Nabucco and Trans-Caspian: Times Change, Pipeline Politics Goes On

On one hand, Turkmenistan is in the catbird seat. Exxon, Chevron, BP and ConocoPhillips are salivating over the country's onshore natural gas fields, in particular South Yolotan-Osman, the fifth-largest natural gas field in the world. It's fawned over by the U.S., in particular Richard Morningstar, the special U.S. czar for Eurasian energy.

Yet all is not well in Ashgabad. Four months ago, there was an explosion at a natural gas line connecting the country to Russia, effectively Turkmenistan's sole natural gas customer. Since then, the line has been fixed, yet the natural gas flow has failed to resume. Why? The global financial crisis. Natural gas demand in Europe -- which had been buying up the Turkmen gas through Russia's good offices -- has plummeted. So have prices. Moscow has told the Turkmen that it wants to renegotiate the volume-and-dollar terms for the gas. The Turkmen have protested that a contract is a contract -- a favorite expression that the Turkmen perhaps have learned from Western oilmen over the years -- and so the flow remains halted. With it, Turkmenistan is losing an estimated $1 billion a month in revenue, or about $4 billion to date. That's a lot for a place like Turkmenistan.

There's another problem. It's the pipeline politics in which Turkmenistan is a player, voluntarily or not, by dint of its location in great game territory.

Since the mid-1990s, Washington has pressed Turkmenistan to agree to an extension of the region's new East-West natural gas network that would connect the country with Azerbaijan, and onward with Europe. The rationale was that, in the same way that Azerbaijan and Georgia have ostensibly won some political breathing space from Russia because of the construction of the Baku-Ceyhan oil line, Central Asia and in particular Turkmenistan and Kazakhstan would benefit through the proposed trans-Caspian natural gas line.

Demands for bribes, Russian protests, war in Afghanistan, and gaffes of various sorts have confounded the trans-Caspian. But now it turns out that events may have wholly overtaken the linkup of Central Asia to the balleyhooed East-West Corridor in any case.

First, in its latest iteration, the trans-Caspian was ultimately supposed to feed Nabucco, a natural gas pipeline to Europe, which has ended up at the butt end of continued utility bill spats between Russia and Ukraine. But now it seems that Europe may very well become awash in natural gas from shale deposits within Europe itself, and liquified natural gas shipments from Qatar and elsewhere. In other words, the need for Nabucco -- and natural gas supplies all the way from Central Asia -- has diminished.

But what of Turkmenistan's gas? In terms of Russia's rivals, it turns out that the Chinese have gotten there first. I personally thought the notion was far-fetched, but the Chinese are actually on the verge of finishing the first phase of the Turkmen-China natural gas pipeline, which looks like it will begin flowing by the beginning of next year. Since South Yolotan-Osman are situated in far eastern Turkmenistan, even if one of the western Big Oil companies gets a piece of these fields -- still only a remote possibility -- they will ship east, not west.

In other words, there appears to be little reason for the U.S. to focus on the trans-Caspian any longer, either, except for its own, parochial sake, and not for any larger policy reason, such as how Baku-Ceyhan broke Russia's monopoly over energy transport in the Caucasus.

We'll keep hearing about these lines. And we'll write about them in this space. But their time has passed.

As for Turkmenistan -- it will find its own way.

Pakistan: A Taliban Train the Populace May Climb Aboard

We return to Pakistan and the Army's effort to push back the tide of the Taliban. Over the last two months, it has seemed that the Army -- though long itself a pillar of the country's militant Islamic movement -- finally recognized that its creation now threatened the country's integrity. It has been fighting back against the Taliban. The news is that the Taliban appear to be adapting in a way that could seriously shift the tide in their favor. That adaptation? It is enacting by fiat the land reform promised by self-proclaimed liberals for three decades.

This news, buried in a startling piece by The New York Times' Jane Perlez and Pir Zubair Shah, is important because of the danger that the country's current leadership -- however flawed -- is swept away in favor of one decidedly favorable to the Taliban. David Ruccio rightly calls this powerful turn of events Taliban land reform.

For those like myself who covered the late Benazir Bhutto in her first campaign for prime minister in 1988, this point was paramount -- coming off of eight years of education at Harvard and Oxford, Bhutto vowed to change Pakistan's feudal landscape, in which most of its 170 million people live as virtual serfs under a stubbornly Raj-style landowning class.

A few years earlier, in my time as a reporter in the Philippines, I had been informed by a wise hand that a feudal never betrays her roots. This person was referring to then-President Cory Aquino, but the rule held in Pakistan as well: Bhutto, the scion of Sindh aristocracy and the daughter of revered former Prime Minister Zulfikar Ali Bhutto, never came close to fulfilling her promise.

The Times piece is about Swat, the pristine northern Pakistan region that has been a principal battleground between the Taliban and the Army. The story is set within the context of landowners refusing to return to Swat after the Army swept much of the Taliban out of the area; they don't think it's safe, so many are staying in the capital of Islamabad. In the vaccuum, remaining Taliban "are spreading the spoils among the landless," Perlez and Shah write.

Then go on to quote Vali Nasr, the smart Islamic hand now serving as a senior adviser to U.S. diplomat Richard Holbrooke:

If the large landowners are kept out by the Taliban, the result will in
effect be property redistribution. That will create a vested community of
support for the Taliban that will see benefit in the absence of landlords.

There we have it. Pakistan's political system is wholly founded on the rule of the country's narrow, landowning and industrial class. That includes Bhutto's husband, Pakistan President Asif Zardari, opposition leader Nawaz Sharif, and virtually members of Parliament.

The article further paraphrases Nasr's thinking:

If [the land redistribution] continues, the landlords' absence will have
lasting ramifications not only for Swat, but also for Pakistan's most populated
province, Punjab, where the landholdings are vast, and the militants are gaining
power.

This is the point. The consequence of the Taliban's capture of Swat last year, and their subsequent shift into neighboring Buner, was always the danger of a tipping point, similar to how the Taliban's 1996 capture of Jalalabad tipped the balance and catapulted the group into Kabul, and rule of Afghanistan.

The political survivors in Pakistan's Parliament may want to think about getting in front of this moving train.

Russia and Bending: What Biden Didn't Say

Last Friday, O&G wrote of U.S. Vice President Joe Biden's strong grasp of reality in the former Soviet Union, as expressed in his actions in Ukraine and Georgia. But yesterday, Secretary of State Hillary Clinton tried to sweep up in the wake of a later, widely remarked-upon Wall Street Journal interview with the vice president, headlined, "Biden Says Weakened Russia Will Bend to U.S." Clinton's remarks on a Sunday talk show came after a senior adviser to President Dmitri Medvedev asked, "Who is shaping the U.S. foreign policy, the president or respectable members of his team?"

The Russian official, Sergei Prikhodko, said he found the Journal story "perplexing." I do too, but for different reasons: Unless Biden said something more than is in the story and the excerpts posted on the Journal website, he didn't suggest that Russia will accede to U.S. wishes.

This is important because, bluntly speaking, the Journal headline and the follow-on reporting by The New York Times make Biden look wholly misinformed. This isn't nuance -- if Biden truly meant what the Journal reports he did, Mike McFaul, the National Security Council's Russia hand, needs to get over to the Executive Office Building and have a little chat with him.

The Journal story, written by Peter Spiegel, synthesizes Biden's remarks as such: The seriously weakened Russian economy will "force the country to make accommodations to the West on a wide range of national security issues, including loosening its grip on former Soviet republics and shrinking its vast nuclear arsenal."

Within the story, we get this quote: "I think we vastly underestimate the hand that we hold." The story goes on with this Biden quote: "Russia has to make some very difficult, calculated decisions. They have a shrinking population base, they have a withering economy, they have a banking sector and structure that is not likely to be able to withstand the next 15 years. They're in a situation where the world is changing before them and they're clinging to something in the past that is not sustainable."

To summarize, Biden thinks that the Obama administration has underplayed its leverage as Russia suffers from a profoundly weak economy and disastrous demographics. On the merits of the assertion, I'd argue that the U.S. has not underestimated its leverage -- to suggest that the U.S. can parlay Russian impoverishment into changed Kremlin policy on Iran, on missile defense, on European gas policy, and so on, is simply a misread of Russia. But this is beside the point. Biden does not predict Russian capitulation. It's not in the quotes.

Now to the Journal's second point -- that Biden suggested that Russia will loosen its grip on former Soviet states such as Georgia and Ukraine.

Biden says the following: "I don't expect the Russians to embrace -- particularly this government, particularly Putin -- to embrace the notion that [they should] reject a sphere of influence. But I do expect them to understand we don't accept a sphere of influence."

Fair enough -- Moscow ought to recognize that Washington won't shift a position on Central Asia, on the Caucasus, and on the other Slavic states that's existed since George H.W. Bush's administration. But where is the prediction of a Russian accommodation to the West's position? It doesn't appear in the quotes as far as I can see.

This isn't Biden's finest moment. But it's a problem of a different order from what one would conclude from the Journal headline and lead.

Talk is Cheap, and Now So Is Satellite-Internet Streaming into Iran

By Sasha Meyer

Iran keeps making headlines, and some experts say the crackdown there could fuel repression in Central Asia. Stateside, there's a public debate on what to do. An op-ed in The Wall Street Journal suggests, among other things, giving the Iranians satellite phones by smuggling the handsets into the country. This might work as a quick fix. But, if willing, the West can do a lot more: It can bring censorship-free Internet to everyone's laptop in the region. As noted previously, the idea is already technologically feasible.

