BACKGROUND: One need only look at a map of the greater Caspian region, which stretches from Turkey to Kazakhstan, to realize its huge geopolitical and economic importance. The United States’ strong interest in the Caspian dates to the break-up of the Soviet Union. Virtually overnight, eight new independent states came into existence in an area rich with natural resources. The principal component of U.S. policy was to help these new states develop as stable independent countries that would ultimately become market democracies in an uncertain part of the World. Now, several years later, democratization in most of these countries has been slow, but they have maintained their independence, which many predicted would be impossible. In addition, the United States believed and still believes that the development of natural resources in the region should provide an alternative source of oil and gas at a time when South Asia and the Middle East are becoming increasingly unstable and demand is soaring from India and China. The U.S. has wanted to make sure that these resources be available for development by American companies as well as business interests from friendly countries; that Turkey, because of its own historical roots, become more involved in the region to help ensure the independence of these new countries; and that multiple routes of access be developed for resources to be exported from the region. The U.S. position was and still is that Russia should not have a monopoly on pipelines, and that no pipelines should go through Iran thereby subjecting these new resources to the whims of a dangerous government. Before discussing the implementation of U.S. policy regarding pipelines since the late 1990s, it is instructive to look at what the existing and proposed pipelines in the region following the break-up of the Soviet Union were. In the Western Caspian, apart from the proposed BTC pipeline, there was already in existence a small and decrepit pipeline from Baku to Russia’s Novorossiysk port on the northern coast of the Black Sea. In addition, the so-called Baku-Supsa early oil pipeline opened in the spring of 1999. This limited-capacity pipeline was designed to carry “early” oil from Western Caspian sites, and terminates in Supsa, on Georgia’s Black Sea Coast. With regard to the Eastern Caspian, the Caspian Pipeline Consortium, consisting primarily of Chevron, other oil companies and Kazakh and Russian state companies, was well under way by the late 1990s in developing the CPC pipeline from the oil fields of western Kazakhstan through Russia to Novorossiysk. The United States extended strong support to this project. This is evidence that the U.S. never had an “anti-Russia” policy in the Caspian. The U.S. has insisted that the sovereignty of new states in the region be respected and that those states have the ability to freely export their resources. Finally, the United States had a strong interest in the development of a Trans-Caspian gas pipeline (TPC) from Turkmenistan, across the Caspian Sea to Baku, which would then run parallel to the BTC to Turkey. This pipeline would have transported natural gas into Turkey, easing its reliance on Russia and Iran for gas supplies at a time of rising demand of gas. In spite a lot of false starts, the TPC never got off the ground. Saparmurad Niyazov, the mercurial President of Turkmenistan, never was fully committed to the project. He was wary of recriminations and retaliation from Russia and Iran, which were Turkmenistan’s principal gas customers. Finally, despite many efforts at mediation by the United States, Turkmenistan and Azerbaijan remained unable to agree on a demarcation line which would define the interests of the two countries within the Caspian and pave the way politically for a pipeline across the Caspian. In retrospect, Azerbaijan never had much interest in a Trans-Caspian pipeline, since it had its own gas in the Western Caspian, and, indeed, a pipeline will be open later this year mirroring the BTC route, to ship Azerbaijani gas to Turkey, and perhaps ultimately into Europe. The BTC pipeline became the centerpiece of U.S. Caspian energy policy. The United States, despite criticism from several quarters, strongly supported construction of the BTC pipeline, because it clearly met U.S. policy objectives. The BTC pipeline was consistent with the policy of multiple pipelines. It avoided all major pipelines from the Caspian going through Russia and into the Black Sea. It also avoided a major pipeline going through Iran. In addition, Turkey strongly supported the BTC, because it would keep additional large tankers from exiting the Black Sea through the narrow straits