WORLD POLICY JOURNAL

ARTICLE: Volume XV, No 1, SPRING 1998

Oil Politics: America and the Riches of the Caspian Basin
Ian Bremmer

Less than a decade after its collapse, the Soviet Union has been eclipsed by the Caspian Basin as an American strategic priority. Unheard of by most Americans in the days of communism, the representatives of Azerbaijan, Kazakhstan, and their unpronounceable neighbors are now regularly seen on the A-circuit in Washington.

This switch comes not because there is a new threat (which militant Islam could conveniently provide) but in response to economic opportunity. In a word, oil. The next Persian Gulf (or so say its promoters), the Caspian Basin has enormous and virtually untapped energy resources. It has opened important new avenues for multinational investment and the fulfillment of consumer demand. As at the turn of the century, global powers once again vie for market share in an area of the world exotic and remote.

Yet the Caspian region is made up of new states, states hobbled by untested institutions, civil unrest, and ethnic tension. It is, in short, a mess, unlikely to respond predictably to the hallowed maneuverings of international diplomacy. How America realizes its interests without further destabilizing the Caspian is fast becoming our first critical policy challenge of the twenty-first century.

Caspian Resources
Measuring the Caspian's wealth is difficult. Proven oil reserves range from 15 billion to 30 billion barrels, comparable to those of the North Sea; estimates of unproven reserves range up to 200 billion.1 Proven natural gas reserves are estimated at roughly 200-350 trillion cubic feet, comparable to North American reserves, and total Caspian reserves could be double that figure. Unproven reserves are just that, of course, and the Southern Tier states2 have considerable interest in keeping estimates high in order to maintain their attractiveness to outside investment.

The main problem is how to get the energy out. Soviet-era infrastructure, combined with geopolitical instability, means that there is no easy link between Caspian resources and consumers. New pipelines must be built.

The pipelines now in place (see map) are being used to transport "early oil"-the preliminary and relatively low-level Caspian production. One connects Baku to Russia, ending in Novorossiysk. A second, which is being refurbished and is expected to be operational by the end of the year, runs from Baku to the Georgian port of Supsa. A third travels west from western Kazakhstan to Russia, terminating in the Black Sea. All three are limited in capacity-carrying from 100,000 to 160,000 barrels a day.

The problem of how to transport the bulk of the Caspian reserves-the "big oil"-is considerably more difficult. The primary options presently being considered for "big oil" include three Azeri variants: (1) expanding the "northern route" from Azerbaijan to Novorossiysk; (2) building a pipeline through Georgia and/or Armenia ending in Ceyhan, Turkey; or (3) building a new trans-Caucasus pipeline from Baku through Georgia to Supsa. From Kazakhstan, the most favored pipeline route follows the early oil route northward from western Kazakhstan through Russia.

But Caspian geopolitics are in no small measure contingent on energy transport, and everyone is in the hunt for a next-generation pipeline. The attraction is easy to understand. A pipeline provides investment and jobs, long-term access to natural resources and transit fees, and-most important-political and economic leverage. In a region where all these things are in critically short supply, pipeline politics matter.

American Interests
American corporations are by far the lead players in the Caspian, reflecting their predominance in the international oil industry. American firms hold substantial percentages of nearly every major Caspian consortium agreement, and have rights over almost every major field presently under exploration or development. Their goals have been straightforward: get the oil out by any (and preferably all) means possible-quickly, safely, and cheaply.

The American government's role has been more circumspect. Washington's stated Caspian policy-to promote the independence and democratization of, and the creation of free markets in, the transition states-differs little from its sound-bite approach toward the rest of the developing world. But Southern Tier realities make for a tough fit. These states are independent only at the margins, they are privatizing by and for small networks of nomenklatura, and they are far from democratic (Georgia and the Kyrgyz Republic, the most advanced on this score, have made the smallest splash in Washington).

The issues that have really driven America's Caspian policy have less to do with the Caucasus and Central Asia than with our relations with key countries outside the Southern Tier-Iran, Turkey, and Russia. Economic interests in the region aside, American policy has been determined by preexisting approaches toward countries with longstanding business on the American agenda and at best tangentially related to the Caspian.

The United States has vigorously opposed Iranian influence in the region. As part of Washington's "dual containment" of Iran and Iraq, American companies are forbidden from engaging in any investment that involves Iran. Furthermore, as a result of the Iran-Libya Sanctions Act (ILSA), passed by Congress in 1996, foreign companies that invest more than $20 million in Iran's energy sector are liable to sanctions. Washington does not want Caspian oil to pass through Iran.

