Session Four: Impact of the Corridor on State and Regional Development

Future Prospects for the Eurasian Corridor
A series of round-table discussions
April 23, 1998

Strengthening Democratic Institutions Project
John F. Kennedy School of Government

Graham Allison (Moderator): The topics that we began with flow through all of our discussions, but now we are going to focus most specifically on the ways in which the Corridor can effect state and regional economic development. The dependent variable is economic development. We are interested in oil, but oil is not the only part of this agenda. It may be the most powerful attractor—I believe it is the reason that this topic is going to rise on the agendas of a lot of governments, including the American government. If there were no oil in the area, this topic would have a different configuration. Nevertheless, the human development, the economic potential, and the geopolitics of the area independent of oil make this region very interesting. In this conversation, oil is one of the topics, but not the only topic. We have a very good group of presenters this afternoon. To begin with, let me call on Peter Aldrich. He is the current chairman and CEO of AEW International and he is currently exploring opportunities in the Corridor.

Peter Aldrich: Thanks Graham. I am going to speak to you as a business person. I grew up in the real estate business. People used to ask what are the three most important things in the real estate business, and the answer was always location, location, location. I think the same thing applies to the Caucasus. Oil, oil, oil. I know you don’t want to hear this, but speaking from the business perspective, if the oil was not there, we would not be there. The promise of the oil is the promise of a quick cash flow which is what allows the other things to happen.

The region is a parody of the good news and bad news joke. The Lord says to the people that the good news is that I have given you all of this oil and the best location for your house, the bad news is the list of your neighbors. This is a tough part of the world. It is a little daunting when I go to my big American clients and tell them I am going to put a bit of their money in this region. It is the oil that makes it possible to do that. We are about to put $45 million into the region through the Fund. We are doing it in a typically crazy way for this region. The fund is called the Caucasus Fund, and it is going to be run by a Georgian, Irakli Rukhadze. The largest part of the equity investment is coming from Russia. The whole thing is made possible by USAID kicking in the $5 million which allows for the Overseas Private Insurance Corporation to issue a guarantee for a big debt borrowing of $15 million. It is a huge hodge-podge. Hopefully this will be wildly successful. This is a little probe to see if this is fertile ground. The fund has a very simple program to buy things cheap, begin joint ventures, and to see if people are open to Western principles. There is a great deal of personal risk and very little market risk. We hope you follow the Caucasus Fund because it will be a great barometer for the future.

Moderator: Our next presenter is Andrew Apostolou, who is a consultant at St. Anthony’s College at Oxford and The Economist Intelligence Unit.

Andrew Apostolou: Thank you. I want to look in detail at the natural resource rich economies of the region—Azerbaijan, Kazakstan, Turkmenistan and to a lesser extent Uzbekistan. The key points are: first, the natural resource rich economies of the region are moving from one form of economic distortion to another; second, economic reform is faltering in the region and is not well entrenched; and third, the resource endowment is not as large as the US government believes and can only be exploited if oil prices recover and there are commercially viable export pipelines.

First, looking ahead for these economies one can say that they are going to be unstable. They are going to switch from being distorted by Soviet era policies to economies distorted by a dependence on natural resources. These economies will be mostly dependent on oil exports, but for Turkmenistan the dependence will be on oil and gas exports and in Uzbekistan on cotton and gold exports. Within the next five years 50% of Kazak exports could be oil, up from 33% in 1997.

As a result, the industrial base is narrowing. In Kazakstan the output of such items as washing machines and shoes has plummeted. The region as a whole has neither the skills nor the infrastructure to produce manufactured goods containing a significant amount of value-added that can also compete internationally. Instead, the output of oil and metals is rising sharply.

Dependence on commodities exports means economic boom followed by economic bust. This has already happened. In 1996, Uzbekistan had a balance-of-payments crisis caused by the government’s inability to adjust economic policy to the fact that world cotton prices were falling.