On July 1, TerreStar, an American company, launched a satellite through which it will offer phone and Internet service directly to pocket-sized phones, PDAs and laptops in the U.S. and Canada, eliminating the need for conspicuous satellite dishes. The service will start before the end of the year in partnership with AT&T, and consumers will use a dual-mode smartphone that connects both to the satellite and the ordinary cellular network. A competitor – SkyTerra – plans to offer similar services next year, after placing two spacecraft into orbit.

Putting a similar satellite over the other side of the globe would go a long way toward helping to ensure a free flow of information in Iran and Central Asia. How affordable the idea would be depends on two trends.

First, launches are becoming cheaper as private space companies begin their operations. One of them – SpaceX – wants to slash costs 90%, and it's already half way there: On July 13th, it launched Malaysian RazakSAT for $8 million, 50% off the industry average for the same type of technology.

Secondly, dual-mode phones could become commonplace in the next couple of years, which would make launching SkyTerra-like services elsewhere in the world cheaper and less risky. Qualcomm, a major supplier of mobile phone chips, plans to integrate satellite capability into its mass market products. Infineon, another big maker of mobile phone processors, has something similar in the works.

This option of adding extra functionality to their products at little or no extra cost will be attractive to handset makers. The opportunity would be especially appealing to those like Taiwan's HTC and its Japanese competitors that are otherwise big in size, but want to expand their tiny U.S. market share. The former manufactures cell phones for many of the world's biggest brands. The latter make the world's most innovative phones. Both suffer from weak brand recognition in the U.S. Offering a dual-mode handset might be a way to remedy that.

The Malady Called Turkmenbashi

Earlier this week, we reported on the impressive surgical abilities of Turkmenistan's president. Gurbanguly Berdymukhamedov not only rode his dentistry skill to the country's top office three years ago; he also can remove a tumor.

The feat attracted much attention not just at the novelty of a head of state taking time off to perform surgery, but because of whom the president succeeded in 2006. The country's former leader was Saparmurat Niyazov, the self-styled Turkmenbashi, or Leader of the Turkmen. Here was a man with a serious fixation on monuments.

We all had good fun at Turkmenbashi's expense before and after his death in 2006. I did so in this promo for Oil and the Glory last year.



But is this all Turkmenistan is bound for? Being a source of humor to the region and beyond? After awhile, my Turkmen friends certainly didn't think all the fussing was funny, and initially Berdymukhamedov attracted good reports for tearing down some of Niyazov's monuments, and reopening schools and libraries.

But it turns out that the surgery incident was indicative of a problem. Berdymukhamedov seems to have contracted the same malady that afflicted Niyazov.

On Tuesday, we heard that Berdymukhamedov launched a book on Turkmen plants with medicinal uses. Now we are told that he's also an expert on the famed Turkmen horse breed, the Akhal Tekke. His book on the subject is called Akhal Tekke: Our Pride and Glory, according to Daniel Kalder at the Telegraph in London.

The day before yesterday, the president's press service reported that Berdymukhamedov is also a pretty good pilot. He took over the controls of a Sikorsky helicopter in order to get "acquainted with the pace of a season cotton treatment campaign, preparation of land for tillage and harvesting of crops." The Turkmen leader then inspected a construction site from the air before being congratulated on his performance by the head of the country's state airline.

This is a man of the people. Berdymukhamedov's caring reaches even the ordinary tree. As the news service noted, after his official inspection, Berdymukhamedov "issued instructions to government officials to 'carefully examine the state of urban plants and establish proper gardening by providing timely watering of plants.'"

Berdymukhamedov is continuing with at least one of his predecessor's grandiose projects -- "Golden Age Lake," in which he is filling up a 77-square mile desert depression called Karashor with cotton-field run-off.

Quite apart from focusing on such $20 billion ventures while his country is mired in poverty, some people think the project could actually provoke war with neighboring Uzbekistan, which like much of the region has a chronic water shortage.

At the project launch a week ago, Berdymukhamedov turned a shovel-full of earth, then got on a horse and rode away to a waiting helicopter.

There was no word on who piloted it.

What Biden in Ukraine and Georgia Shows: Making Up (With Russia) Is Hard to Do

In a two-day swoop, Vice President Joe Biden has single-handedly signaled something about the reset button: While the idea of rapprochement with Russia that he ostentatiously suggested five months ago is romantic, getting back together usually isn't a good idea for divorced couples. They tend to go back to the same old aggravating habits.

In this case, Biden first went to Ukraine, which he assured that Washington isn't recognizing Russia's claimed entitlement to influence over its neighbors. He said that if Ukraine decides to join NATO, the U.S. is behind it. (Thanks to RealClearPolitics for posting the transcript.)

Then today, Biden flew south to Georgia, where he said the same thing: "We understand that Georgia aspires to join NATO. We fully support that aspiration," Biden said.



Almost nothing is guaranteed to raise the hackles of Russian Prime Minister Vladimir Putin more than the suggestion that Georgia should be permitted to join NATO; a close second would be the same formulation for Ukraine. Russia regards both nations as its own. Indeed, Russian Deputy Foreign Minister Grigory Karasin responded by saying that Georgia is "remilitarizing" after being pummeled by Russia in a five-day war last August, and saying that Moscow might move to stop it.

So why did the Obama administration choose to put irritating language into Biden's mouth? The answer is realpolitik. Washington truly does want calmer, more constructive relations with Russia. It knows that neither Ukraine nor Georgia are capable of meeting NATO requirements; it also knows that the two aren't welcome as members by much of Europe, which -- there is no delicate way of putting it -- allows Russia to call the shots on issues including further NATO enlargement and the direction of new natural gas pipelines.

Yet, putting aside for now the question of whether NATO in fact should expand further, for reasons of politics and appearances, Washington cannot be seen to be acceding to Russia's wishes. So you have speeches like Biden's in Ukraine and Georgia.

It's true that Biden tried to soften the sting by also suggesting that both Ukraine and Georgia could improve their political systems. Biden also refrained from agreeing to Saakashvili's request for a replenishment of armored weapons, which Georgia all-but exhausted in the August war.

Some of the blogosphere is alight with accusations that Washington threw "another ally under the bus," as Pamela Geller over at Atlas Shrugs put it. Others, such as Robert Antonio Hussain, go the other way. "Why must VP Joe Biden stir up the pot all over again about Georgia, Russia, NATO and Georgian Pres. Saakashvili?" wrote Hussain.

The answer to Geller: No he didn't.

The answer to Hussain: Because he must.

After the Matches, After the Drones, How to Capture An Elusive Taliban Leader

For more than a decade, both the U.S. and the Pakistans have tried a rising scale of payments -- from a few hundred dollars up to $25 million -- to capture the most violent militants using the borderlands with Afghanistan as safe harbor. On one of my reporting trips to Pakistan in 1998, American aircraft dropped green matchbooks offering $5 million for the capture of Osama bin Ladin. I keep a box of the matches as a souvenir in a drawer.

Needless to say, neither this system, nor the use of arms, has resulted in many top-rank captures. Those that have occurred – such as that of Khalid Sheikh Mohammed and Ramzi bin al-Shibh – were the result of other traditional intelligence.

Why would dirt-poor people living in the tribal belt give up a chance at millions of dollars for turning in an Uzbek or a Saudi with whom they have absolutely no blood link, with whom their sole link is that they happened to drop in on the village one day?

One reason is the code – the Pashtunwali, under which the tribals don’t make a habit of surrendering guests. The other reason is that the Americans went about it all wrong culturally. What they needed to do was to quietly seek intelligence, without tipping their hand publicly; then lots of Pakistanis, including tribals, might have helped find virtually any of the militants, including bin Ladin.

But after the matches, it was more or less a matter of pride to keep one’s mouth shut. But that’s all another, long story.

What’s now news is a new tactic to make it in the tribal interest to talk. The tactic is arresting other members of the tribe. In the case of Baitullah Mehsud, the Taliban commander accused of murdering former Prime Minister Benazir Bhutto in 2007 and various other continuing acts of mayhem, the Pakistanis are arresting other Mehsuds.

Given that the Mehsuds are an enormous tribe -- according to a seriously good story by The Washington Post’s Joshua Partlow and Haq Nawaz Khan, there are a few hundred thousand of them in and around the Pakistani border region of South Waziristan – there are a lot to choose from. Partlow and Khan report that hundreds of Mehsud-owned businesses may have been shut down, and 25 members of the tribe arrested.

This is getting some bad press. Over at Registan.net, Josh Foust for one is up in arms.

But this seems to me to be among the shrewdest tactics the Pakistanis have employed so far. As my old friend Jim Rupert of Bloomberg reports from the field, drone attacks may have done more to aggravate the region than make its occupants give up Behsud.

Yet those who have actually traveled in the tribal areas know that this is a tough region. It freely engages in smuggling, kidnapping, opium- and gun-running, and so on. I recall inspecting the enormous estate of Haji Ayub Afridi, one of the border region’s most legendary drug smugglers, along the Khyber Pass. Afridi would understand the language the Pakistanis are speaking with such roundups.

This is carrot and stick. The stick is arrest. The carrot is that, if you want to avoid jail and your business shutting down for awhile, the U.S. is offering up $5 million.