of the Bosporus, would provide transit fees to Turkey and would help to develop Eastern Turkey. The strongest opposition to the BTC, at least in the initial stages, came from the oil companies, including those belonging to the Azerbaijan International Operating Company (AIOC), which together with the State Oil Company of Azerbaijan (SOCAR) operated the principal production sites in the Western Caspian off the coast of Azerbaijan. The companies’ principal concerns in the early stages related to the price of oil, the amount of oil reserves in the Western Caspian and the cost of the proposed pipeline compared to other routes. The price issue clearly took care of itself. It is hard to believe that as recently as 1998, the price of oil reached a low of approximately $10 a barrel with company projections that prices would not significantly rise. Companies were also concerned that the amount of oil in the Western Caspian was significantly less than projected. This issue ultimately was resolved by rising prices and increasing opportunities to supplement oil being transited through the BTC by oil from Kazakhstan. The U.S. believed that supply issues were ultimately a question of timing as to when construction would commence. Hundreds of millions of dollars had been spent on exploration and development of production facilities in the Caspian. The companies would not ultimately let this oil be stranded. Ultimately, the biggest issues related to the cost of construction. The companies believed that the cost of construction of the BTC was prohibitive and certainly higher than alternative routes, such as an expanded Baku-Supsa pipeline, which would require transit through the Bosporus, or a pipeline through Iran. Interestingly, the companies never argued for another pipeline through Russia or for a pipeline that would ship oil by tanker from Supsa to Ukraine, Romania, Bulgaria or Greece, thereby avoiding the Bosporus.

IMPLICATIONS: The United States took a very hard and consistent line regarding alternative routing. The U.S. told the companies that it supported Turkey’s position that additional tanker traffic through the Bosporus was environmentally unacceptable and that it was irrelevant that an expanded Baku-Supsa pipeline would be less expensive than BTC, because Turkey would not let them have it. The companies argued that the Montreux Convention of 1936 required access to the Bosporus, however Turkey responded that the Convention was enacted when Istanbul was a fraction of its present size, and that it could not accept the risk of additional large tankers through the Bosporus. Turkey argued that it could legitimately enact regulations and restrictions regarding traffic through the Bosporus that would make an expanded Baku-Supsa pipeline uneconomical. The companies also complained that Turkey had not objected to the CPC pipeline, which would require that large tankers cross the Black Sea from Novorossisk and exit through the Bosporus to the Mediterranean. The difference was that there was no realistic alternative to CPC, but that BTC, which had the added attraction of providing transit fees to Turkey, was a suitable alternative to the Baku-Supsa pipeline. The companies ultimately determined that they needed U.S. and Turkish support and grudgingly abandoned the expanded Baku-Supsa alternative. There was somewhat less pressure to build a pipeline through Iran, but some companies would have clearly preferred this alternative. The U.S. position was that it was unclear that an Iranian route would be less expensive than the BTC pipeline, but that, in any event, a pipeline through Iran would be a violation of the Iran-Libya Sanctions Act (ILSA). U.S. officials argued that a pipeline through Iran would be foolhardy for both geopolitical and commercial reasons. Why would companies want to take the commercial risk of transporting oil through Iran? How could the U.S. grant a waiver under ILSA that would subject new sources of oil to the whims of an Iranian Government? Likewise the U.S. Government consistently refused to grant licenses for “swaps” of Caspian oil for Iranian oil. Under a “swap” arrangement a company would deliver Caspian oil to a northern Iranian port and in return pick up Iranian oil at a southern Iranian port. The U.S. was concerned that swaps could create the perception that BTC was not needed and could still subject Caspian oil to the whims of the Iranian Government. Given recent history in Iran, it is clear that U.S. policy regarding transit through Iran was absolutely correct. Western European countries, particularly Britain and France, voiced concerns about U.S. Caspian policy, particularly relating to Iran. French