Turkmenistan and Uzbekistan will compound the distortion of relying on commodity exports through their policy of import-substituting industrialization (ISI). These two countries are creating domestically oriented industrial bases that are uncompetitive, thereby building on the distortions caused by the Soviet-era. Turkmenistan is officially committed to full import substitution by 2000—one of the many less than sensible policies not mentioned during President Niyazov’s state visit to the USA this month. ISI means adding to uncompetitive Soviet-era industries with yet more uncompetitive industries. To pay for ISI both Turkmenistan and Uzbekistan will have to export more commodities. Uzbekistan will have to export more cotton and gold to repay the loan from the EBRD which has been taken out to rehabilitate the Fergana oil refinery. The Fergana refinery was built to process Russian oil, but Uzbekistan now has $180 million of debt so that the refinery can now process domestic oil for the domestic market.

A further problem in the natural resource rich states is the decline of the agricultural sector. Agriculture is the largest employer in these countries but is already dwindling in importance. As oil and gas exports rise, so it is likely that local currencies will over appreciate (the so-called Dutch disease), thereby making the agricultural sector uncompetitive. These countries will be saddled with a large dependent workforce. In Turkmenistan agriculture is 44.3% of total employment but only 17.5% of GDP in 1996. Most titular nationals, ethnic Azeris, Kazaks, Turkmen, and Uzbeks, live in the countryside and are dependent on agricultural employment. In Azerbaijan this problem is exacerbated by the one million refugees and displaced persons from the war in Nagorno–Karabakh.

In the natural resource rich economies, the state will dominate exports. Most exports will be oil and gas from the state and foreign companies in partnership with the state. The local private sector, on which Western governments are spending millions of dollars in aid and loans, will be marginal and as dependent on the state as the private sector is in Saudi Arabia.

Second, economic reform has been superficial. The region has seen some stabilization, the reduction of inflation and restoration of output, but little structural reform. In Azerbaijan and Kazakstan there have been serious and sustainable moves towards reducing inflation. But structural reform, the closure of firms that are not viable and privatization, has ranged from slow and fitful in Kazakstan to the almost non-existent in Azerbaijan, Turkmenistan and Uzbekistan. The slowness of structural reform can be seen in the low levels of recorded unemployment, small numbers of bankruptcies, and the high levels of inter-enterprise arrears and bad debt in the banking system. The banking sectors in these countries are some of the smallest in the world, with the deposits in locals banks just 5–16% of GDP.

Fiscal reforms are faltering. With the exception of Turkmenistan and Uzbekistan, whose economies are mostly unreformed, the ratio of revenues to GDP in the region is less than 20%, roughly what sub-Saharan African countries collect in taxes from their economies. The comparison with sub-Saharan Africa is, of course, unfair—unfair on sub-Saharan Africa. Former Soviet republics have larger fiscal commitments than sub-Saharan African countries because of their well-developed welfare states and large number of pensioners. The failure of fiscal reforms means another element of instability—if revenues drop sharply these governments may have to print money to meet their obligations.

What fiscal restraint has occurred has often been a result of financial sleight of hand. Kazakstan brought its fiscal deficit down to just 2.4% of GDP in 1995 and 1996 by taking out a cheap loan on the poorest members of society—that is by running up wages and pension arrears of 2% of GDP. These arrears were then cleared by going to the capital markets and taking out expensive overseas debt. A foreign direct investment inflow of $500m (2% of GDP) which could have paid off the wage and pensions arrears somehow managed to go missing. The strategy of borrowing abroad rather than taxing at home will be familiar to those who have followed the ups and downs of Latin American economies.

None of the dictators presently in power shows a genuine commitment to economic reform. Messrs. Aliev, Karimov, Nazarbaev, and Niyazov give the impression that they regard the IMF and economic reform as necessary evils. Once significant dollar inflows arrive from natural resource exports, these presidents are likely to put economic reforms on hold. Indeed for all the talk of a new generation of young reformers, the number of serious economic reformers in these countries is extremely small. By contrast, it is in Armenia, Georgia, and the Kyrgyz Republic that there is a more genuine commitment to economic reform precisely because they cannot look forward to a natural resource windfall in the future.