Becoming a Central Asian Dictator: Family Helps; So Does Medical Training

We have just a few examples of what it takes to assume control in one of the Caspian's more serious dictatorships. One best way of course is to be the dictator's offspring. But Gurbanguly Berdymukhamedov triggered a search for the dentists of current dictators when he rose to Turkmenistan's leadership in 2006 on the sudden death of President Saparmurat Niyazov.

Now, however, the readers of Central Asian tea leaves may have to recast their successor-guessing net. It turns out that surgeons may do as well.

As Turkmenistan.ru reports today, Berdymukhamedov surpassed himself and actually performed cancer surgery on an unidentified patient from the Balkan Velayat province of western Turkmenistan. Well, he did have a bit of assistance -- two German and one Turkmen specialist were on hand with anesthesia and a helping hand.

This news is attracting attention. In Britain, the BBC reports that the tumor, declared benign, was behind the patient's ear. In Taipei, Taiwan News notes that some think that Berdymukhamedov's book on medicinal plants should be adopted in the training of health workers.

In other words, in terms of analysis, this development could shake up politics. In Kazakhstan, for instance, former first son-in-law Rakhat Aliyev is currently on the outs after unfortunately plotting a couple of coup attempts against President Nursultan Nazarbayev; he is on the run and living in exile in Austria. Central Asia's best analysts say this permanently puts the kabbosh on Aliyev's political ambitions. But these experts need to take into account this Central Asian shift: Aliyev is a trained surgeon.

Anyone have a list of the surgeons of Uzbekistan?

The Thread that Binds the Unrest in Iran and China

A common thread runs through the current hard-line crackdowns in Iran and western China. It's business -- in the case of Iran, the personal fruits of the country's entire economy; in that of China, just ordinary livelihood.

Starting with Iran, Michael Slackman of The New York Times contributes a strong profile on why the Revolutionary Guards are so intent on their man – Mahmoud Ahmadinejad – retaining power after the disputed June 12^th presidential elections. It’s the “military-based conglomerate” that they control, a “multi-billion-dollar empire reaching into nearly every sector of the economy,” Slackman writes. That includes oil, car-making, and road-and-bridge building. Since he came to power in 2005, Ahmadinejad has awarded the Guards 750 oil and natural gas development projects, Slackman writes.

Not that Ahmadinejad initiated a new practice by enriching the group that’s primarily keeping him in power. A year before his 2004 murder in Moscow, Forbes correspondent Paul Klebnikov wrote a brilliant investigative piece on how the family of former Iranian President Ali Akbar Hashemi Rafsanjani had grabbed control over vast swaths of the economy. Today, Rafsanjani fashions himself as a reformer defending voters cheated in the June 12^th election; during the election campaign itself, he threatened to sue Ahmadinejad for accusing him and his family of corruption. Klebnikov doesn’t document corruption; he only lays out the family’s financial rise from poor obscurity.

All this adds up to is what those familiar with the region already know – there are no innocents in the race for power around the Caspian Sea. In the remote chance that Ahmadinejad were swept from power, would a new Iranian regime be clean of such pocket-lining? If the past is any teacher, the answer has to be a firm no. Slackman’s story doesn’t declare otherwise, only that the Guards have much to gain if Ahmadinejad remains in place.

Which brings us to China. Slackman notes that Iran remained conspicuously silent on the Chinese crackdown on Muslim Uighurs this month. One possible reason? One of the Guards’ main trading partners is China, he writes.

In China, my former Wall Street Journal colleague Ian Johnson weighs in with a penetrating piece on the subtext of ordinary business in the violence in Xinjiang. The rioting that killed almost 200 people was triggered in an immediate sense by the murder of two Uighurs, Johnson writes.

But he adds that the undercurrent is seething Uighur anger over the takeover of traditional industries by the majority Han Chinese – the bazaars, even the preparation of halal meats consumed by the Uighurs.

The Grand Bazaar in the regional capital of Urumchi is now run by Han. So is the main marketplace downtown. As for halal meats, Johnson describes a business owned by Huo Lanlan, a Han who runs one of Xinjiang’s largest halal food processors. Of 300 workers, Lanlan employs just a few Uighurs, including a cleaning lady.

So that when the Uighurs rioted, it wasn’t just over a murder. The Uighurs see Chinese prosperity creeping in to Xinjiang, but largely enjoyed by Han from elsewhere.

The Virtues of the Courts: A Window into How Former Soviet Dealmaking Really Happens

When it comes to the Caspian era in the history of oil, it has required the intervention of New York courts and prosecutors to understand the intricacies of how the huge deals happened. In the just-concluded trial of high-end handbag-maker Rick Bourke, we heard evidence of the alleged payoff demands of the late Azerbaijan President Heydar Aliyev. And in the still-to-be-tried bribery case of New York businessman James Giffen, we have pages of detailed federal allegations of payoffs to Kazakhstan President Nursultan Nazarbayev, the cash coming from America's largest oil companies.

Though Central Asia and the Caucasus clearly didn't have a monopoly on official avarice, Russia has remained largely a subject of pub and law firm-conference room talk. Until now.

In two, side-by-side cases being heard on the third floor in London's Royal Courts of Justice, four of Russia's richest former and current billionaire oligarchs are battling over billions of dollars in claims against one another.

The personalities run the 18-year arc of post-Soviet history: Boris Berezovsky, who was instrumental in both Boris Yeltsin's and Vladimir Putin's political careers before falling out and fleeing to England; Roman Abramovich, Berezovsky's successor as Russia's premier oligarch, who had his own frictions in Russia and now lives in London, where he owns the Chelsea soccer team; Oleg Deripaska, Abramovich's successor as the king of Russian oligarchs, who is trying now to keep his empire from falling apart in the global financial crisis; and Michael Cherney, the toppled metals giant who preceded all of them before fleeing to Israel.

The subject of both suits is the 2001 merger of the joint metals empires belonging to Cherney and Deripaska (Sibal), and Berezovsky and Abramovich (Sibneft). The resulting concern is Rusal, the world's second-largest aluminum company.

The kernel of both suits is that Berezovsky and Cherney want more money. In their separate responses, Deripaska and Abramovich claim the two don't merit any.

As with the Caspian, however, the cases appear likely to open up first-hand testimony on how the innards of Russia really work. They include allegations of "illegal acts by senior officials at the center of government" in Russia, including by Prime Minister Vladimir Putin, according to a Financial Times piece today by Michael Peel and Andrew Jack. Jack spills out details specifically of the Berezovsky case in a companion on-line piece.

How to Tour the Unseen New York

In a few days, my wife is going off to New York, and though she lived in the city as a student and knows it reasonably well, she'll be taking with her a gem of a new travel book called New York Curiosities. It's chock-full of the type of gold nugget-little hidden details that you otherwise would have no idea about.

The author, Cindy Perman, actually trolls the entire state of New York. Still, this visit is just to the city. So, as usual, the first thing I did was thumb through to the Russian saunas. Perman earns her legitimacy by visiting the Russian Room, where a fellow named Frank, toting an all-important wrapped bundle of oak leaves, says the baths are "the closest you can get to God -- spiritually, mentally and physically." And then there are the extravaganza gypsy dancing dinners at the Odessa, Rasputin and Primorski supper clubs.

Enough with the former Soviet Union. On to Americana. Perman visits Woodlawn Cemetery, where she skips the monuments to Miles Davis, J.C. Penney and Robert Moses, and heads like a beeline to that of George Spencer Millet, who died at 15 from "falling on ink eraser, evading six young women trying to give him birthday kisses in office of Metropolitan Life Building." Perman glosses over the Brooklyn Bridge and Park Slope and rushes to Brooklyn College, where in the athletic field she finds four or five dozen green monk parrots, which legend has it got there from their native Argentina when a crate at JFK Airport broke apart, and they made an escape.

In the bowels of Grand Central Station, Perman finds the Whispering Gallery, right next to the famous Oyster Bar, where I usually go but totally missed out on the basement's true charms. You can actually stand on one side of the corridor, Perman reports, and your friend on the far other side can hear your whispers.

Looking for some culture -- plus evidence that New York is still the factory of something to the world -- Perman heads to Steinway & Sons, a small shop in Queens where 300 craftsman assemble the approximately 12,000 parts that go into a Steinway grand piano. There is also a sauna here, but it's not for visitors. Unless, that is, you fancy relaxing with a bunch of pianos on their way to being finished.

Exxon, the Chase for Reserves, and the Oil Sands

Talking to corporate analysts over the several years that I've been back in the U.S. and covering oil, a recurring question I hear is how Exxon manages year after year without exception -- unlike its Big Oil rivals -- to replenish its cache of proven oil and natural gas reserves. That's what the company has reported in its news releases and annual reports for the last nine years -- an unbroken trajectory of replacing more than 100% of the oil and natural gas that it pumps out of the ground.

The answer is that it hasn't done so, not at least according to the rules of the Securities and Exchange Commission, which governs such matters. When you examine Exxon's annual filings for 1999-2008, the company has had a quite-normal -- for oil companies, that is -- four years of exceeding 100% replacement, and five years not. For instance, for 2008 the company issued a statement saying that it possessed 22.8 billion barrels of proven reserves; yet its 10-K filing with the SEC reported just 21.1 billion barrels in proven reserves (to get there, see page 7 of the 10-K, and tally up the developed and undeveloped reserves in the consolidated and equity categories).