and British officials in private meetings took the position, similar to several companies, that we should not let politics interfere with commercial decisions. A high-level official at Whitehall said to a group of American officials that “Tony Blair may be Prime Minister, but we are all “Thatcherites”. The view that commercial and political issues are not related would appear to be rather naïve, if not cynical. How can commercial decisions, for example, be made with respect to building a pipeline through Iran without considering the “politics” whether domestically or in Iran? Recent events have made perfectly clear that constructing a pipeline through Iran would have been foolhardy and dangerous. Ultimately, BP, as the manager of AIOC, came to realize that BTC was the only alternative for the transit of oil from the Western Caspian. However, the U.S. Government did more than beat the companies’ with sticks to force them to accept BTC. The U.S. took many constructive steps to help make the project possible. Perhaps the biggest breakthrough came with respect to cost of construction. Turkey’s cost estimates for construction of the pipeline were significantly less than AIOC’s estimates. The U.S. took the position with Turkey that if it believed its numbers and wanted the pipeline to be constructed, it should give a formal guarantee that costs would not exceed a set amount. After much negotiation, Turkey agreed in principle to a cost guarantee and ultimately agreed to guarantee the cost of the Turkish portion of the pipeline. This made sense because the Azerbaijani and Georgian portions of the pipeline would have to be built even if the pipeline were to go to Supsa. The U.S. role in conceiving and obtaining the guarantee gave it considerable credibility with the companies. Turkey also attained significant credibility with the companies that it was serious about the pipeline. In addition, U.S. government agencies, the Overseas Private Investment Corporation (OPIC) and Export-Import Bank provided financing and, in the case of OPIC, political risk insurance for the project. Funding in the form of loans was also made available by the World Bank and European Bank for Reconstruction and Development. Some have asked why the U.S. Government did not provide direct subsidies to the project. Apart from the likelihood that Congress would not have approved such direct subsidies, the U.S. Government did not need to do it. The U.S. Government helped considerably in different ways to make the pipeline possible, but ultimately the companies had no other choice but to build the pipeline. A third area where the United States played a constructive role was in working closely with the leadership and other officials of the three transit countries; Azerbaijan, Georgia and Turkey. The U.S. helped at various points to further the negotiations of the intergovernmental agreement among the transit countries as well as the host government agreements between AIOC and each of the three transit countries. These agreements provided the political and legal foundation for the pipeline, without which financing would have been impossible and the pipeline would not have been commercially feasible. In addition, the BTC would have been impossible without the steadfast support during the early years of then Presidents Heydar Aliyev of Azerbaijan, Eduard Shevardnadze of Georgia, and Suleyman Demirel of Turkey. The three Presidents made numerous joint public statements of support for the project. If, for example, a problem would arise regarding some part of the negotiations relating to Azerbaijan, President Demirel would literally pick up the phone and straighten out the issue with President Aliyev. President Shevardnadze’s support for the project never wavered despite the fact that an expanded Baku-Supsa pipeline would have meant more revenues for Georgia. He valued regional cooperation and Georgia’s relationship with Turkey more than Georgia’s narrow interest. President Saakashvili’s government has also strongly supported the project. The United States was a valuable cheerleader for the project but it was the unwavering support of the three Presidents that as much as anything else convinced the companies that BTC was their only alternative. There can be no question that BTC has been a success from the standpoint of United States energy policy. The Caspian basin provides a necessary alternative source of energy that can provide a significant percentage of increased world demand for oil over the next several years, and BTC provides an outlet for these resources that neither traverses Iran nor contributes to an over-dependence on Russia for energy supply.

