The Oil and Glory Interview: Hugh Pope on the Armenia-Turkey Rapprochment

In October, Armenia and Turkey signed protocols that -- if ratified by their respective parliaments -- will open their shared border and in multiple ways normalize relations between the two traditional antagonists. Given the region's numerous nationalist rivalries, the move has triggered much thinking on what it means, and what else is possible. Hugh Pope, a friend and former colleague at The Wall Street Journal and now director of the Turkish project for the International Crisis Group, is one of the best authorities on the greater Turkic world. Hugh has a new book coming out -- Dining With al-Qaeda -- that sounds like a keeper. In exchange for dinner at my home last week, he kindly agreed to address some of the burning questions on the Armenia-Turkey accord.


O&G: Will the Turkish and Armenian parliaments ratify the agreement?

Pope: The parliaments will ratify the agreement on the protocols (normalization of diplomatic relations and opening the border) if Turkish Prime Minister Erdogan and Armenian President Sargsyan recommend them to. The most interesting aspect of the protocols is in fact how little dispute there is between the two governments about the actual contents. The main problem is domestic, mainly from political opposition (on both sides to different extents), the diaspora reaction (for Armenia) and the Azerbaijani factor (for Turkey, which has a shared ethnic relationship with Azeris and cheap gas from Baku). All these three problems can be overcome if the two leaders can demonstrate the same firm political will that they have done in the past.

Turkey must also look to its own needs, delinking its policy from full association with Azerbaijan's own perception of its short-term interests. In fact, the protocols are a good way to help spread stability in the region, which will be in Azerbaijan's long term interest, and Turkey’s keeping the border closed since 1993 has done nothing to solve Nagorno-Karabakh. Similarly, Armenia must distance itself from the nostalgic desires of members of the diaspora and some of its own population, who seek to keep alive territorial claims on Turkey by not recognizing the international border. Outside support is also vital, and continues, and this is also a source of hope that ratification will go ahead.

Q: Step back, Hugh. What is the significance of the agreement regionally, historically and so on, whether or not it is ratified? Are you surprised?

A: The protocols represent the best chance for two traumatized peoples to achieve closure on the politicized debate whether to recognize as genocide the destruction of much of the Ottoman Armenian population and the trauma of the collapse of the Ottoman Empire and its accompanying displacement and massacres. Both sides have tried the all-out nationalist narrative, and it has not healed the wounds of history.

The second significance is the positive example being set by the Turkish government since 2002 to grapple with subjects that until recently were completely taboo and to overcome historical problems. They’ve gone a long way to fixing their problems with Syria, Iraq and the Iraqi Kurds, and are also working on an opening to Turkey’s own Kurds and on finding a settlement for the divided island of Cyprus.

The dynamics supporting Turkey-Armenia convergence are strong, I believe. The agreement on the protocols is the latest and broadest indication of a process that started in 2000 with the first meeting of Turkish and Armenian academics in the US. This was followed by meetings by retired officials and senior academics in the Turkish-Armenian Reconciliation Commission, and then in years of secret talks between Turkish and Armenian diplomats.

In Turkey, this bilateral process has been accompanied and even led by the great 2005 meeting of Turkish academics rejecting the old denialist narrative about the Ottoman-era massacres of Armenians in the First World War, and the wave of regret and awareness in Turkey that followed the murder of Turkish-Armenian journalist Hrant Dink in 2007. In Armenia and the diaspora, there has been some reaching out to Turkey too, as increasingly more people believe that dialogue can bring greater Turkish appreciation of the pain suffered by Ottoman Armenians during the World War I, an apology, and perhaps some compensation.

Opening the issues of the pre-1923 period is a Pandora’s box for Turkey, however. A significant portion of the population of modern Turkey is descended from Muslims driven bloodily out of the Balkans, the Caucasus and the Middle East as the Ottoman Empire collapsed, resulting in family dramas that up to now have rarely been discussed. Although often only tangentially related to the Armenian question, it make some Turks ask, what about our own traumas?

Q: Does the agreement say anything about the times in which we live? For instance, could we expect other stubborn animosities to cool for the sake of pragmatism?

A: The agreement on the protocols do show unfortunately that it takes a long time to heal the wounds of conflict and massacre, especially when one side is much weaker, when territory is contested and when the two sides have no joint project with which to help the healing process (impossible between Turkey and Armenia as states during the Soviet period, of course).

Perhaps the most interesting aspect of the agreement was the beneficial effect of Russia, France and the U.S. working together. Of course, Moscow and Washington have different objectives, but they both support Turkey-Armenian normalization, and if their foreign ministers hadn’t been in Zurich on Aug. 30, the signing of the protocols may never have happened.

Q: What type of reaction do you expect from Azerbaijan? If a military one, would its performance on the battlefield be better than in the early 1990s? And whatever the case, wouldn't such an Azeri reaction scuttle the deal?