So I gave Exxon a call. How do you get from 21.1 billion barrels to 22.8 billion barrels? I asked.

Add in the oil sands, was the reply.

That would be the approximately 1.8 billion barrels of oil equivalent that Exxon has booked so far in its Alberta, Canada, oil sand holdings (see pages 22 and 23 of the 10-K; add the Syncrude and Kearl reserves).

Strictly speaking, SEC rules don't permit comingling of oil that's pumped out of the ground, along with oil sands -- exceptionally tar-like material that in most cases isn't pumped, but instead is actually mined like a mineral, then mixed with chemicals in order to move it to a refinery for processing. But companies can comingle them in public announcements such as news releases and annual reports that are read by reporters, investors and Wall Street analysts, according to an SEC spokesman.

This isn't criticism of Exxon. Rather, it's simply evidence that Exxon, like all of Big Oil, is mortal. I wrote about this in a piece earlier this week for Business Week.

In fact, Exxon has been highly critical of how the SEC requires it to report reserves. It has said that it has its own, rigorous, internal methods of assessing its proven reserves, and that this process far more accurately reflects what it possesses.

Why does reserve replacement attract so much attention? Because investors and company analysts regard this metric as a primary measure of an oil company's health. If a company's reserve base is consistently stable or growing, then it's regarded as maintaining its assets as a base for growth. If the reserve base is consistently shrinking, a company can be thought to be cannibalizing itself.

For 2008, for instance, Shell says that it replaced just 95% of what it drilled. The year before, Chevron reported a replacement rate of just 10-15%. That attracted them much critical commentary.

And Exxon? It reported that it replaced 101% of its production in 2007, in addition to 103% in 2008. Yet its SEC report shows that its proven reserves actually dropped both years -- to 21.7 billion barrels from 22.1 billion barrels from 2006 to 2007; and, as mentioned above, on down to 21.1 billion barrels in 2008. The sands made the difference. Without the sands, Exxon's reserve replacement last year would have been about 27%.

The situation will change starting next year. The SEC is going to start allowing companies to combine the oil sands with other reserves. The decision came after oil companies argued strenuously that new technology makes unconventional oil equivalent to conventional reserves, so that now there is no reason not to permit companies to put them in the same basket.

Whatever the case, for the record below are the comparisons for the last nine years, including links for most of them to both the 10-Ks and the relevant news release or annual report.

Exxon's Reserve Replacement (in barrels of oil equivalent)

Oil sands

SEC-10K

In News Release

1999	577 mln		20.6 bln	21.3 b
2000	610 m		20.8 b	21.5 b
2001	821 m		20.79 b	21.5 b
2002	800 m		20.68 b	21.7 b
2003	781 m		21.1 b	22 b
2004	757 m		20.9 b	22 b
2005	738 m		21.6 b	22.4 b
2006	718 m		22.1 b	22.7 b
2007	694 m		21.7 b	22.7 b
2008	1.87 b		21.1 b	22.8 b

How to Rile Up the International Community: Arrest a Donkey (and His Friend)

Can't one arrest a donkey in one's own country?

Adnan Hajizade, a 2005 graduate of the University of Richmond and now a BP public relations staffer in Baku, put on a little prank three weeks ago. He posted a You Tube video of a mock news conference in which, dressed as a donkey, he spoke German, played the violin and joked about a lack of civil liberties in Azerbaijan. The costume itself was a send-up of a government program that imports donkeys at what local critics say is exorbitant prices.



In any case, a week ago Hajizade was in a cafe with his friend Emin Milli, an English and German interpreter who graduated from a German university, when two men walked in and started beating up Hajizade. Milli stepped in, and he got it, too, according to Milli's wife, Leyla Kerimli, a Ph.D student at Columbia University.

Hajizade and Milli went to a police station to file a complaint, but the authorities instead charged them, using the Soviet-era offense of hooliganism. They are now in two-month pre-trial detention, and face up to five years in prison.

It's been downhill for the Azeri government ever since. The U.S. and German embassies complained, to which the government responded by demanding that “embassies of separate countries end their interference in the investigation, which is outside of their diplomatic missions.” That had no effect. Oil companies almost never get into civil rights discussions with governments, but in this case BP also expressed its unhappiness. Hajizade's former classmates in Richmond weighed in.

That wasn't all. Donkeys apparently are intriguing news in a way that the by-now run-of-the-mill political arrests in the region almost never are. France 24 ran a piece. The same was in Brazil, and in Austria. Ellen Barry of The New York Times wrote a piece accompanied by a screen-shot of the donkey video. Bloomberg did a television piece.

Basically, these various officials and media outlets seem to be mocking Azerbaijan. But is that fair? We'll discuss that at another time.

For now, I shared coffee yesterday with Milli's 32-year-old wife, Leyla Kerimli. She's worried about her husband, whom she married two years ago. She and a friend think that there must be a mistake -- an overzealous police lieutenant or prosecutor trying to impress President Ilham Aliyev.

I have a feeling that is the case. After all, there is suspicion that murder in Russia occurs for a similar reason -- an attempt to make the boss happy.

No one serious in Azerbaijan truly thought they could arrest a donkey with impunity.

The Oil and Glory Interview: U.S. Eurasian Energy Czar Richard Morningstar

Richard Morningstar talks much about déjà vu. In the late 1990s, then-President Clinton appointed him as Washington’s first special envoy for the Caspian Sea. Against strong headwinds, he attempted to persuade, cajole and muscle Big Oil into building the Baku-Ceyhan pipeline. A hostile BP, Exxon and other companies declared that they would love to build the line, but that there simply wasn’t enough oil. Russia said it might fire on any installations built in the sea. Time and new turmoil within the oil industry changed BP’s attitude, and the geostrategic pipeline became a fact in 2006. Today, after a decade teaching law at Harvard and Stanford, Morningstar is back in the same job. The task? To persuade not just companies, but also several countries to build yet another pipeline – a much-troubled natural gas line called Nabucco. He just attended a signing ceremony among five of the proposed transit countries in Ankara. O&G caught up with Morningstar by cellphone as he passed through the Frankfurt Airport on the way back to Washington.


O&G: Nabucco supporters argue that the pipeline is necessary because Russia uses or will use its dominance of the natural gas supply in Europe for political leverage. Is the argument valid?

Morningstar: That gets into why Russia does what it does. Does Russia play commercial hardball to get the best deal it can, or as a political weapon? I think that Russia does want to maximize its commercial benefit. The result is that sometimes it has political implications. The benefit of Nabucco is that it does provide diversity of gas supply to Europe. It does develop the Caucasus and Central Asia. Though Nabucco won’t cure Europe’s energy security, it will provide a natural gas source, especially for countries that were cut off during the disputes between Russia and Ukraine.

Q: Some people including me thought that, had events turned out differently in Iran, it might have become the needed source of natural gas for Nabucco. Are the post-election events in Iran a setback for Nabucco?

A: It had not been anticipated that Iran gas would be part of Nabucco. Our policy has been clear – we don’t think that Iran should participate in Nabucco now. We’ve reached out, but it takes two to go to the prom. I don’t know what impact events of the last few weeks in Iran will have. If we can resolve our nuclear issues, we might be able to resume normalized relations.

Q: There is as yet insufficient natural gas to support Nabucco. Are the Europeans getting the cart before the horse in terms of emphasizing the pipeline before having the gas?

A: This reminds me of the talk in 1998 and 1999. At that time, the talk was that there wasn’t enough oil for Baku-Ceyhan. Sure enough, BTC is up and going. The supply issue needs to be dealt with, but this agreement [in Ankara] will help push those issues.

Q: But BTC started off with a supply of oil in Baku. Nabucco starts off with none.

A: But there was also a lot of concern in the early years that there wouldn’t be enough oil out of the western Caspian. That “you are on a fool’s errand.” We stuck to policy, and it ended up working out. The Ankara ceremony is similar to those early days.

Q: Is Nabucco getting away from its original reason for existence, which was to provide Turkmenistan and the rest of Central Asia with a non-Russian transportation corridor?

A: If Iraqi gas can be part of the project, that would be great. Azeri gas will be absolutely critical to this project. Turkmen gas will also be important. It may come after Azeri gas.

Q: You speak as though you are confident that Turkmen gas will supply Nabucco.

A: There are going to have to be steps. I was in Ashgabad on Friday, and the president stated strongly and publicly that Turkmenistan wants to contribute gas to Nabucco.

Q: Is Nabucco more of a European issue than a U.S. issue?

A: It’s clearly a European issue. I think we have significant interests as well. They are, one, increasing overall production; two, creating diversity in the European supply and enhancing energy security. We want to see a strong Europe. And three, helping the development of the Caucasus and Central Asia.

Q: What about shale gas, which has been discovered in Europe. Isn’t that something that can help to substitute for gas from a Nabucco line?

A: The Europeans think that shale gas will be much more successful in the U.S. than in Europe.

Q: And LNG from Qatar and elsewhere? Can’t that serve Europe?

A: LNG will be part of it. We are strongly supporting the southern corridor. But it is still only one part of a puzzle. Alternative technology and LNG will both be part of the puzzle. Also the natural gas interconnections between the countries. It may be possible to get the pipeline sanctioned on the basis of Azeri gas.

Q: You are saying that the pipeline is financeable just on the basis of gas from Azerbaijan?