Corruption will also undermine economic reform. The popular belief in Azerbaijan, Kazakstan, Turkmenistan, and Uzbekistan is that economic reform is only benefiting the President, his family and their cronies. The more petro-dollars that are earned, the more are diverted, the less structural reform there will be and the more hardship will be suffered by the population. That will build popular resentment against both the local dictators and against economic reform.

Third, and finally, the resource endowment is not as large as often claimed and can only be exploited if oil prices recover and there are commercially viable export pipelines. With a generous but not massive natural resource endowment but with faltering economic reforms, the region will be characterized by unstable economies. The best recent estimate for oil and gas reserves came from Wood Mackenzie, an Edinburgh based consultancy, in September 1997. Wood Mackenzie have put Azeri, Kazak, Turkmen, and Uzbek reserves at 68bn barrels of oil and gas, a realistic estimate as opposed to the ridiculous figure of 200bn barrels of oil alone quoted by the US government. Foreign investment will follow this resource endowment—by contrast, Armenia, Georgia, and Tajikistan will attract relatively little foreign investment.

Oil and gas investment in the region depends on sound pipeline economics and a world oil price of at least $14 per barrel, as offshore production costs will be high. Sadly, to date oil politics and strategy have come before cost and financeability.

Moderator: Next is Thomas DiBenedetto, the President of Junction Investors.

Thomas DiBenedetto: I have been active in Georgia since February of 1995. At that point, I along with two associates founded a bank in conjunction with some Georgians, two of whom are now dead. One unfortunately was assassinated around the same time they tried to assassinate President Shevardnadze. The comments earlier about security are very real and dear to me. The recent attempt on Shevardnadze’s life is indicative of the desire of regional powers to destabilize the area. And that destabilization is very much related to the oil and gas pipeline. The strong desire from Azerbaijan to Georgia to create pipelines is something the Russians do not like. The most important factor is getting the powers of the region to look at the long term benefits of peace and trade over the short term benefit of having a pipeline run through their region.

In trying to understand the economics of the region, it is important to look at what happened when the Soviet Union disbanded. The countries of the former Soviet Union were controlled out of Moscow. Suddenly they were under local control. The people in control were unfamiliar and inexperienced with their new situation. All of the countries of the Caucasus essentially had their GDPs cut in half. Given that, they have made tremendous progress. If you look at the last year, in Armenia there was GDP growth of 5%, in Azerbaijan there was 5.8%, and in Georgia it was 11.8% with a 7% inflation rate. Those are pretty healthy numbers considering all of the external factors that exist in the region. If you look at the direction these economies have taken, they have broken away from Moscow and have turned towards the West. Because of this emphasis on developing joint ventures with Western partners, many of the old trade agreements with their neighbors were pushed aside, since everyone thought the real gold was in partnerships with the West. This has prolonged the lack of internal trade within the region. In recent months there have been some positive developments as the countries try to create new links and trade. One of the results was the development of banks to help conduct the trade. In Georgia, many banks were formed, and by 1994, there were 240 banks. Unfortunately, they were very weakly capitalized and very poorly run. Today there are probably 40 banks. Our bank, Absolute Bank, is one of them. We have developed in conjunction with the EBRD a loan program for business and we are administering a program for the World Bank for small businesses.

This brings us to another area that is critical for the region. For democracies to develop, people need a stake in those democracies. One of the failures in most of Eastern Europe has been the concentration on large enterprises. The same mistake has been made in this region, although recently some programs have been helping small enterprises. They are good because they tend to create jobs and bring people into the economic system. The development of small enterprises is critical to the development of these economies.

