THE FORTNIGHT IN REVIEW
Publication: Fortnight in Review Volume: 3 Issue: 19
The Fortnight in Review
Yeltsin Punishes Architect of Privatization
A week is a long time in politics, former British prime minister Harold Wilson once famously remarked. Two weeks ago, First Deputy Premier and Finance Minister Anatoly Chubais was riding high, displaying his political muscle by persuading President Boris Yeltsin to sack Chubais’s political rival, Boris Berezovsky. A week later, a journalist on the newspaper Novaya gazeta (said to be, together with Moskovsky komsomolets, the only Moscow newspapers not to enjoy the protection — and suffer the influence — of one or other of Russia’s big media barons) published an article accusing Chubais and a number of his high-flying government colleagues of having taken money from a company owned by Oneksimbank. In recent months, Oneksimbank had profited from privatization deals whose outcomes the officials were in a position to determine.
At first, Yeltsin was unwilling to discipline Chubais, saying he was too valuable an official to lose. After a week, however, Yeltsin was forced to give in partially to the Duma, which was demanding the dismissal of Chubais from both his posts. Otherwise, the Duma threatened, it would withhold approval of the 1998 federal budget. Finally, on November 20, Yeltsin sacked Chubais as Finance Minister, while keeping him on as First Deputy Premier.
Russia Marks 80th Anniversary of Bolshevik Revolution
On November 7, demonstrators marked the 80th anniversary of the Bolshevik Revolution in many Russian cities and in most CIS and Baltic countries. Turnout in general was apparently lower than last year, with the vast majority of the population using the occasion as an opportunity for a day off work. November 7 is still a public holiday in Russia, as in the Soviet period, but it is now known as "Reconciliation Day," and there are no official celebrations. In his weekly radio address, President Boris Yeltsin tried to strike a balance: the revolution was an event that helped to turn Russia into a superpower, he said, but it was also "a fatal historical mistake" that unleashed political fanaticism and social conflict.
Although the Communist movement in Russia has been split for several years into a number of rival trends and parties, the splits were more evident at this year’s demonstrations than in any previous year. In Saratov Oblast on the Volga, for example, demonstrators were addressed by the representatives of no fewer than three Communist parties. This sort of discord has been in the making for some time, but has recently been accentuated by the decision of Russian Communist Party leader Gennady Zyuganov to call off a threatened vote of no confidence in the Yeltsin government.
Russia Hikes Interest Rates to Defend Ruble
The Russian government and Central Bank on November 10 announced measures aimed at protecting the ruble against the speculation that had disrupted other emerging markets in recent months. The moves, which included raising interest rates and changing the way the exchange rate will be set, were made public after the IMF had announced that it was withholding the latest quarterly tranche of its $10 billion loan because of Russia’s poor tax collection performance. The Central Bank raised its refinancing rate from 21 to 28 percent; it also raised its minimum requirements for hard currency reserves held by commercial banks.
In addition, the Finance Ministry and the Central Bank issued a joint statement announcing that, as of the beginning of next year, Russia will abandon the gradually-depreciating "ruble corridor" it has used to date and move to a more flexible "ruble band." This will allow the ruble to fluctuate within 15 percent either side of a set rate — 6.1 redenominated rubles to $1 in 1998 and 6.2 in 1999. (One new ruble will equal 1,000 old rubles as of January 1, 1998.) The new policy means the ruble will be free to range between 5.25 and 7.15 rubles to the dollar. The aim is to signal support for the currency and protect it against what First Deputy Prime Minister and Finance Minister Anatoly Chubais described as "unfavorable phenomena in world financial markets." IMF officials, nonetheless, continued to express unease at the large size of Russia’s budget deficit and the government’s failure to collect taxes. Observers agreed that the ruble seemed safe for the time being from speculative attack, but the long-term health of the economy remains tied to the government’s ability to improve tax collection.