A: The companies and governments say the project is financeable. They are confident they will have enough gas. I am not in a position to say that the pipeline is financeable just on Azeri gas. The European Union has some money – 5% -- and the EBRD is also willing to get involved.

Q: What do you think about the addition of Joschka Fisher, the former German foreign minister, to the Nabucco team?

A: He’s a tremendously dynamic person. He’ll add a lot of vigor to Nabucco. It’s fascinating given the role that [former German Chancellor and Nord Stream Chairman Gerhard] Schroeder is playing. He has a tremendous reputation and lots of influence in Europe. He can help to unify Europe’s position.

Murder and Ramzan Kadyrov

The Washington Post's Philip Pan puts today's murder of Russian activist Natalya Estemirova within the context of a string of slayings of the foes of Chechen President Ramzan Kadyrov. Estemirova was among many who accused Kadyrov of running an exceptionally brutal and murderous regime.

For hours, the blogosphere has been replete with reports on Estemirova's kidnapping and murder, so all we do here is attempt some context. Just three days ago, O&G used the occasion of the five-year anniversary of another Russian slaying -- that of American reporter Paul Klebnikov -- to note the multiple forces in Russia that conspire to keep killers safe from justice. President Dmitry Medvedev has ordered a priority investigation into Estemirova's killing, but until now the Kremlin has been among the forces protecting murderers. Simply put, no major slaying that I can think of has been solved in Russia since the Soviet breakup.

The highest-profile critic of Kadyrov to be murdered was reporter Anna Politkovskaya, who was slain in 2006. Here are a few victims of just the last year: Umar Israilov, a former Kadyrov bodyguard, was shot down in Vienna on January 13. Six days later, Stanley Markelov, a lawyer who represented the family of a woman murdered in Chechnya, was shot dead in Moscow. Two months later, Sulim Yamadayev, a former commander in Chechnya, was killed in Dubai. Yamadayev's brother, Ruslan, a political rival of Kadyrov's, had been shot dead in Moscow the previous September.

That's a good start for any genuine investigation.

Exxon: Late, But Always the Bride

Exxon was late getting onto the Caspian in the 1990s, but it still ended up with pieces of prime real estate. On the Baku side, deputy Energy Secretary Bill White interceded to get it a piece of the offshore after Exxon stood on the sidelines while its rivals slugged it out. In Kazakhstan, even GOP heavyweight Jim Baker couldn't persuade Kazakh President Nursultan Nazarbayev to grant Exxon a piece of the ultra-supergiant Kashagan oilfield; Nazarbayev told Exxon the bidding was over. So Exxon simply bought Mobil Oil, which itself was one of the best old-fashioned horse traders on the Caspian and had grabbed huge slices of both Kashagan and Tengiz.

Yet none of that meant that Exxon had drunk the Kool-Aid on the Caspian. It was the only member of Big Oil present in Baku to refuse Clinton administration entreaties to help build the geopolitically minded Baku-Ceyhan pipeline.

It's a similar story with Exxon's announcement yesterday that it's investing up to $600 million in an algae-to-fuel venture with genetic biologist J. Craig Venter. I wrote about this for Business Week on-line today. Exxon waited until Shell, Chevron and others dipped their toes into algae, then dove in with Venter, the most famous private genomics scientist in the world.

Quite apart from the long-shot chance that the venture could actually succeed, Exxon benefits from being able to brandish an environmental pin on its lapel, and its association with an authentic biofuels rock star. As Deutsche Bank's Paul Sankey told me in an email, "I think it's part R&D, part PR." Venter himself needed the cash injection, and could earn $300 million from Exxon if he meets certain unspecified project milestones probably associated with the economics of the algae.

The announcement included an ominous note as well as far as I'm concerned. It was that Exxon took this step after a deep-dive evaluation of every alternative fuels technology currently being studied anywhere. Apart from algae, it determined that none of the other potential technologies -- not manipulation of microbes, not the use of yeast, not breaking down cellulose with enzymes -- would produce a commercial product.



Much is said about Exxon, but one indisputable thing about the company in my opinion is that it is deadly serious when it comes to studying how to do something, or how to do something better. Its execution and management of complex energy projects is unparalleled in Big Oil; that is the singular reason why it's so profitable. So if Exxon tells us effectively that, of the currently studied technologies, only algae is going to survive commercially, the opinion must be taken account of.

Nabucco is Signed; Europe Gets Comic Relief

Grist for geopolitical actors and commentators for almost two decades, pipeline politics is again the biggest item in Europe.

Today's papers are filled with photos and news on the signing ceremony in Ankara for the Nabucco pipeline, which is meant to reduce Europe's reliance on Russia and its natural gas. The Financial Times has gone the furthest, running a photograph of the ceremony across four columns on the top of page one. The FT leads with a half-answer to the question of where the gas will come to fill the politically minded line -- the news that Iraqi Prime Minister Nouri al-Maliki says he'll provide half the gas needed by the line, or 15 billion cubic meters a year, by 2015. Where and how he'll get that gas isn't made clear.

Nabucco, backed by the European Union and Washington, is vying against a proposed Russian natural gas pipeline called South Stream. Europe relies on Russia for some 25% of its natural gas, and there is concern that Moscow has or will use this market dominance as political leverage against members of the European Union. South Stream, it is said, will cement that hold on Europe even further, while Nabucco would add gas diversity. Russia says it's all nonsense, and that it is a reliable supplier.

But, as John Vinocur of The New York Times writes hilariously on his blog today, the real news comes from Germany, where it's the Showdown at the O.K. Corral for all-German gunslingers arrayed on either side of the pipeline debate.

As O&G and others have noted previously, former German Chancellor Gerhard Schroeder has raised eyebrows for some time for serving as Gazprom's pipeline representative in Europe. He is chairman of another proposed Russian line, called Nord Stream. Now, Schroeder faces a challenger: His former vice chancellor and foreign minister, Joschka Fischer. The venerable Fischer famously was a member of German radical groups in the 1970s before renouncing his past and becoming Germany's most popular politician, and now has been hired by two members of the Nabucco consortium.

Vinocur writes that this matchup is playing in Germany like Ali-Frazier. German bloggers are abuzz over the development. In an editorial, the left-of-center Süddeutsche Zeitung presents the rivalry between the pipelines “as something akin in the view of Europeans to the struggle between good and evil.”

There is much doubt that either pipeline will end up being built. Meanwhile, get out the popcorn.

Post-Mortem on Obama in Moscow: The Greater Attractions of a Harley

The Wall Street Journal's Jonathan Weisman today puts together the four major policy speeches that President Barack Obama has made abroad -- in Cairo to a Muslim audience; in Prague to Eastern Europeans; in Ghana to Africans; and now in Moscow to Russians. Weisman's takeaway is that Obama is combining "tough" and "love" overseas -- respect for other cultures with demand for concessions on big issues.

I myself noted that Obama didn't get much traction in Moscow. My former Washington Post colleague Masha Lipman regards it as an important speech, and speaks similarly to Weisman in terms of Obama's message in Moscow. "Obama was delicate and subtle, as well as firm and concrete," she wrote in the Post.



Lipman suggests that one reason the speech went under-appreciated in Russia is that it wasn't broadcast live. Russian commenters to her column helpfully provide a link to the translated Russian broadcast of the speech on state-owned Vesti-24. Here is the full broadcast for Russian-speaking readers.



Finally, Lucky Barker, a Lipman commenter with a wicked sense of humor, poses the possibility that Obama was simply upstaged. As it turns out, Prime Minister Vladimir Putin followed his breakfast with Obama that morning with a televised visit to a local biker's club.

The Murder of Paul Klebnikov, and a Tormented Juror

Ellen Barry of The New York Times weighs in today with an interesting five-year anniversary story on the assassination of Forbes correspondent Paul Klebnikov, the New York native who was shot in the back as he walked to the Metro across the street from his office. The angle is an interview with Alexei Rybin, a juror in the 2006 trial that acquitted three suspects. Rybin is tormented because he believes that guilty men went free.

The trial itself seemed destined not to produce an objectively reached verdict. In one passage, Barry describes jurors watching from a window "as a witness fled the courthouse pursued by five men in masks, then was tackled, handcuffed and put in the back of a van."

The piece describes the multiple forces that confound justice. Yes, Russia is still unaccustomed to the jury system, and politics infuses and interferes with jurisprudence. In addition, there is much speculation that the jury was tampered with -- for instance, neighbors of the jurors whispered in their ears that the men were innocent, and they apparently listened.

With President Barack Obama in Moscow last week, the Russians agreed to a joint investigation with U.S. detectives in the case. Yet, a little over a week earlier, Petros Garibyan, the highly skilled investigator of the murders of both Klebnikov and journalist Anna Politkovskaya, wrote a letter telling Klebnikov's lawyers that their probe was over. At the New Yorker, Keith Gessen writes about the problems with both the Klebnikov and Politkovskaya trials.

As we've discussed here previously, as well as in Putin's Labyrinth, Prime Minister Vladimir Putin has at minimum enabled the system of unpunished murder, and President Dmitry Medvedev isn't willing to challenge him on it.