In conjunction with the development of oil, the capital flows into the region dwarf the money coming from any other sector. In Azerbaijan there must be $30 billion from the West to develop oil. The numbers of all of the other industries cannot compete. Oil is indeed a critical factor. But if you look at economies where oil has been important in the past, one has to look at what happens when there are downturns. One must develop other sectors of one’s economy. Another important consideration is corruption. It is rampant throughout the region and needs to be addressed politically because it retards economic development and is very expensive, and hence discourages people from participating in the economy. The other related item of interest is looking at trade partners. One discovers that in Azerbaijan the number one partner is Iran and in Georgia the number three partner is Iran. Georgia’s number one trading partner and Azerbaijan’s second partner is Russia. One must pay attention to Iran and Russia and their power and influence in the region. The likelihood is that the US will develop relations again with Iran.

Moderator: Thank you very much. The fourth presenter is George Cabot Lodge who is a professor at Harvard Business School.

George Cabot Lodge: Thank you Graham. I also want to thank Rusudan for including me in this conference. I don’t think I deserve to be here since I am by no means as experienced as the other people who have spoken here. As Graham mentioned, I did have the great opportunity of working with the Minister of Planning in Kazakstan and his group of very brilliant, impressive and young staff. Having this chance to look at the world from his point of view allowed me to do my assignment, which was to make recommendations. I did that and they were not very happy. I would like to quickly describe what I think the planners in Kazakstan see. They know that since the country became independent in 1991, they have seen the worst contraction of the economy, something like 5 times less GNP, they have prolonged years of depression, and they have 25% unemployment, potential inflation, current account problems, ecological disasters, growing income inequality, deteriorating health and education, and low savings and investments. Similarly they are well aware of the difficulties of privatization, which they have ended enthusiastically. Of the political problems that are reflected in alarming public opinion polls, we know that the people expect a lot from a government that they neither trust nor believe is efficient. More profoundly, they have reason to wonder whether Kazakstan is a country at all. It has never been a country — in its geography, demography, history. There are serious questions as to what degree a community exists. There is a national government. The ministries were once powerful, but now are competing with one another for power.

There is, however, a lot going for this country. The planners know that they need a robust private sector. The question is how is this private sector going to be financed? Will it be financed by domestic savings? Not likely. Therefore the answer becomes financing through foreign savings, foreign investment. We talk about foreign investment as if it were a monolithic entity. And it isn’t. Oil companies are there for the long run. Many of the mineral companies are there for the short run. I think we need to think about foreign investment in many different ways as we have recently learned from Asia and Mexico. There is better foreign investment and not so good foreign investment. This runs smack into the advice of the IMF, interestingly enough. The planners came up with a procedure for getting government incentives to encourage good foreign investment, especially in those areas where it is urgently needed, such as the agricultural sector or manufacturing related to agriculture. The IMF threatened to withdraw its funds unless Kazakstan kowtowed to the IMF.

This brings up many questions about the role of Western institutions in the planning of these economies. Rebuilding Kazakstan’s agriculture is the number one priority from any perspective. How do you do that? How do you take collective and subsidized farms and convert them into small, privately owned, and internationally competitive farms. The advice of the Western development banks is free market, free trade, private property, and limited government. This is a recipe that cannot work. When I spoke with the planners about the role of the US government in agricultural development at every stage, they were shocked and amazed. There is a fascinating ideological problem here. The rejection of Communism is enthusiastic and the acceptance of a kind of extreme laissez-faire individualism is equally enthusiastic. What is required, of course, is a pragmatic acquirement of an indigenous ideology that will support what actually has to happen. Free trade is fine but if you wipe out the cottage industry and the textile industry, it has a down side. I believe that the number one problem is the need to substitute a sufficient and relevant ideology for an old and deficient one, and also for the kind of ideology that many Westerners are trying to impose.

Moderator: George, thank you very much. This is a role that he has played on many other occasions. I think that it is charming that the Harvard Business School is advising the IMF and the World Bank on the limits of orthodox theology in free marketeering. I think this will be a subject that will come back actively in the discussion. First on our list of commentators is Steve Anlian of USAID in Armenia.