CONCLUSIONS: U.S. policy goals, however, cannot be limited to energy. The BTC success must be translated into success in other areas. First, we must help countries in the region make progress in the development of civil society. We must also recognize that economic development and security are essential to the development of civil society and democratic institutions. Critics say that the BTC pipeline rewards Azerbaijan which has a questionable record on democracy. There certainly, however, is no reason to believe that without BTC, Azerbaijan would have a better record on democracy. BTC has made possible increased engagement with Azerbaijan, which should have an incrementally positive effect in the human rights and democracy areas. However, this means positive involvement. The U.S. must work with Azerbaijan’s leaders and leaders of other countries in the region to demonstrate that it is in their interest to improve their democracy record. The U.S. must also give assistance to the private sectors in these countries to help develop civil society. It must also be remembered that it is difficult to work with the private sector without some cooperation from the Government. That does not mean that there should be a cookie-cutter approach. Balancing the importance of strategic interests versus records on democracy and human rights is extremely difficult. Each country should be treated individually. The U.S. should go the last mile in working with leaders that it believes that it can influence in a positive direction, such as President Ilham Aliyev of Azerbaijan. But when leaders reach the point where it makes little sense to deal with them any longer, the U.S. should limit its ties with their governments, even when there may be competing strategic interests, while at the same time attempting to work with non-governmental sectors to develop civil society over the long term. Second, the United States must continue to develop strategic relationships with those countries it can successfully work with. The United States, for example, has worked successfully with Azerbaijan on maritime security and stemming the flow of terrorists. But we should not force strategic relationships with countries that have unacceptable human rights records and show no indication of moving in a positive direction. Uzbekistan is such an example, though some within and outside the Administration argue that a resumed strategic relationship outweighs Uzbekistan’s human rights and democracy records. Third, the United States cannot and should not ignore Russia. The relationship between the United States and Russia in the Caspian Region, but for a brief post-9/11 honeymoon period, has been tenuous at best. When this writer was first introduced to Russia’s former Foreign Minister Igor Ivanov in 1999, Mr. Ivanov said in a somewhat jocular but biting way, “We know you, and we do not like what you are doing!” The United States has never sought to, nor could it, exclude Russia from the region. The United States was a strong supporter of the CPC pipeline. But it also cannot be American policy that all pipelines lead through Russia. No country should have an effective monopoly on Caspian resources and potentially limit the sovereignty of new states in the region. In addition, Europe should be particularly concerned about any such monopoly, given the dependence that it already has on Russian-sourced energy. The logical solution is for Russia to encourage its companies to partner with companies from other countries to develop alternative routes. Instead, for example, of resisting gas pipeline routes to Europe that do not originate in Russia, Russia should encourage its companies to participate in and reap the benefits of new ventures and new routes. It is also critical that Russia respect the independence of the new states in the region, not use energy as a lever as it has with Georgia, and that Russia cooperate with the United States to resolve ethnic conflicts in the region, such as those in Georgia and Nagorno-Karabakh. Fourth, Turkey should be encouraged to re-emerge as a major participant in the Caucasus and Central Asia. In the last few years Turkey’s new leaders appear to have looked away from this region. Turkey, because of its historical roots, can and should play a productive role both economically and politically in helping these new countries move forward on the path towards market democracy. As part of this role, Turkey should strive to reach accommodations with Armenia and play a positive role in trying to resolve the Nagorno-Karabakh conflict. In addition, as Turkey looks towards European integration, it can play an important role in partnering with Europe and the United States in developing the region. BTC is a first step. Turkey must also play a major role as a transit country for natural gas to Europe, which would reduce Europe’s over-dependence on Russian gas. Turkey should step forward as a major player in the region and leverage that role into greater cooperation with Europe as Turkey undertakes accession negotiations with the European Union. Finally, the U.S. should leverage the region’s energy resources to promote regional economic cooperation and to resolve regional conflicts. How, for example, can there be real regional cooperation if Nagorno-Karabakh is not resolved and if Armenia cannot benefit from the development of the region? The U.S. should explore further what tangible benefits can accrue to both sides through resolution of the conflict, and through incentives should continue to work with willing partners to push the parties towards a fair and comprehensive settlement. In summary, the successful completion of the Baku-Tbilisi-Ceyhan pipeline is an example of what can accomplished when American policy is consistent and has sound objectives. The objectives which were the basis of American Caspian energy policy in the 1990s have proven to be correct and are as valid today as then. The Caspian Region continues to be vital to the interests of the United States, and the United States must continue to pursue these objectives.

AUTHOR’S BIO: Richard L. Morningstar is Adjunct Lecturer in Public Policy at Harvard University’s Kennedy School of Government and lecturer at Stanford Law School. Mr. Morningstar has served as Senior Vice President of the Overseas Private Investment Corporations (OPIC), as Ambassador and Special Advisor to the President and Secretary of State on Assistance for the New Independent States of the former Soviet Union; as Special Advisor for Caspian Basin Energy Diplomacy, and as U.S. Ambassador to the European Union.