Guest Column: Scott Horton on the Pirate of Prague and the Conviction of a Handbag Maker

O&G is delighted to publish a guest column from Scott Horton on the trial of Frederick Bourke in the late-1990s scheme to bribe Azerbaijani leaders to sell Socar, the state oil company. As he explains, Horton has some first-hand experience with the case stemming from his representation of some unrelated parties. I first met Horton more than a decade ago in Tashkent, and have turned to him on numerous occasions for exceedingly reliable judgment on events across Central Asia, the Caucasus and Russia, including in the preparation of The Oil and the Glory. Horton is a contributing editor at Harper’s Magazine, where he writes the No Comment blog, and an adjunct professor at Columbia Law School. He has also regularly consulted with and appeared as an expert witness before the House Judiciary Committee on Justice Department oversight matters.

A jury in Manhattan rendered a split verdict yesterday in the trial of the handbag king Rick Bourke on charges arising from an investment scheme in Azerbaijan with the notorious “Pirate of Prague,” Viktor Kozeny. He was convicted of violating the Foreign Corrupt Practices Act (FCPA) and making false statements to investigators about the matter. He was acquitted on money laundering.

I followed this matter from close up. As a lawyer, I was asked to come in and direct an investigation of Kozeny’s scheme for a client, and in the course uncovered a large-scale fraud that Kozeny had worked on people who bought Azerbaijani privatization securities from his Minaret investment bank. I was involved in a series of suits against Kozeny on behalf of some of his victims and secured attachments of some of his property. I had no involvement in the matters that were the subject of the Bourke case, but I know and have met many of the witnesses who testified in the case.

In The Oil and the Glory, you gave us a good view of how the Caspian littoral attracts elements of the business world who operate on the fringe of legality, and sometimes cross the line. They play off the shadowy legal environment that pervades the region, and work with the assumption that the will of those in power (regularly the targets of their blandishments) will protect them from any form of legal accountability. But one of the problems with this calculus is revealed by this prosecution: the FCPA in the United States and comparable anti-corruption legislation in other developed states makes it a crime to offer payments to secure business or the continuation of business from a foreign government official. The Bourke case offered a fascinating and rare glimpse into the sort of dealings that are commonplace in the region.

Even though it secured a conviction, the prosecution did not make out a strong case linking Bourke to the corruption. Some of the arguments made focused on Bourke’s wealth and suggested that his desire to profit by investment in Azerbaijan was unseemly. The government’s case was at best oblique. It charged that Bourke invested with Kozeny, that Kozeny and his agents did the bribing, and that Bourke knew about it. Therefore Bourke, the investor, was just as guilty as Kozeny. The key evidence presented by the government came from Swiss lawyer Hans Bodmer and adviser Thomas Farrell, two of Kozeny’s agents who worked out a special deal with the government so they could escape serious punishment for their role in the alleged affair. But evidence adduced in the trial showed that neither of these witnesses could possibly have had the meetings they described with Bourke in which they purport to have confirmed his knowledge of the fraud. Amazingly, that didn’t stop the government from putting forward their dubious testimony.

If you follow high-profile prosecutions around the country now, you know that there has been an epidemic of crooks giving evidence to help out prosecutors that cannot possibly be correct. Their motivation is pretty clear: For giving the evidence, the prosecutors let them off the hook for their own crimes, or let them cut a deal. Of course, these are indispensible tools that enable a prosecutor to build a case. But the rule is that the prosecutors shouldn’t be offering prizes to induce people to give false evidence. That’s a rule that doesn’t appear to be closely adhered to. Increasingly, the attitude is “victory at all costs” and indifference to the truth. Being scrupulous about ethics and evidence does not appear to advance prosecutorial careers, particularly when the Justice Department has developed a consistent pattern of failing to enforce its own ethics guidelines. (In an article in the current ABA Journal, for instance, the Justice Department’s ethics arm — the Office of Professional Responsibility — is labeled the “roach motel” because “the cases go in, but nothing ever comes out.”)

It puzzles me that the government was able to get to the jury with this evidence, but I am sure there are pieces of the story I do not know. Still, I am not surprised that it was able to wrangle a conviction. A jury, especially in these times, is likely to strike out against a person of wealth and privilege it suspects has been involved in some corrupt dealings. That leads me to doubt that the convictions will stand following an appeal; indeed, the trial judge may have to test closely whether the evidence really supported the verdicts. But those are questions for the lawyers.

Now the government has its conviction, but I still think we should all be troubled that the government ever brought this case. I’ll give you three reasons why it never should have been brought.

First, the real, unquestioned malefactor in this matter is Viktor Kozeny. He masterminded the scheme, implemented it, and defrauded the other investors like Bourke in the process. But today Kozeny is sunbathing at his beachfront estate in the Bahamas. And two of the individuals who were his key agents in implementing the scam – Bodmer and Farrell – are getting off very lightly, because they offered evidence (which I believe is almost certainly untrue) that helped the government get a conviction against Bourke. One of the victims of the scam – Bourke – is facing a prison term. Doesn’t this strike you as a strange outcome?

I think Kozeny is an absolutely brilliant scam artist — one of the greatest of the last century — and I am convinced that when all is said and done, we will discover that the single greatest con he ever pulled off targeted the prosecutors who brought this case.

Shortly after the fraud was uncovered, Kozeny engaged as a lawyer James Nesland, an alumnus of the Southern District attorney’s office, for the express purpose of whipping the prosecutors in New York into a lather and sending them after his own victims. Kozeny coupled this with a threat to investors that if they pursued claims against him, they would find themselves the targets of federal prosecutions he was going to launch. In fact, Kozeny and his high-paid lawyers effectively implemented this strategy, and the federal prosecutors in Manhattan were like so much moist clay in his hands.

As they case proceeded, they paid no real attention to Kozeny and the actual perpetrators of the fraud. Indeed, a state prosecutor working on the case told me that it was “impossible to get the feds to pay attention to Kozeny,” and that they were “bizarrely fixated on bagging a big Wall Street investor, whether there was evidence for it or not.” That pretty much aligned with my own observations of their conduct. They poured all their attention into Kozeny’s victims, driven by Kozeny’s self-serving claims that the victims knew of and were full participants in the scam. And this explains in part why Kozeny is soaking up the rays today, while a man that Kozeny fleeced out of millions faces sentencing.

Why would young prosecutors rise to the bait? Why would their supervisors let them? That would require us to look behind the impenetrable veil of prosecutorial discretion, which cloaks an awful lot of misconduct these days, as House Judiciary Chairman John Conyers has noted. But if you understand how the internal politics of the Justice Department works, you can understand how they were scammed. The pitch put to them was simple. Going after Kozeny would be an old-hat fraud claim. Nothing new. Nothing exciting. No breaking of new ground. But charging the co-investors would allow a young prosecutor to make his reputation — it would be an opportunity to break new ground by establishing the secondary liability of co-investors. And Justice had long been looking for the right case on the back of which the principle could be established. Kozeny offered up the bait, and the prosecutors in Manhattan fell for it.

In this respect, Kozeny is a lot like Sir Edmund Backhouse, the great charlatan-fraudster of the early days of the twentieth century, who was the subject of a psychological biography by Hugh Trevor-Roper called A Hidden Life. Backhouse ended a career of breathtaking frauds without ever facing a prosecution, or even a criminal inquiry. How? As Trevor-Roper noted, he was always careful to study the government with care, to offer it something, to enmesh it in an embarrassing or compromising manner in his scams. He always offered the government another fish, easier to grab, and somehow a more satisfying catch. And most importantly, Backhouse fully understood the world of petty bureaucratic vanities and played it to his benefit, masterfully. But Backhouse should move over. Kozeny has greatly outdone him.

Second, in international law we have a defense call tu quoque which would, in a world governed by sounder principles of justice, have stopped this prosecution in its tracks. The word means “you do it too.” And the point is simple. The conduct that the government is criminalizing in this case through the prosecution of Bourke is conduct in which the very government that brought these charges openly and flagrantly engages. I’ve been studying the course of U.S. government contracting, particularly associated with the Department of Defense, over the course of the eight years. I don’t know whether Kozeny actually bribed Azerbaijani government officials in an effort to gain control of the State Oil Company of Azerbaijan. But I do know that agents acting with the authority and approval of U.S. Government bribed officials of foreign governments in connection with a series of schemes to acquire and develop military installations in Central Asia. I’ve studied these cases in some detail, and shared some of my research with NBC News and the New York Times. The evidence is unequivocal that, for instance, in the case of the Manas base in Kyrgyzstan, Defense Department agents granted multimillion-dollar no-bid contracts to the family of the Kyrgyz president to induce him to grant the base concession. It was a flat out violation of the FCPA. An FBI investigation into the matter was squelched. I’ve seen comparable corrupt deals involving the United States government in at least five other countries (Uzbekistan, Iraq, Kuwait, Jordan and Turkmenistan). In fact, I’d say that in audacity, the Kozeny schemes pale in comparison with those carried out by Uncle Sam, with utter impunity.

The message that the Justice Department is sending us is pretty clear: Foreign corrupt practices are an exclusive preserve of the U.S. Government. Copy our own conduct, and we’ll prosecute you. After all, we’re shameless.

The point here is that if the United States is going to enforce the FCPA (and I believe it should vigorously enforce the statute), its enforcement shouldn’t be selective. And it should start with agents of the U.S. Government because they have in fact been involved in the highest profile FCPA violations in the last decade; and the impunity surrounding their conduct brings cries of contempt and hypocrisy down on the United States. But of course, bringing a case that involves high ranking officials of the Bush era would not be a smart career move for a young prosecutor in Manhattan.