Chechen Oil Pipeline Open for Business
On November 9, early oil from the Caspian began to flow through the Chechen section of the Baku-Novorossiisk pipeline on its way to western markets. The Chechen section of the pipeline had been restored after being seriously damaged during the 21-month war with Russia. Officials in Moscow continue to insist that Russia will build a new oil pipeline bypassing Chechnya, but both Russia and Chechnya stand to gain by reopening the existing pipeline through Chechen territory.
Did Moscow Resolve the Crisis in Iraq?
A fortnight that began with Russia reaffirming its "strategic partnership" with China concluded this week with the apparently successful brokering by Moscow of a settlement of the crisis between Iraq and the UN. The resolution of the three-week Persian Gulf standoff, which had begun with the expulsion of American members of a UN weapons inspection team from Iraq in late October, was a major and unexpected triumph for Russian diplomacy. It came after the Clinton Administration had launched a military buildup in the region and had urged Russia to use its influence over Baghdad in an effort to prevent what seemed increasingly likely to turn into a military confrontation.
That appeal resulted in an unscheduled visit by Iraqi deputy prime minister Tareq Aziz to Moscow. Following several negotiating sessions involving Aziz and Russian foreign minister Yevgeny Primakov, as well as a meeting between Russian president Boris Yeltsin and the Iraqi official, Primakov announced on November 18 that Moscow had drafted a plan to bring the latest Persian Gulf crisis to an end. He provided no details of the plan, but said that he would travel to Geneva the following day to present the Russian proposal to the foreign ministers of France, Britain, and the U.S. The initial reaction outside of Moscow, and particularly in Washington, was one of skepticism, and there were hints that the Geneva meeting would not come off at all.
Events moved quickly from that point, however. Primakov did manage in the early morning hours of November 20 to meet in Geneva with British foreign secretary Robin Cook, French foreign minister Hubert Vedrine, U.S. secretary of state Madeleine Albright, and Chinese envoy Sha Zukang. Afterwards, Primakov announced that Iraq would declare later that day its willingness to allow the immediate return of all the UN weapons inspectors — including the Americans — and the resumption of their work. "That is what Russia has achieved," Primakov said of the triumph, "without any use of violence, any use of weapons, without a show of force."
The details of the Russian-brokered deal were not made immediately available, and Albright, for her part, said that the U.S. had made no concessions to Iraq to gain its agreement. She also said that the U.S. and UN would monitor Iraq closely to ensure that Baghdad follows through on its latest commitments. That same wariness was evident in the remarks of other U.S. officials, including President Bill Clinton, later in the day on November 20. Pentagon officials, for example, announced that the U.S. would send additional warplanes to the Persian Gulf region, and Clinton’s national security advisor, Samuel Berger, warned that "This [crisis] is not over." He said that Washington would continue its two-pronged policy of pursuing a diplomatic solution to the Iraq-UN confrontation while simultaneously threatening military action.
Renewing Ties with China
Following talks in Beijing on November 9-10, Russian president Boris Yeltsin and Chinese head of state Jiang Zemin reaffirmed the "strategic partnership" between the two countries and declared an historic end to disputes over the Russo-Chinese border. Yeltsin’s trip to China marked the fifth summit between the two countries, the third meeting between Yeltsin and Jiang over the past 20 months, and Yeltsin’s third visit to China. Yeltsin received the red carpet treatment while in Beijing, and the two leaders used the meeting to underscore the intimacy of their personal ties. The visit continued several weeks of frenetic diplomatic maneuvering among Asian-Pacific powers. It followed Yeltsin’s unprecedented November 1-2 meeting in Krasnoyarsk with Japanese prime minister Ryutaro Hashimoto, and Jiang Zemin’s first state visit to the U.S., which concluded on November 2.
