares your views that we need to shift the Nation away
from petroleum consumption and that renewable fuels can, and must, play
an important part in that shift.
Earlier this year, I announced in a speech at the Detroit Economic
Club that DaimlerChrysler would add to the 1.5 million FFVs that it had
previously produced by manufacturing, by the 2008 model year, just
under 500,000 FFVs annually. These 1.5 million vehicles represent about
10 percent of our total production since 1998, and the 500,000 figure
is nearly 25 percent of our expected annual production. Both
percentages are the highest for any manufacturer, a fact of which our
company is very proud.
On April 25th, I had the honor of following President Bush to the
podium of the Renewable Fuels Association conference, held in
Washington. I announced that for the first time ever, beginning in
model year 2007, our Jeep brand will offer flex-fuel vehicles, for both
retail and fleet sales. Customers who order our popular Jeep Grand
Cherokee or the new Jeep Commander with the 4.7 liter engine option
will receive vehicles capable of running on E85 fuel. In addition, the
Chrysler Sebring, Chrysler and Dodge minivans, Dodge Dakota and Dodge
Ram pickups, and the Dodge Durango SUV will also offer FFV capability.
In total, we anticipate sales of more than 250,000 FFVs in model year
2007, which will then nearly double by the following model year.
DaimlerChrysler is fully committed to increasing levels of FFV
production.
Our commitment to renewable fuels, though, extends beyond ethanol
use. DaimlerChrysler is the only manufacturer to offer a diesel vehicle
that leaves the factory fueled with bio-diesel. The Jeep Liberty
diesel, manufactured in Toledo, Ohio, is fueled with B5 as it leaves
the assembly line. We have also announced that beginning this Fall, we
will endorse the use of B20 diesel fuel, for use by our military,
government and commercial fleet Dodge Ram customers.
Senators, we share your goals of reducing petroleum consumption and
increasing the use of renewable fuels. The actions described above,
plus our continuing efforts to improve the efficiency of gasoline-
powered vehicles, increase our use of diesel engines--which provide 20-
40 percent improvements in fuel economy compared to equivalent
gasoline-powered vehicles--and our leadership in fuel cell vehicles--
with more than 100 vehicles, ranging from small cars to transit buses,
in operation around the world today--are testimony to our commitment.
DaimlerChrysler believes that incentives are the most efficient
means to increase production, distribution, and sales of both renewable
fuels and vehicles capable of operating on them. In this regard, some
of the provisions of your bill, especially those regarding the
elimination of a manufacturer's CAFE credits, are of concern to us. But
given our shared goal of increasing the number of FFVs, we look forward
to working with you and other Members of the Congress to resolve any
different approaches we may have on this extremely important issue.
Sincerely,
Tom W. LaSorda,
President and CEO.
The Chairman. They came, recently, to Washington, within
the last two weeks or so and met with several of us. They have
written back that they understand the need for alternative
energy. They understand the need for fuel economy. They pledge,
in this letter, that, quite apart from ads that I--we've all
seen in the national papers--that the three companies will
provide at least 1 million flexible-fuel cars in this
production year. They pledged to increase that to at least 2
million by the 2010 production year.
Now, even that, we might say, is still very slow progress
with regard to an entire fleet of cars in this country, but
here is a public statement that this is important, in terms of
their policy, producing cars in a commercial world in which
they have to sell those cars. And then, furthermore, they point
out, correctly, that a lot of E85 pumps are going to be
required at filling stations around the country. And so,
they're very hopeful that their friends in industry will take
that seriously.
Here you have advocacy by American business people who have
come and visited with Members of Congress. They have come back
and written down on a piece of paper to us, ``We pledge to do
these things,'' because they are very important for America and
for our energy policy, if there are not to be severe
adjustments in the standard of life to which we've become
accustomed.
The good news is that there were also listeners and dialog
that produces results, sometimes of a nongovernmental
character. No one has mandated anybody to produce flexible-fuel
cars, but there's a recognition, as Americans, that this is
tremendously important to do. My guess is that other people in
other countries, likewise, may have similar sentiments if they
understand that there's a vanguard of the faithful prepared,
really, to offer leadership in this regard.
We appreciate your papers and your testimony very much as a
part of this dialog. We look forward to staying in touch with
all three of you.
And before I conclude this hearing, let me ask if any of
you have a final comment for the record this morning.
[No response.]
The Chairman. Very well. We thank you and ask that you stay
in touch, as I've mentioned.
And the hearing is concluded.
[Whereupon, at 10:50 a.m., the hearing was adjourned.]