Third, this case reflects a false allocation of precious prosecutorial resources. The case was developed over the last six years. During that period of time, the “sheriff of Wall Street,” as the U.S. Attorney in Manhattan is known, failed to bring a single enforcement action looking into any of the massive frauds and gross malpractices that brought the nation’s financial community to the brink of depression. The case of Bernie Madoff, which was repeatedly flagged and blown off, is a telling example.What were Manhattan prosecutors doing at this time? They deployed the prosecutorial equivalent of the Red Army in a very dubious effort to take down (and that’s the only word for it) the Governor of New York, Eliot Spitzer, over the fact he was visiting a prostitute. And they brought cases like the Martha Stewart and Bourke prosecutions, which seem designed to advance the careers of individual prosecutors, not to do substantial justice. In the course of the last century, the public has never been so poorly served by its federal prosecutors as today. Their mercurial, irresponsible conduct is a big part of our current problem. The U.S. Attorney’s office in Manhattan, just like Main Justice, is in extremely bad need of adult supervision.

But on balance, criminal inquiry into the scams in Azerbaijan was a good thing, and prosecutions may well have been warranted. Here we witnessed a very bad exercise in targeting. Are the prosecutors trying to send a message that investment in developing markets has a new risk element — risk of prosecution because a fraudster is also involved in the marketplace? That can’t be a proper policy, because we should be promoting the global movement of investment capital — that’s essential to holding New York’s position on the global financial markets.

Frederick Bourke Convicted in Pirate of Prague Oil Bribery Case

Viktor Kozeny -- mastermind of an infamous late-1990s scheme to buy Socar, Azerbaijan's corruption-ridden state oil company -- is sitting free in the Bahamas, which refuses to extradite him to the U.S. As O&G readers recall, Fortune magazine dubbed the Czech national "the Pirate of Prague" for his history of dissatisfied investors. In any case, absent the chance to try anyone else central to the scheme, federal prosecutors threw the book at Frederick Bourke, co-founder of handbag maker Dooney & Bourke, who invested $5 million in the deal. Yesterday, a federal jury convicted Bourke for conspiring to pay bribes. The judge said she will sentence him to less than 10 years in prison.

The deal to bribe then-Azerbaijan President Heydar Aliyev went bad, mainly because Socar was never truly for sale; it was a scam. As for guilt, Bourke and a slew of other leading Wall Street investors certainly could be convicted of greed and stupidity – it was obvious to anyone with even passing knowledge of Azerbaijan that Aliyev would never sell even a sliver of Socar, his cash cow.

Blogger Christopher Fountain is having fun at Bourke’s expense, but the lawyers over at Cassin Law, who write the FCPA blog, say Bourke was a victim, not a culprit.

Pipeline Politics: Europe's Stubbornness, and the Virtues of Shale

On the heels of the Obama-Medvedev-Putin summit, five nations will sign what they are calling a breakthrough agreement for a long-troubled natural gas pipeline meant to change the energy equation in Europe. That's code language for reducing a perceived threat of increased Russian influence on the continent.

As Sylvia Westall and Orhan Coskun at Reuters suggest, don’t crack the champagne yet.

The background is this: Washington and the EU are troubled by Russia's domination of Europe's natural gas market; Gazprom provides some 25% of the gas supply, and the West perceives that Moscow will use that market power for political advantage. Russia denies any such intention. Yet the West's persistent concerns are the logic behind Nabucco, a proposed pipeline that would help to diversify Europe's gas supply.

Turkey, Bulgaria, Romania, Hungary and Austria – countries through which Nabucco would pass – will be the signatories to the agreement Monday. Though Nabucco’s devisers have been struggling for years, the formula for building a pipeline is actually quite simple: If you have a sufficiently large reserve of natural gas, financiers will probably pay for the construction of a pipeline to sell it. Conversely, if you lack that gas, bankers will tell you to come back when you get some.

The latter is the situation for the European Union and Washington, Nabucco’s primary backers.

Turkmenistan – originally, Nabucco was meant to build on U.S. efforts to provide Central Asia with an alternative transport route to Russia – has balked at contracting with any serious western players for any fields on-shore, where the large volumes of natural gas are situated. Azerbaijan -- a possible backup player until Turkmenistan possibly changes its mind – last week signed a deal with Russia for its volumes from the super-giant Shah Deniz field.

The re-election of Mahmoud Ahmadinejad, and the bloody crackdown that has followed, suspends hopes for the medium term at least for Iran becoming that source of natural gas. Iraq is also mentioned, but that’s only a reality in the event of a deal between the Kurds and the central government, a long-shot indeed. The question is why the pro-Nabucco forces persist in pushing on a proverbial wet noodle. While the physics of inertia carry them forward, they might pay attention to other developments acting to diversify Europe’s natural gas.

As No Hot Air blogs, one is new technology that makes shale gas possible and economical to extract from convenient places like Germany, Hungary and Poland. Closer at hand in terms of availability is liquefied natural gas, which has come on stream in large volumes out of Qatar; but Europe must build the infrastructure to handle it.

Will Europe and the U.S. shift their focus to these very real alternatives?

Iran: Politics and Stirring Up Internet Cyberspace

By Sasha Meyer

A recent op-ed piece in the San Francisco Chronicle urges the Silicon Valley to help the Iranians. The author, Cyrus Farivar, suggests providing censorship-free Internet access by means of terrestrial or airborne base stations deployed near Iran's borders. Farivar is on the right track – Silicon Valley can and should help. But this particular approach might not work.

The reason is that the adjacent countries are either war zones or run by governments that might not be keen on hosting such facilities. As their reaction to the outcome of Iran’s June 12th president election suggests (they all promptly congratulated Mahmoud Ahmadinejad on his official re-election), their view seems to be that the crackdown is an internal issue. Thus they would likely avoid involvement in a project that would support the reformers.

What way might work? The Silicon Valley, Western NGOs and the general public could lease bandwidth from Google-backed O3b Networks, a satellite Internet company, give it to users in Iran, Afghanistan and Central Asia, and pay for it themselves via crowd funding. The rationale for doing so regionally rather than focusing on a single country is twofold: It would create disincentives for any single government to tamper, since that might upset its neighbors. Likewise, some of the countries are inextricably linked to a larger foreign policy puzzle, which also could discourage interference.

O3b's service, slated to start next year, will cover the Earth's surface up to 45 degrees north of the Equator. That includes all of South and Central Asia, except the northern parts of Kazakhstan. Although the initial focus is on providing up to 10 Gbps to local telecoms, plans also include 2 Mbps connectivity for consumers equipped with a 0.5-1 meter dish. That is a size possessed by many ordinary residents of the region.

Google and O3b emphasize that the service will be affordable, so it might be feasible to pay for it via online fund raising, a strategy that has proven successful in recent elections elsewhere. A complementary method could be the click-to-give ad-supported route used effectively by sites like HungerSite. Hollywood stars might be willing to help promote the effort, since they are championing an increasing number of causes.

Secondly, the Western public can help develop an inexpensive DIY (do it yourself) satellite modem for use with O3b services. An efficient and efficacious approach would be an open source hardware (OSH) project. The term refers to the engineers and tinkerers who are doing for electronics what programmers have done for software – creating free and open source products like Firefox and Linux to collapse the cost of innovation. They create and share devices by posting all the schematics and know-how online for anyone to use and modify.

Clubs like NYC Resistor and HacDC engage in OSH projects, and companies – Bug Labs, Adafruit and Arduino – make OSH products. The public can call on these modern day mad scientists to design the modem and fund the project via the Open Source Hardware Bank, which opened earlier this year.

The response in the region (at least among Central Asians) is likely to be positive thanks to a strong DIY mindset there, stemming from a combination of reasonably high educational levels and low incomes.

One promising idea that OSH talent could pursue is software defined radio (SDR). In a conventional radio, all the processes are handled by single-purpose circuits whose functionality can't be altered or upgraded. Hence the high cost and the need for a multitude of radio gadgets – the walkie-talkie, the garage door opener, FM radio and so on – that all look and work differently. With SDR, you have a multifunctional radio device because most of the work is done through software. It can seamlessly switch from one function to another by simply starting up a different piece of software. Upgrades are not just possible but are easy. As a result, SDR can cut costs by 90%.

Not surprisingly, this approach has been embraced by big players like Nokia, Samsung and Intel. But it's the grass roots efforts that are most relevant here, such as the USB device developed by a team led by Matt Ettus. It's a universal radio peripheral that can work as a GPS receiver, TV decoder, GSM base station and radar. Presumably, one would need just another piece of software to turn it into an O3b satellite modem.

Finally, as described here in a previous post, the Americans and Europeans could lobby their governments to build a satellite that would bring a massive amount of bandwidth to the region, much as Japan is doing for East Asia and the Pacific.

Obama in Moscow: A Cool Reception, and a Dose of Putin

President Barack Obama employed his signature moves -- the candid town hall address; the glamorous wife and daughters -- and to be sure Russian President Dmitry Medvedev seemed to lap it up. But in the end Russia is not Cairo, nor Berlin. This is not 1994, when then-President Bill Clinton led some Moscow women to swoon. In place of the intrigued, still-fascinated eyes of the 1990s, Obama was met largely with disinterest from the Russian public, and the wagging finger of Prime Minister Vladimir Putin in private. In short, he fell flat.