Meanwhile, Washington has strongly promoted Turkey throughout the Caspian region as the ideal outlet for foreign trade, portraying our NATO ally as a secular model for Islamic nations and as a gateway to the West. It has also encouraged Turkey to establish closer relations to the Southern Tier. Clearly, Washington wishes Caspian oil to pass through Turkey.

America's stance on Russia is more confusing. One analyst explains America's "Russia first" policy thus: "The policies of a democratic Russia in the [Caspian] region are assumed to be benign, so the Clinton administration has given Moscow a free hand there."3 Another takes the opposite view: "The United States has made a foreign policy priority out of making sure that Central Asia's oil and gas are transported via alternative [non-Russian] routes."4


Unfortunately, both are right. America's Russia policy is contradictory. This is less the result of an ideological divide in the United States and more the result of competing interpretations of the nature of the Russian regime. On the one hand, Russia has been America's primary strategic interest in the region. And a healthy Russia is essential for the future stability and prosperity of the Caspian region. Affording Moscow flexibility vis-ý-vis its bordering countries seems a small price to pay for this. On the other hand, Russia is a competitor for regional influence and harbors imperialist notions about its southern flank. Allowing Russia to ride roughshod over the Caspian and, as a consequence, U.S. commercial interests, may have unfortunate consequences. Our policy? Washington is not sure if-and how much-Caspian oil should pass through Russia.

The exception to America's "outside-in" Caspian focus has been landlocked and resource-poor Armenia. The reason for this is the powerful Armenian-American lobby-1.5 million strong-which has succeeded in keeping the plight of hapless Armenia before officials in Washington. In consequence, Congress has earmarked large-scale financial aid for Armenia (which now receives more U.S. aid per capita than any other country except Israel), and has passed Section 907 of the Freedom Support Act, which prohibits humanitarian aid to Azerbaijan because of its "blockade" of Armenian territory. Therefore, Washington desires Caspian oil to pass through Armenia.

All of these pieces meet incoherently, and America's overall strategy has accordingly shifted over time. Originally, the United States equivocated on its pipeline preferences, opposing Iran but otherwise supporting a "multiple pipelines" strategy. But more recently Washington has favored the Baku-Ceyhan route, which crosses Armenia as well as Georgia, as the primary route for moving "big oil."

Caspian Contradictions
Economics and politics clash over America's Caspian policy. The cheapest pipelines face the greatest diplomatic obstacles. The most attractive economically is a pipeline running due south from Baku to Iran. But American sanctions have kept this southern route off the table.

Political roadblocks similarly frustrate America's preferred route, from Azerbaijan through Armenia and Georgia to Ceyhan. Armenia and Azerbaijan have been at war over Nagorno-Karabakh-a mountainous enclave of Armenians within Azeri territory-for the better part of a decade, and there is little room for dialogue. Ilham Aliev, deputy president of Azerbaijan's state oil company, explained that the Armenian route is not a possibility "no matter what concessions [Armenia] makes over Nagorno-Karabakh."5

Routes more agreeable to all concerned still bear substantial political risk. Avoiding the Armenian section of the Ceyhan pipeline would still require passage through some of the most conflict-riven territory of the region, both in Georgia (near war-torn Abkhazia) and in southeastern Turkey (home to Kurdish national aspirations). These worries are trumped by concerns about Russia's northern route, 150 kilometers of which pass through independence-minded and ungovernable Chechnya. A bypass proposed by Russia would traverse neighboring Dagestan, the only region of Russia with a level of turmoil comparable to Chechnya's.


From Kazakhstan, the primary plan is for a $2 billion pipeline to ship Kazakh and Russian oil through Russia to the Black Sea. Thus far, however, Russia has kept strict control over the piping of oil through its territory, greatly limiting Kazakh export. A second option is to build a pipeline under the Caspian seabed to Baku, where it would join up with the flow from Azerbaijan.
Other than the obvious expense of such a route, there remains the unresolved question of who controls the seabed. Tanker or barge options, across and up or down the Caspian, and numerous joint rail possibilities have been proposed, but they would be inefficient and expensive, and difficult to administer. Nonetheless, they are becoming increasingly attractive, given the lack of alternatives.

Hence some of the region's more ambitious proposals: one would move oil from Baku to the Georgian port of Poti, then by tanker across the Black Sea to Odessa, and on through Ukraine to Poland. There are proposals to pump oil east, including a $2.5 billion pipeline from Turkmenistan to Pakistan. But this would require transit through Taliban-controlled Afghanistan 100 kilometers from the front lines of the Afghan civil war.