Steve Anlian: Thank you. The only thing I will say officially about the US policy in the Caucasus is that economic integration of the region is the focus. Their professed strategy is stability through economic integration. The Freedom Support Act does allow for humanitarian aid and there is a great amount of funds going to refugees. In an effort to be balanced, within their Congressional framework, assistance is delivered. For those of you who have access to the Internet, I would encourage you to take a look at the USAID homepage for the amounts for each republic.

I am actually on sabbatical this year so my comments are my own and not as a representative of the US government. We have heard the terms shared royalties, shared gains, and distribution of gains this morning. We are now in the economic box and that is where I am going to stay. I think the point is about economic inclusion and economic exclusion. We have heard a lot of discussion about the regional players that we can call the outer circle, including Iran, Russia, and Turkey. There is also an inner circle comprised of Georgia, Azerbaijan, and Armenia. And pieces left out of the puzzle are going to cause the spoiler syndrome.

There has to be a conscious attempt to be inclusive. There are two ways of doing that. Some of us have already talked about the dependency of the central government and how 90% of the revenues will be going to it. If managed poorly, these resources are the kiss of death. The wealth may foster instability, fortifying short-sighted autocracies that are allowing a privileged few to grab the initial spoils. They should be encouraged to go forward with democratization. Otherwise, society and western companies will all lose. From an economic perspective, there are ways that a government can collect revenues and distribute the wealth. In theory, wealth can be distributed through a very fair and equitable taxation policy through subsidies to the needy and what we call inter-governmental transfers. The question is: does a citizen in one place feel that through the central government’s policy they are being treated as equitably as a citizen somewhere else? Does it take more than dependence on a well-oiled machine of fiscal decentralization? That is one approach.

Another approach is an honest analysis of the geophysics. Geophysics is my background. I have looked at these maps, I have looked at many maps. We have a buried treasure here. It would be an interesting exercise to lift the political boundaries. The Silk Road in fact is the path of least resistance. It doesn’t take a deep analysis to see that this is an industrialized area. This is not the New World or uncharted territory. There are established transportation routes and railroads are where they are for a geophysical reason. One needs to objectively look at the existing Corridor. This is the best and easiest route. You cannot contrive a relationship between these countries if it does not work.

You want to reduce the number of stake holders in pipeline or transport strategies. Once you get beyond one or two, the dynamic changes. It is almost better to be more inclusive so that you develop a club entity so that no individual group, whether ethnic or a nation state, can be disruptive because they will then be disrupting a larger group. If you look at this corridor from a geophysical perspective, what is the easiest route? We heard from the Romanian representative this morning about the new pipeline that is going through Croatia, Slovenia, and Serbia. The reason it exists is because someone is going to save $2 on every barrel of oil. When oil prices are as low as they have been recently, it makes economic sense. Similarly, if you look at many of the contrived corridor alignments, they do not make economic sense. They are artificial and they have a political agenda. To avoid this, look at the shortest route to political efficiency and social welfare, which is what is important at the end of the day. If in fact, at the same time, it is inclusive, then we should progress that way regionally.

Moderator: Thank you Steve. Our next speaker is George Appling from Harvard Business School.

George Appling: Thank you very much. First off we all know that major pipeline capacity is needed out of the Caspian and that there have been serious political obstacles to getting it built. Specifically, there has been Russia and Iran versus Turkmenistan, Azerbaijan, and Kazakstan. There is massive disagreement as to how to divide the Caspian and where the pipeline should go. What we don’t think about very much is that Russia very much needs pipeline capacity outside of the Caspian. In the northwest sector of the country, Russia needs new capacity. The main export routes for Russia are all full. We should think about this more. If you put the need for massive capacity of the Caspian together with the Russian need for capacity outside of the Caspian, I think we will have an opportunity to create linkages between these two issues. There can be a series of tradeoffs that can get the pipelines built. This would mean a couple of things. The trend towards isolating Russia outside of the Caspian is counterproductive and misplaced. It is in the US’ national interest to have the oil supply diversified. My assertion is that we should think about linking new export capacity from Russia outside of the Caspian with new export capacity within the Caspian and to make the tradeoffs necessary to get both built.