A: Great powers must make it very clear to all sides that any renewal of hostilities to try to derail the ratification of the protocols is unacceptable. Azerbaijan is currently working hard to legitimize its right to territorial integrity, while its president is frequently talking about the use of force to regain lost territories. Clearly, the Azerbaijani army is better armed and better trained than in the early 1990s, when it only had barely-coordinated militias. But Armenian and Karabakh Armenian forces control the high ground, they have had nearly two decades to dig in, and have everything to lose.

Any military offensive would be risky for the Azerbaijani government. Firstly, it might not succeed, and any reversal would be politically disastrous. Any attempt to reclaim territory by force is likely to be met by a massive military response and lead to a rapid extension of the conflict throughout the region. Secondly, the world would identify Azerbaijan as the initiator of hostilities, whereas it currently has some sympathy as the loser from the 1992-1994 Nagorno-Karabakh conflict -- that is, defending its territory integrity according to international law.

The worst problem is that a military flare-up could happen without anyone actually deliberately choosing the time. Some 3,000 people have been killed in and around Nagorno-Karabakh since the 1994 ceasefire. Bored, armed young men are within 20 meters of each other in places, snipers are active, and the international observer mission is tiny and weak. Bellicose rhetoric influences people’s minds, and raises the risk of a renewed outbreak of violence.

Q: Do you expect a deal settling Nagorno-Karabakh, and if so what will it look like? If not, why not?

A: The Madrid principles laid down by the Organization of Security and Cooperation in Europe (OSCE) Minsk Group, co-chaired by the U.S., Russia and France, are still the best roadmap anyone has for settling the Nagorno-Karabakh conflict. These foresee the return of occupied territories around Nagorno-Karabakh; interim status for Nagorno-Karabakh itself; a mechanism to decide the final status of Nagorno-Karabakh; a secure corridor between Armenia and Nagorno-Karabakh; the return of displaced persons; and international peacekeepers and security guarantees.

The Turkish activism of this year has energized the Minsk process somewhat, and at times it seemed as though a deal might be possible. Unfortunately, the core issue – the future status of Nagorno-Karabakh, the procedure leading up to that final status, and whether it will have the right to secede from Azerbaijan even in a distant future – has proved just too raw and political a subject for either government to make compromises on.

Turkish and Armenian Rapprochement: A Region Grows Up

Given the players and the history, a deal is still a long shot. But that traditional antagonists Armenia and Turkey have continued their talks this far -- at least by appearances, they are within three days of an accord re-establishing diplomatic relations and opening their borders -- is already a sign of an until-now missing maturity in the deeply suspicious region.

The main flashpoint between the two countries has been Turkey's 1915 massacre of hundreds of thousands of Armenians. Turkey refuses to acknowledge responsibility for the carnage, and permits pseudo-scholarly denials of the well-established history itself. A second issue is the two-decade-long dispute between Armenia and Azerbaijan over the status of the enclave of Nagorno-Karabakh. Turkey, which supports Azerbaijan in the dispute, has insisted that the issue be settled as part of the rapprochement with Armenia.

Yet, if the pact proceeds and the countries' parliaments go on to ratify it -- not a certainty by any means -- one is led to wonder what else is possible in the region. Could Georgia and Abkhazia lower their voices? Could Georgia and Russia lower theirs? For that matter, could Russia concede that Georgia are Ukraine are independent countries?

All right, I've gone a bit too far. But you get the thrust -- the political courage displayed by Armenian President Serge Sarkisian is notable; I myself witnessed the 1998 coup that brought down then-Armenian President Levon Ter-Petrossian when he was close to a peace deal with Azerbaijan over Nagorno-Karabakh.

Ter-Petrossian's enemies at that time -- the ultra-nationalist Dashnak party -- are leading the domestic Armenian protests against Sarkisian now. Abroad, too, Eurasianet.org reports, Sarkisian faced 3,000 demonstrators outside his hotel in Los Angeles, where he visited Sunday as part of a tour to sell his plan to emigre Armenians. A similar demonstration in Paris turned violent last Friday when emigre Armenians accused Sarkisian of treason and clashed with riot police, Eurasianet.org wrote. In Beirut yesterday, Sarkisian faced an unhappy crowd of Armenians insisting that Turkey first agree to use the term genocide to describe the World War I-era massacre, according to the BBC's Jim Muir.

So the deal isn't quite in the bag. And even if it is, the political fallout is unpredictable.

Which makes the progress all the more remarkable. In the Wall Street Journal today, Marc Champion and Nicholas Birchin report that Turkey has dropped a key condition and will sign Saturday even without settlement of Nagorno-Karabakh.

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.

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.

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.