China and Kazakhstan also have plans to link their two countries. Their 3,000 kilometer pipeline would cross the remote and topographically challenging Tienshan mountain range. It would also pass through China's rebellious Xinjiang province, with its autonomy-seeking and economically disadvantaged Uighurs. And once in Xinjiang, the oil would have to be processed or transported by rail or truck-China's existing pipeline network extends no further. Nonetheless, last September the China National Petroleum Company signed a $4 billion deal with Kazakhstan to begin work.

Assessing the Neighbors
U.S. Caspian policy is riddled with ambiguous intentions and interests. Armenia and Turkey are more problematic allies than Washington acknowledges; Iran sorely merits removal of its pariah status; and America's wavering on Russia needs to be replaced by a policy of cooperation and support.

Armenia, one of the most progressive Soviet republics under Moscow's rule, has a dubious recent record, including extensive human rights violations and one of the least free and fair presidential elections (1996) among the newly independent states. Military victories in Karabakh have resulted in Armenia's occupation of that contested region, as well as the territory surrounding it, leaving Azerbaijan with hundreds of thousands of refugees on its hands. The recent power struggle among the top leadership, which culminated in President Levon Ter-Petrossian's resignation, makes questionable any Caspian policy which includes reliance on the Armenian government.

There are also obstacles with respect to a leadership role for Turkey in the Caspian region. Ankara's longstanding repression of an indigenous Kurdish population and the Turkish high court's recent banning of the popular Islamic Welfare Party make Turkey a problematic proponent of reform in the region. Turkey's importance as a strategic ally should not be discounted, but neither should the fact that American sentiment is not shared by the Europeans, as they continue to reject Turkish applications for membership in the European Union (EU). America's desires to support Turkey should be weighed against its comparative unattractiveness as an investment partner.


The issue of Iran is far more complicated. Its opposition to the Middle East peace process, its apparent sponsorship of terrorism, and its nuclear research and ballistic weapons acquisitions programs bolster an unsavory international image. But following the landslide election of the moderate Mohammad Khatami to Iran's presidency, the country is in the midst of a democratic transition. Fundamentalists by no means monopolize what is an increasingly pluralist society, and Khatami himself has led the way toward opening a dialogue with the United States.
More relevant, Iran has been anything but a tireless exporter of Islam in the Southern Tier. Iranians are Shi'a Moslems, and all of their Caspian neighbors except for the (Turkic-speaking) Azeris are Sunni. Iran's strategy to broaden its ties in the region have rarely extended to mosque building. Ironically, Turkey has been more effective in this regard, combining Islam with a Westward orientation and economic success-bringing it into much closer alignment with the aspirations of Southern Tier leadership.

Iran's role in the Caspian has been pragmatic. Teheran has been driven primarily by the need to avoid taking sides on most issues. Russian technology and diplomatic support have improved Iran's strategic position in the region. Teheran has reciprocated by supporting Russia's proposed "condominium approach" toward the delineation of the Caspian Basin and expanding economic ties with Armenia (making Iran Armenia's leading trading partner and, indeed, its closest ally after Russia). But Iran also stands to benefit greatly from transporting Caspian oil, and so has a strong interest in improving relations with the region's energy-producing states. Moreover, 25 million ethnic Azeris live in northern Iran, making this a potential troublespot were relations with Azerbaijan to worsen. Iran's potential to serve as a Caspian bridge builder should therefore not be underestimated.

Russia, on the other hand, insists on treating the Caspian Basin as its personal backyard. Russian demands have included the right to base troops and station border guards throughout the region. And Moscow expects the Caspian states to be members of and participate in a Russia-dominated Commonwealth of Independent States (CIS). It has used economic strong-arm tactics to pressure Southern Tier states into accepting equity-debt swaps and to secure Russian capital participation in consortia agreements on countless occasions. Prime Minister Viktor Chernomyrdin has himself made it abundantly clear that he expects Russian firms-and not the highest bidders-to receive first consideration for Caspian energy development projects.

Russia has enormous leverage. Soviet central planning meant that roads, rails, electricity, and pipelines ran from Russia to the outlying republics. Nearly all of this infrastructure remains in place. And although the Russian bear may not be what it once was, Moscow's ability to punish far exceeds its capacity to reward. The Russian military might have been incapable of suppressing the Chechen revolt, but it experienced little difficulty in destroying Grozny, Chechnya's capital. It could not bring an end to the fighting in Tajikistan, but it was able to keep the fires burning over Abkhazia in the latter's continuing secessionist struggle with Georgia. When the Southern Tier states have not been forthcoming, Moscow has not hesitated to use the stick-closing off Kazakhstan's pipeline, attempting to topple Azeri president Heidar Aliev, and providing economic and military support for secessionist-seeking Karabakh Armenians. So no matter what Moscow's intentions may be, constructive engagement with Russia is essential in the Caspian.