Moderator: Thank you. I think George is previewing a study that has been going on here at the Belfer Center. Next up is Elizabeth Zaldastani Napier, the Vice President for the America–Georgia Business Development Council.

Elizabeth Zaldastani Napier: Thank you. I am going to talk about the status, barriers and potential of Georgia. Georgia has made extraordinary progress over the last few years. Real GDP growth was more than 11% last year which is one of the highest in all of Europe. Georgia has had three years of a stable currency. It is considered one of the successful currencies by the World Bank. Georgia is also the gateway to 100 million people, which is rather extraordinary since the country itself is only 5.5 million people. The country has location, location, location.

Let me speak briefly about the obstacles in Georgia. One obstacle is a lack of awareness. Every country in the Eurasian Corridor has some level of awareness, with the exception of Georgia. Georgia has started behind everyone else because of its name. Georgia does not have much of a diaspora, so we are the opposite extreme from the Armenians. We need to increase awareness because Georgia has huge potential.

Let me also address Georgia’s potential. Although Georgia does not have oil and gas, it does have significant potential in water. Water for hydropower and water for consumer products. Georgia is using only about 10% of its capacity in terms of hydropower. Georgia historically has been very strong in agriculturally related products. Tourism is another opportunity. There is a huge potential for all kinds of tourism infrastructure. There is only one large hotel and it has just been bought by the Sheraton. There are not a lot of layers in the game, but that will probably change. Finally, given the location of Georgia, transportation is another opportunity. We are hoping to increase awareness of Georgia, so we hopefully will see major strategic investment soon. We hope that the US will play a big role in that.

Moderator: Thank you Elizabeth. The next speaker is Irakli Rukhadze, the Chief Operating Officer of the Caucasus Fund.

Irakli Rukhadze: I am going to concentrate on the Caucasus vis-à-vis all eight countries we have talked about today. I should mention that it is a great relief that I don’t have to spell Caucasus which is what I usually have to do for potential investors. Once they know that there is oil in the region, spelling and linguistics become irrelevant. I am not going to talk about oil today. Instead I am going to talk about other things that have great opportunities for investors. I am going to talk about agriculture, real estate, and transportation. These are the areas that the fund is going to concentrate on.

Agriculture has great potential for all three Caucasus countries. If you look right before the break up of the Soviet Union, agriculture comprised 25–40% of their GNPs. Geographically, the Caucasus are the southern-most point of the broader Northern region and they basically had a monopoly over the fruits and vegetables that were flown up to Russia and the CIS. Today when you go to Moscow and speak to the large food distributors, they will tell you that most of the produce comes from South Africa and South America. They will also tell you that they cannot deal with the peasants in Armenia who are incapable of entering into long term contracts. They sell apples today, shoes tomorrow, and god knows what the day after tomorrow. This does not mean that this cannot be a tremendous opportunity. In fact, half of the goods were spoiled because they did not reach the market. There is real potential for immediate revenue, and there is a huge potential market. While we talk about oil, we forget that apple concentrate is just as much of a commodity and it doesn’t need 15 years to develop.

Real estate has tremendous opportunities because anywhere you look there is a tremendous hunger for quality property. Anyone who has stayed in an overpriced and underquality Soviet hotel room knows that there is great potential.

I would also like to think about transportation. There has been much talk about the Silk Road to the extent that I think someone should just come down and lay out this smooth road. If you look at the increases in transportation, they are astronomical. The Silk Road is happening. It may not be very smooth, but where there are challenges, there are opportunities. The infrastructure is completely inadequate and there is opportunity there. Does this mean that any investor can just come in and reap the profits? No, because all of these countries are very different. It takes specific knowledge and skills to work with partners and create exit avenues. If one can put those skills together there are tremendous opportunities inside and outside of oil.

Moderator: Thank you. Next up is Izabella Tabarovsky who is a Research Associate for Cambridge Energy Associates.

