PRISM

Volume 3 Issue 18 (November 7, 1997)

THE FORTNIGHT IN REVIEW

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.

Chirag-Azeri-Geneshli

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.

Oguz

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.

Apsheron

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.

"Nakhichevan"

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.

Yalama

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.