The Fuzzy Factor

American policy in the Caspian may be a muddle, but is it sufficiently rigid that it requires overhaul? International opposition to U.S. sanctions against Iran is strong, and several multinational companies have started to build there. In September 1997, the French energy company Total led a $2 billion consortium with Russia's Gazprom and Malaysia's Petronas to develop Iran's South Pars gas field. When Washington protested, French premier Lionel Jospin stated, "Nobody accepts that the United States can pass a law on a global scale.... American laws...do not apply in France."6
The 1996 Iran-Libya Sanctions Act itself allows for the waiver of sanctions by special determination of the president, a clause the United States has not hesitated to use. Last year, the United States ruled that a $190 million pipeline to transport Turkmen natural gas via Iran to Turkey would not face American sanction. The first explanation offered was that the pipeline was of primary benefit to Turkmenistan, not Iran (why the United States would oppose sanctions on Turkmenistan, given President Niyazov's own domestic liabilities begs the larger question). Washington's fallback position was that the deal predated ILSA.

The presence of U.S. companies in oil deals has also not precluded Iranian participation. Kazakhstan, wishing to engage in oil swaps with Iran (exchanging Kazakh oil production for Iranian), circumvented sanctions by spinning off parts of its share of production in the Chevron/Tengiz Field. The United States has engaged in a full regimen of legal calisthenics to keep from awkwardly penalizing Caspian projects thought to be unstoppable. And even a "sanctionable" finding does not mean sanctions will actually be imposed. Such policy wiggle could make life considerably easier for would-be Caspian investors.

But U.S. policy has prevented American companies, as well as their joint venture European partners, from exploring an Iranian pipeline or swap options.7 This fact, in combination with the heavy involvement of American companies in Caspian oil exploration projects, makes negligible the prospects of a major Iran route. In short, unless America's policy changes, Iran's role in the Caspian Basin will remain peripheral.

The congressional prohibition against direct American aid to Azerbaijan (as a result of the efforts of the Armenian-American lobby) has been compensated for by increased assistance from the EU. American dollars continue to flow into Azerbaijan from U.S.-based multinationals and foundations, and the Clinton administration has effectively targeted local nongovernmental organizations for aid. But America's negotiating position on Karabakh, not to mention its efforts to secure a trans-Armenian pipeline route, have been severely undermined by the policy.

In effect, the United States has alienated the Azeris and the Iranians, and punished American companies, without changing political realities in the Caspian region.

Moving Past the Wiggle
The United States needs a clear and consistent Caspian policy that articulates American interests. American policy must have more to do with the Caspian states themselves, and less to do with the "either/or" correlation of outside forces.


Nor should democratization be ignored. This means responding not only to the building momentum for reform in Khatami's Iran but also to the authoritarian backsliding evidenced in Kazakhstan and Azerbaijan. Presidents Heidar Aliev and Nursultan Nazarbaev both made trips to the White House in the past year, to be welcomed by a Clinton administration that made scarce mention of the domestic unrest at home. Although dictatorships may be "oil-friendly" (and so facilitate our efforts to secure pipeline arrangements), questions of leadership succession will inevitably undercut the long-term success of a U.S. policy that turns a blind eye to the abuse of power.

Reformist tendencies should be gauged in terms of the rapidity and direction of reform. To promote progress toward lasting stability and democracy in the Caspian region, the United States should support regimes that show a willingness to take steps now to instill change. And if the primary measure of domestic reform is pace and trajectory, the United States must recognize that Iran gets higher marks than most of its Caspian neighbors.

But by far the most stabilizing of America's policy aims in the Caspian is the fostering of independence. And true independence for the Southern Tier states means the ability to secure their own fate. They must be able to develop their resources at a steady pace, with the involvement and assistance of as many outside powers as possible.

Russia should not dominate this process. But neither should it be cut out of the deal. Under Soviet rule, none of the Southern Tier states were happy with Moscow's diktats. But even in 1991, as the Soviet Union crumbled at the center, there was enormous reluctance on the part of these states to cut themselves totally free. Today, although there are deep divisions over how much distance from Russia is preferable, none of the Southern Tier states wish to sever their ties to Russia altogether.

This means developing the Caspian region as a coherent whole, rather than lining up for or against Russia. Any effort to chip the Caspian states off the CIS bloc will likely prove counterproductive. The codifi-cation of political disagreements among CIS states will bring no benefits in terms of economic integration, functional cooperation, internal democratization, or (by definition) cross-border ties.