Izabella Tabarovsky: Thank you. I am very glad that George made his comments before me for it will make my comments much shorter. I would like to further elaborate on the idea that it is counterproductive to exclude Russia as a transportation route for oil. Russia has a tremendous pipeline capacity that is operating at half capacity. There is a shortage at export destinations. There are cheaper solutions rather than creating pipelines from scratch. If you reverse a pipeline that currently goes from Russia to Kazakstan and take Kazak volumes into Russia, and then expand the capacity of the so-called Friendship [Druzhba] Pipeline going through Belarussia or the Ukraine, the investment is under $200 million dollars as compared to the $2 billion required to build the new pipelines. Russia is an important power and it is there to stay. There need to be some important changes that will ease relations with Russia. Setting the Eurasian transportation corridor in opposition to Russia or as an attempt to limit Russia’s influence is the region brings us again to the Cold War era where we pay too much attention to politics and not enough attention to commercial issues. So I believe that this is something that we should all keep in mind. Thank you.

Moderator: Thank you again for being direct and succinct. Our next speaker is Mamuka Tsereteli who is the Economic Counsellor for the Georgian Embassy in Washington.

Mamuka Tsereteli: Thank you. My main point follows Irakli’s point and I would like to say a few words about the Eurasian transportation corridor as an existing reality. Almost 8 million tons of cargo went through Georgian territory last year. Only one fourth of this cargo was oil. This means that the remaining amount consisted of different items. Oil plays a major role in the process of generating attention towards the region. Other products have huge existing potential. I have a list of strategic projects that may be developed in Georgia, including the oil pipeline project, the railway lines, power line construction, highways, rehabilitation of railways and ports, and the rehabilitation of air traffic control. These are either under discussion or are being implemented. When the air traffic control rehabilitation was announced, all flights over Georgian territory increased greatly. This has caused an increase in revenue. Basically, there is a lot of opportunity for further development and profits. We hope that this potential will be realized. We are optimistic and we have a lot of hope for the Corridor.

Moderator: We now have time for comments and questions. I have put myself first on the list because I want to ask Prime Minister Lubbers a question. On the issue of whether to include or exclude Russia, you played a vital role with the European Energy Charter. Could you please address some of the points raised by Mr. Appling?

Lubbers: For the answer, I need to make a distinction between two points. Speaking politically or institutionally, of course, Russia needs to be included. These systems are effective when they are multinational and treaties have clout and there are procedures. What I said this morning is that the Duma is hesitating to sign even though the Russian Federation has already accepted it. The second point addresses the economics as well. When we talk about pipelines there are negotiations. In the case of the Energy Charter, to what extent do we include Russia? I do not believe the members of the treaty will always invite Russia. Sometimes because of geography, they will be included. Some cases will be quite complicated, i.e. Chechnya. If there is a specific system for working together in the field of energy, the problem of Chechnya may be solved.

Question: I have a specific question for presenters or discussants. What was the impact on the fall of oil prices on the region?

Apostolou: It has not fed through completely yet. There is a problem of falling exports, and the head of the state oil company has been fired in Kazakstan. Someone has to pay the price. It is going to put some projects on hold. Similarly the fall in metal prices is also going to hit the Kazak metal industry as well. One thing the governments need to learn is that they cannot expect investors to put in committed funds if prices are going to fall under a certain level.

Kolt: I want to speak to the issue of Russia’s inclusion. I think it is desirable. The first place that the oil companies rushed into was Russia, not the Caspian. They discovered that Russia was the gusher that wasn’t because of Russian ambivalence over Western company involvement. So the companies left. Secondly, as far as the eight countries go, they want Western participation, but in large part because of the pressure that they have felt from Russia. I agree with you about geophysics and the importance of finding the easiest route.

Comment: When you talk about the inclusion of Russia it doesn’t have to be physical involvement. The pipeline can run through a different territory but carry Russian oil.

Tabarovsky: There was a conference that I attended about a month ago, where I believe that Kazakstan stated that they wanted to reverse the pipeline. Whether this is a long term opportunity, we don’t know. Kazakstan is interested in developing Asian markets as the new markets. The reversal of the pipeline is a major project and it seems as if it is probable that it will happen.