The declaration on the final demarcation of the Chinese-Russian border was the highlight of the summit meeting, proclaiming as it did a close to centuries of disputes along the 2,800 mile eastern border. The demarcation, which took six years to carry out, is the result of a 1991 Sino-Soviet treaty which had earlier drawn considerable fire from regional leaders in Russia’s Far East. At issue, in particular, had been several small islands located in the rivers that form the border between the two countries. The summit agreement apparently stipulates joint use of some of the disputed islands without fully resolving the status of all the islands in question. The western border between Russia and China, a small 30-mile section that falls between Kazakhstan and Mongolia, is not covered by the border agreement, but its eventual demarcation is not expected to pose problems.
The two sides also signed a package of documents aimed at reversing a recent decline in bilateral trade. One of the accords was a memorandum of understanding on the construction of a $12 billion natural gas pipeline from Siberia to China’s eastern seaboard. There were apparently no major military agreements signed during the summit, but a Chinese airline announced the purchase of five Russian M-171 helicopters. Cross-border trade was the main item on Boris Yeltsin’s agenda during a November 11 visit to the Chinese city of Harbin, capital of Heilongjiang Province, a region sharing a long frontier with Russia. Yeltsin announced that Russia would launch several projects in nearby Amur and Chita oblasts aimed at boosting cross-border trade in the region.
‘New Historic Era’ Opens for Caspian Region
On November 7, the first commercial oil was successfully extracted from the Chirag-I offshore oil field, as part of Baku’s "deal of the century" with the Azerbaijan International Operating Company (AIOC). Oil industry leaders and senior government officials from nearly 20 countries attended on November 12 the official inauguration of commercial production. AIOC’s contract is the first and thus far the largest among the nine contracts, each worth between one and several billion dollars, signed by Azerbaijan with international oil companies in the last three years. Further projects already underway or planned onshore and offshore in Kazakhstan and Turkmenistan promise to open a new historic era for the Caucasus-Caspian region, for countries further afield in the former Soviet space, and for world energy economics. The political and oil industry leaders who assembled in Baku on November 12 suggested that the date may go down as the symbolic beginning of that new era. In historical perspective, this development resumes and amplifies the pioneering efforts of the Nobels, the Rothschilds, and the Rockefellers, who, at the turn of the century, had launched in Azerbaijan — then a part of the Russian empire — one of the world’s first major oil booms.
The fulfillment of that potential largely depends on the choice of the principal export routes. It is generally understood that any routes via Russia would be economically non-viable as well as exposed to political manipulation. The discussions held in Baku on November 12 seemed to evidence a tentative Western consensus in favor of building the main export pipeline from Azerbaijan via Georgia to Turkey’s Mediterranean coast at Ceyhan. An export pipeline of lesser capacity to Georgia’s Black Sea coast remains a secondary option; while the "northern route" into Russia, leading to Novorossiisk, seems at this stage to be deemed useful mainly as a stopgap solution for the early oil, pending construction of export pipelines through Georgia and Turkey.
The "deal of the century," signed in 1994 by AIOC and SOCAR (State Oil Company of Azerbaijan), envisages investments worth $8 billion to develop the Chirag, Azeri, and Guneshli offshore oil fields. AIOC is a consortium of 12 corporations led by Amoco, Unocal, and Exxon of the U.S., British Petroleum, and Norway’s Statoil. British Petroleum and Amoco are the project operators. The contract area, situated some 120 kilometers offshore and covering approximately 450 square kilometers, at an average drilling depth of some 3,000 meters, is estimated to contain at least 500 million tons of oil and 90 billion cubic meters of associated gas. Annual output is planned to reach 5 million tons by the year 2002. This "early oil" will be followed from 2003 onward by the "future oil," with output levels expected to reach at least 40 million tons annually beginning by 2007.
It was also during this fortnight that Azerbaijan ratified four additional major oil contracts, adding to the sense of an historic breakthrough. Three of these contracts are with U.S. companies and were signed last August during Azerbaijani president Haidar Aliev’s visit to Washington. The participating companies are not newcomers to the Caspian; all are already involved in various oil and gas prospecting, extraction, and transportation projects offshore and onshore in Azerbaijan and Kazakhstan.