Arrangements that more surreptitiously seek to exclude Russia and Iran, like the Eurasian Transport Corridor (TRASECA), or Republican senator Sam Brownback's "New Silk Route" proposal to bolster infrastructure in Central Asia and the Caucasus by expanding trade and building pipelines pointed west, are similarly dangerous. By undermining the legitimacy of Russia's and Iran's roles in the region, they pitch the Caspian states against one another, and this can only lead to increasing subterfuge and violent reactions on Moscow's part in order to maintain Russia's interests.8

Finding the Key
Given the Caspian region's instability, and the tendency of today's friends to become tomorrow's enemies, multilateralism is key to the interests of the Southern Tier states. This means that the United States must recognize its strengths and limitations in the region. It can and should uphold international standards when Russia attempts to impose its "condominium" interpretation of the Caspian's delineation. It cannot (and should not) will the Southern Tier states to orient themselves exclusively toward the West.

The United States may be the world's only superpower, but it is not the only major power in the Caspian. U.S. Secretary of Energy Federico PeŇa's January meeting with Russian deputy prime minister Boris Nemtsov to discuss U.S.-Russian cooperation in the Caspian is a positive first step. Russia, Iran, and China all have critical roles to play, and American involvement in these negotiations can only enhance regional security.


A multilateral approach also means recognizing the economic realities of a global market. Eastern pipeline routes have the important advantage of bringing energy closer to potential buyers. To the extent that the bulk of future growth in energy demand is expected to be in Asia, there is great political motivation for China, Japan, and other Asian countries to divert the flow of Caspian oil eastward.9

Globalizing the Caspian will enhance the region's stability. If oil stops running from Azerbaijan once Russian firms are already leveraged into consortia, closing down production will hurt Russia. If the Chechens know that by shutting down-or blowing up-a pipeline they can bring production in the region to a standstill, they gain leverage. If, on the other hand, they stand to lose concessions while the oil flows through other countries, they have more incentive to negotiate.

But perhaps most important, a multilateral approach recognizes that the role of foreign capital is critical to the survival of the states of the Caspian Basin. Multinational companies have more influence over Caspian leaders than do many of their parent governments. They also serve as spokesmen/lobbyists for the Caspian governments at home, whether in Washington, London, or Paris. And with neither national loyalties nor regional constraints, these entrepreneurs bring to the Caspian a mentality that transcends borders. Their interest in the Caspian is as a region of transit, and thus they expose the Caspian states to globalizing influences heretofore unknown.

The Caspian's oil fields will not become America's newest "vital" security interest. The Caspian is not the Persian Gulf. And equating Azerbaijan with Kuwait exaggerates not only the potential riches of the region but America's commitment to defend it. We cannot hope to make the Caspian "ours."
A more realistic approach requires a less confrontational environment. Capital for energy-sector investment is not unlimited, and although the Caspian Basin is the flavor of the year, there are other areas competing for attention-Northeast Asia, Alaska, and the South China Sea. Continued instability along the major pipeline routes, an unwillingness on the part of the local actors to embrace the greatest possible number of options, and the inability of major multi-nationals to recoup their investments will inevitably lead to a shift of attention elsewhere. For the states of the Caspian Basin, that would be a pity indeed.

Notes
The author would like to thank Lowell Barrington, Bijan Mossavar-Rahmani, and Cory Welt for their comments on an earlier version of this article.
1. Most American companies share a working estimate of 65 billion barrels, with the potential of 4.5-6 million barrels per day.
2. Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
3. S. Frederick Starr, "Power Failure: American Policy in the Caspian," The National Interest no. 47 (spring 1997), pp. 24-27.
4. C. Clovert, "Battle for Natural Resources," Financial Times, September 19, 1997.
5. Center for Political and Strategic Studies, Central Asia and Caucasus Update (College Park, Md., December 1997), p. 2.
6. Roger Cohen, "France Scoffs at US Protest over Iran Deal," New York Times, September 30, 1997.

7. ILSA, and its related guidelines, is vague on whether an oil swap that did not involve infrastructure investments in Iran would be permissible. However, U.S. companies have been wary of testing such a possible loophole in light of the broader U.S. policy toward Iran.
8. Subregional organizations with an inclusive approach-such as the Black Sea Economic Cooperation Council, which has provided a forum for Armenian-Azeri-Russian negotiations on issues of mutual interest in spite of their mutual enmity-are highly useful.
9. "Have Credit, Will Travel," Caspian Investor, October 1997, pp. 19-22.

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