That's a dose of reality. In the best of times, on most topics, the best that can be expected in a U.S.-Russia relationship is probably respectful disagreement.

“We don’t really understand why Obama is such a star,” 25-year-old Kirill Zagorodnov, a student at Moscow's New Economic School, told Clifford Levy and Ellen Barry of The New York Times. “It’s a question of trust, how he behaves, how he positions himself, that typical charisma, which in Russia is often parodied. Russians really are not accustomed to it. It is like he is trying to manipulate the public.”

Stefan Wagstyl of the Financial Times heard the same story from the students he collared after Obama's speech at the school yesterday. But Nikolai Petrov of Moscow's Carnegie Center also cautioned Wagstyl not to go too far with his analysis: "These students are not typical. They are mostly mathematics specialists," Petrov said.

While this slap of reality was telling, probably the most important meeting of Obama's Moscow trip was his two-hour breakfast with Putin. By Wagstyl's description, it appears that Putin put on one of his bravura performances. Putin has been wowing Westerners for years with his three-hour, no-notes discourses on Russian affairs at the annual Valdai Discussion Club. Now Obama got a taste of Putin's presence of mind.

Obama's takeaway? Putin is "tough, smart, shrewd, very unsentimental, very pragmatic." And also in charge.

U.S.-Russia Summit: Warmer Temperatures in Moscow

The chief takeaway of the U.S.-Russia summit is that it's been all upside, and no downside, for the leaders of both countries: Russian President Dmitry Medvedev got to tally up respect points from hanging out and negotiating nuclear arms reductions with President Barack Obama; and Prime Minister Vladimir Putin got to stare fiercely at the American president (video). From Obama's side, he got to take down the temperature with Moscow, Washington's loudest European critic.

Yet nothing that happened in Moscow shifts the shape of world events as they were when Obama arrived there. For instance, the two sides could do nothing to change the direction of events just south of Russia, in Iran.

The State Department has denied that Vice President Joe Biden has given Israel the go-ahead to fly over Iraq and attack Iran. That's not what Biden meant when he said in an interview Sunday that the U.S. won't stand in Israel's way were it to attack Iran, the State Department asserts. In the closing weeks of his presidency, George W. Bush refused to grant such permission. An Iranian official replies that Tehran will mount a "real and decisive" response to any such attack.

This could be mere brinksmanship. Israel itself is pushing the U.S. to put together a fresh set of "crippling sanctions," according to Michael Crowley at The Plank.

Ria Misra at Inside Politics suggests that an ideological split that's just become public in the religious center of Qom "may be the critical leverage that finally forces not only the overturning of the [June 12 presidential] election results, but maybe of the ayatollah as well." She is talking about a critical statement issued Sunday by a reformist clerical group called the Association of Scholars and Researchers of Qom Seminary. Kathy Kattenburg at The Moderate Voice is also impressed with the development.

This could be another bout of getting carried away, as pundits and the media did leading up to the Iranian election. In fact, as Najmeh Bozorgmehr reports in the Financial Times, the most powerful clerical group in Qom, the Society of Scholars of Qom Seminary, issued a simultaneous statement congratulating Iranian President Mahmoud Ahmadinejad on his official re-election.

Meanwhile, opposition leader Mir Hosein Mousavi's outspoken appearance yesterday in public -- the first time he has been publicly cited in three weeks -- is bound to stir up more turbulence. That will offer up a chance for Obama and Medvedev to exercise their new-found camaraderie.

Obama, Medvedev and Obduracy in Moscow

Look for presidents Barack Obama and Dmitry Medvedev to emerge from their long hours of summitry this week massaging each other's shoulders, and riffing on their personal chemistry. While expressing the usual caveats, Prime Minister Vladimir Putin will probably do the same. They will carefully avoid the soul-gazing verbage of George W. Bush, but the meaning will be similar.

That diplomatic lubrication won't make either side yield on the respective postures that mainly irritate the other side: Despite the knowledge that a U.S. missile defense system planned for Poland and the Czech Republic doesn't work, Obama isn't going to outright renounce its deployment, not without a fairly serious tradeoff from Moscow (and it's hard to imagine what that would be); and Medvedev won't relinquish Russia's insistence on a continued sphere of influence that includes the Caucasus, Central Asia and Ukraine, even if Obama outright cedes the right of Georgia and Ukraine to join NATO, which one can't picture him doing.

Certainly Obama isn't going to drive a wedge between Medvedev and Putin, nor drive the prime minister from influence, as seems to be the push in Washington. Obama should get accustomed to the apparent fact that Medvedev and Putin simply see eye to eye -- perhaps by necessity -- on most subjects.

Perhaps this is as it should be. My Business Week colleague Jason Bush and I write in this week's magazine on the business agenda for the summit. But in traditional Washington-Moscow relations, progress is made on the edges of obduracy. And in fact neither side wants much from the other. Washington would like more Russian cooperation on its initiatives; Moscow would like more respect.

On Obama's Plate in Moscow: Iran and Breakfast With Putin

The philosophical underpinning of President Obama's arms-control agenda in Russia next week is that -- by allowing Moscow to preen on-stage, reviving its former role as a superpower state, ostensibly regulating peace in the world -- Russia will be more amenable to persuasion on other topics.

But does this reasoning hold? Will Moscow see things Washington's way on the Caspian, on Georgia, and on the balance of petro-power in Europe?

More important at the moment, could Moscow decouple from Iran, with which it has maintained an alliance of poking-fingers-in-the-U.S.-chest? Now that the chances for a game-changing U.S. opening with Iran have been all-but eliminated by the after-election crackdown in Tehran, is there anything to be done before Israel, for instance, decides it can no longer wait for Iran to become a nuclear state?

I've surveyed some old Russia and foreign policy hands from the George W. Bush and Clinton administrations, and the answer comes back that, at least on Iran, Moscow either can't or won't be able to help restrain Tehran. As for petro-power and the Caspian -- Moscow is capitalizing on the global financial crisis to re-assert power in its struggling neighborhood, and will push back on any attempt to deny it regional domination.

Steve Sestanovich, ambassador-at-large for the former Soviet Union under President Clinton and now a senior fellow at the Council on Foreign Relations, told me that Moscow is already effectively cooperating with U.S. aims on Iran -- while it committed to finishing Iran's Bushehr nuclear reactor and providing S-300 missiles, Moscow for years has failed to deliver either. "Their policy is to avoid annoying anybody too much," Sestanovich says. "The middle ground allows them to make a lot of money. And they hold in reserve a role as a possible diplomatic mediator if the U.S. or Iran indicate they are reconsidering their position."

Georgetown Professor Angela Stent, a former State Department and National Intelligence Council expert on the region, just got off the plane from Moscow yesterday. She says that Russian officials and experts have a mixed view of Iran -- the latter say that Russia can live with a nuclear Iran, just as it lives with a nuclear Pakistan and India; and the former say they don't believe that Tehran is anywhere near obtaining nuclear capability.

Whatever the case, seeking Russian help on Iran is misguided, Stent suggests. "Russia doesn't have the power to deliver Iran," she says.

A former Bush administration official who preferred to speak not for attribution said that any stiffer sanctions -- even if the Europeans and Russia were to agree -- "would not work quickly enough." "They are on the threshold" of nuclear capability, this official said, and this again raises the possibility of an attack by Israel on Iran.

Interestingly, Obama administration officials still talk of the possibility of negotiations with Iran. That seems to ignore political reality both in Iran -- Sestanovich notes that Iranian officials themselves seem publicly at least not to welcome further talks -- and the U.S., where Obama could face a buzz-saw of criticism should he be seen as equivocating after the bloody aftermath to the June 12th Iranian presidential election.

Obama will spend some 10 hours with President Dmitry Medvedev while in Moscow. But on Tuesday, Obama is also going to have a private breakfast for an hour or an hour-and-a-half with Russian Prime Minister Vladimir Putin.

Obama told The Associated Press that Putin "has one foot in the old ways," while Medvedev understands "that the old Cold War approaches to U.S.-Russian relations are outdated." This is a nice public relations setup, but not likely to result in any progress -- Medvedev has done nothing so far to indicate any separation from Putin on foreign policy, and there's no reason I can think of to believe that he will.

The former Bush administration official asserted that Obama shouldn't dignify Putin's behind-the-curtain grip on power by spending time with him; technically speaking, only Medvedev is on the same protocol level, this thinking goes. For that reason, this former official told me, Bush didn't meet with Putin once he was no longer president and began serving as prime minister. That's technically correct but disingenuous. In fact, just prior to Putin's stepping down, Bush violated his own rule precluding meetings with other heads of state unless there was a concrete deliverable to be achieved: Bush did so by flying out to Putin's vacation home at Sochi, hence delivering much prestige to the Russian leader but nothing for the U.S.

Stent says rightly that it's not realistic to ignore Putin. "To move the agenda forward, you have to meet with both of them," she told me. "It wouldn't make sense not to meet with Putin."

Indeed, rolling back a few years earlier, when Bush's father went to Moscow as U.S. president, he met with both Soviet leader Mikhail Gorbachev and his antagonist-for-Soviet-power, Boris Yeltsin, who was then the mere president of the component state of Russia.

Putin is not ignorable, any more than Russia, as usual, keeps itself in the diplomatic game by its willingness to play the outsider.