Abdimomunov: Regarding the pipeline, Russian oil companies have the right to close it because of politics. Kazakstan cannot hugely depend on it even though it is one of the major projects. The Kazak government is not static. They are learning as they go along. The government actually did the budget based on 1997 oil prices. We learn from other countries, i.e. Iran. The government is now trying to redo the budget based on 1998 prices. They know that they cannot rely too much on oil.

Zeyna Baran: I want to make a point about Turkey. Turkey has been saying that Russia needs to be part of the pipeline because they are neighbors and trading partners. They haven’t found a way to do it yet. They have looked to the US to provide a framework with little progress. There has also been a lot of talk about the underutilized Bosphorous capacity. I think there is a major diplomatic conflict that is going to come up. I am not sure if there is a willingness on the part of the US to mediate. I think this needs to be kept in mind.

Comment: I would like to ask a question of the business community. Is there any idea of what are the kinds of people for whom the work is conducted? Is the work for progressive people or people who have a different attitude towards business?

Kakabadze: The impression I get is that we find that we only want to work with people under 35 because they “get it” and they tend to be blind to the racial or ethnic identities of the people with whom they do business.

DiBenedetto: Looking at the former Soviet Union and who has accumulated huge amounts of wealth, there are two classes. One is the former KGB type officials that are in a position of power and align themselves with the administrators of large companies. They have also figured out a way to obtain an equity piece in the company, similar to a leverage buyout in the US. These people were in the right place at the right time. They were better able to deal with the free market because they had more flexibility than most people in society. Then we have the “Young Turks” that have through their wits and hard work accumulated money by identifying opportunities and taking advantage of them in very legal ways. These are the two manners in which wealth has been accumulated. There is a strong desire to include young people in the process because they are more open to ideas. The advent of technology, such as the Internet, will dramatically change the lifestyles of people in the region. People in rural areas have not been able to communicate their ideas, conduct business, and communicate their knowledge to the rest of the world well. In time, they will be in a position to do that and it will have quite an effect on the region and the world.

Boothby: I have a final comment. I think that there is the real possibility that the situation in the region may overheat. The Shevardnadze regime is coming to an end. There is not a clear indication of what the leadership will be when Shevardnadze moves on. In Azerbaijan, when the money comes in, there will be no President who will be able to resist doing something about Nagorno–Karabakh and the refugees. I think we need to keep all of these groups together. If we do not, not only will the situation overheat, it may boil over.

Moderator: I think that was an excellent final comment. I will take that as my version of a benediction. It is evidence of the success of this meeting and discussion. We all are trying to get a multidimensional understanding of the problem. On behalf of the Harvard group, I want to thank all of you. I also want to thank Rusudan for organizing this. The last comment goes to Rusudan.

Gorgiladze: Thank you very much. It was your participation and thoughts that made this a success. I have been obsessed with this topic, so thank god we finally discussed it.

I want to make a very brief comment about Shevardnadze’s future leadership. I believe (and not because I am state official under Shevardnadze’s leadership) that Shevardnadze has enough time and has done enough to build the system. And if this system is irreversible, then it doesn’t matter who will come after.

As Mr. Lubbers was pushing us to think about institutional cooperation or organization, such a mad idea came to me: in the 1940s, the European Union started with coal and steel; so why don’t we start with oil and silk? Even as far as geopolitics and other issues are concerned, the Silk Road originally and geographically is a natural corridor.

Today we met our expectations, at least mine. We started this discussion, we triggered debate, and we will continue this next year. Within the subjects of discussion, we had such multi-level discussions, and even the fact that we did not always match each others level was absolutely fascinating. In the previous session, we just moved a little bit and forgot that the session was about opportunities that the Eurasian Corridor gives us for the democratization process. We forgot it because the reality is that this aspect is often forgotten, and that is fascinating in itself.

The deepest words that I remember from today are hope and our future. Let me finish on this. Thank you very much.