The U.S. company Mobil Oil will develop this field in partnership with SOCAR, each holding a 50 percent interest. The contract envisages $2 billion worth of investment and a 25-year period, with Mobil fully financing SOCAR’s share during the exploration period. Situated some 80 kilometers southeast of the Apsheron peninsula and covering an area of 430 square kilometers, at sea depths ranging from 50 to 300 meters, the Oguz field is estimated to contain 100 million tons of oil.
Previously known as Zeinalabdin Tagiev, the Apsheron field will absorb $4 billion worth of investment over a 25-year period. The field is estimated to contain 120 million tons of oil and 400 billion cubic meters of associated gas. It is situated some 85 kilometers southeast of the Apsheron peninsula and covers an area of approximately 400 square kilometers, at a sea depth of 450 to 500 meters and at drilling depths ranging from 4,800 to 7,100 meters. The partnership includes SOCAR, the U.S. company Chevron, and Total of France, with shares of 50 percent, 30 percent, and 20 percent, respectively. Chevron is the project operator. The two Western companies will cover SOCAR’s share of the investment during the exploration period.
This Caspian offshore oil field — not to be confused with landlocked Nakhichevan region after which it is named — will be developed by the Exxon company of the U.S. and SOCAR in 50-50 partnership. The investment is projected at $2 billion over a 25-year period of exploration and exploitation. Exxon will fully finance SOCAR’s share during the exploration period and is the project operator. Situated some 55 kilometers south of Baku and some 90 kilometers offshore, the Nakhichevan field covers an area of approximately 280 square kilometers, at a sea depth varying from 400 to 600 meters and at drilling depths averaging 5,000 meters. The field’s reserves have not been conclusively estimated.
Situated in the northern portion of Azerbaijan’s Caspian shelf, the Yalama oil field occupies some 270 square kilometers at a depth of some 600 meters under the sea bottom. Its reserves are estimated at up to 100 million tons of oil. It is to be explored and developed by Russia’s LUKoil company and SOCAR under a 25-year contract signed last July. The investment is valued at $2.5 billion, with LUKoil holding 60 percent and SOCAR 40 percent interests. LUKoil will fully finance SOCAR’s participation in the project for an initial six-year period.
The ratification of these contracts brings to nine the number of offshore oil projects launched by Azerbaijan and international oil companies. Aggregate investments under these contracts amount to approximately $30 billion. Across the Caspian Sea, Kazakhstan has the potential to experience an even more spectacular development of its oil and gas resources. Its strategy, similar to Azerbaijan’s, relies largely on Western partners while giving Russian companies a limited role, intended in part as an incentive for Russian political cooperation.
Azerbaijan, Kazakhstan, and also Turkmenistan (the latter after a period of hesitation and ambiguity) espouse the principle of sectoral division of the Caspian Sea among the five sovereign coastal states. Russia and Iran advocate the opposite principle, that of "condominium" or joint control over mineral resources. However, Moscow has recently tended to mute its objections to the sectoral division that has developed de facto in the Caspian Sea. It was left for Iran to lodge protests with Azerbaijan and at the UN over Baku’s ratification of these projects. Turkmenistan for its part claims, wholly or in part, the Azeri, Chirag, and Kapaz/Serdar oil fields from Azerbaijan. Two Russian companies this year shelved a project to develop Kapaz/Serdar after Turkmenistan stated its claim to it. Ashgabat declares itself prepared to refrain from seeking actual control over these fields and to accept compensation instead. Significantly, Ashgabat bases its case on the sectoral division principle. U.S. officials encourage Turkmenistan and Azerbaijan to settle the matter through direct negotiation and through U.S. good offices.
"The Fortnight in Review" is prepared by Senior Analysts Elizabeth Teague (Russia), Stephen Foye (Security and Foreign Policy), Vladimir Socor (Non-Russian republics), and Analyst Igor Rotar.
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Copyright (c) 1997 The Jamestown Foundation.