Nabucco Hucksterism, Iran Pollyanishness, and a $5 Billion Bribe. The Oil and Glory Interview: Steven Mann

On Thursday, a ceremony in the State Department will mark the retirement of Steven Mann, Coordinator for Eurasian Energy Diplomacy, after 32 years with the U.S. diplomatic service. The 58-year-old Mann served most of the last 17 years in senior positions in the Caucasus and Central Asia: He opened the U.S. Embassy in Yerevan in 1992, was ambassador to Turkmenistan, and tried to negotiate a deal between Armenia and Azerbaijan on Nagorno-Karabakh. For the last several years, Mann was America’s man on the spot in the New Great Game on the Caspian Sea.

I visited Mann at his Chevy Chase home. Amid stacked up magazines and books, Mann told me that Europe’s “energy security” is not necessarily at peril. And, for O&G readers, he broke one bit of historical news: Remember the demise of the trans-Caspian pipeline in the chapter An Army for Oil? The one in which then-Turkmen President Saparmurat Niyazov persisted in demanding a $500 million bribe of the Bechtel-General Electric consortium? It turns out that Niyazov originally requested $5 billion. The edited interview:

Q – Does the U.S. need a high-level ambassador on Eurasian energy? And what is your advice going forward?

A – Yes it is helpful. But we also have to get away from Nabucco hucksterism.

Q – What is that?

A – In terms of the wrong lessons learned from [the Baku-Ceyhan pipeline], the wrong lesson learned is to adopt a project and attempt to bring it about through political will. I think so much of the governmental activism on both sides of the Atlantic the last few years has been devoid of a commercial context. There have been quite a number of officials who know very little about energy who have been charging into the pipeline debate. Nabucco is a highly desirable project, don’t get me wrong. But there are other highly desirable projects besides Nabucco. And the overriding question for all these projects is, Where’s the gas?

Q – South Stream was Putin’s response to Nabucco. Did the U.S. blunder by promoting Nabucco before having the commercial context?

A – In terms of whether we are talking EU or US diplomacy, I think you have to be credible. All too often we’ve gotten out ahead of the commercial realities of Nabucco. You have to be able to point to an upstream supply. You have to have a commercial champion. And governments don’t build successful pipelines. Consortia do. The object of any envoy should be to get all those stars aligned before you give the full embrace to any project.

I think Secretary Clinton will bring a more unified focus to the U.S. effort. In the previous administration, we had six special envoys on energy in the State Department, and three deputy national security advisers on the [National Security Council] staff.

Q – Is that too many?

A – It’s four too many in State. And three too many at NSC.

Q – The stated reason for Nabucco is to diversify Europe’s energy supply. Is that a valid enough reason for U.S. involvement? And is European energy security a genuine issue?

A – Anyone who makes that argument knows very little about energy. And I often heard those arguments in the White House Situation Room. Diversification is an objective good. But it can be achieved in ways other than pipelines. The best thing Europe could do for its security is to link its energy grid, which it’s already doing.

Q – Is there alarmism on the subject?

A – The January cutoff of gas through Ukraine only affected 2-3% of European consumers.

Q – So it is overplayed.

A – Yea, I think it was overplayed. What also was underplayed was how successful the Europeans were in shifting gas, linking grids. That’s the untold story of [the January cutoff].

Q – The corollary – that Russian domination of supply equals a political threat in Europe – is that also alarmist?

A – With the EU, I think it’s hard to make that case. That’s the kind of argument that has to be dissected on a country-by-country basis. But Gazprom has been an extremely reliable supplier for 25 years. And I think Gazprom will continue to be an extremely reliable supplier to Europe.

Q – So really one should not be vexed if and when Nord Stream and South Stream are built? And if it takes some time for the ducks to be lined in a row for Nabucco, so be it?

A – Basically, yes. I think Nabucco is far more important to Azerbaijan and Turkmenistan than it is to the EU.

Q – In the late 1990s, there was the initial effort by Bechtel and GE Capital to build a trans-Caspian pipeline from Turkmenistan to Baku.

A – What happened was that Niyazov, with his Soviet mentality, demanded so-called preliminary financing. That is, an upfront payment to do the project. [The consortium] already paid a signing bonus of $10 million. But then Niyazov demanded in the range of $5 billion. Then it came down to $3 billion. And the consortium said, ‘This is utterly unrealistic.’ Niyazov thought they were bargaining. So he dropped the demand to $1 billion; then it came down to $500 million. The consortium said, You have until March 2000 or we walk. And at that time, they walked.

The fundamental problem, and it’s relevant today, is that a foreign investor cannot rely on a governmental entity [in Turkmenistan] to supply the upstream, to supply the product.

Q – Was it ever realistic that Niyazov was going to hook up with the East-West Corridor?

A – It was and it is realistic. Without alternatives to the Gazprom monopoly, Turkmenistan has to accept the price that Gazprom is willing to pay. There is a powerful commercial logic to a trans-Caspian pipeline.

Q – What is the best way today for a Caspian republic to get along in the region?

A – Kazakhstan is a good model of how to develop a Eurasian energy sector. You’re good partners with Russia, but you take advantage of foreign technology and capital.

Q – Does Russia have a role in helping to create a thaw between the U.S. and Iran?

A – Every time there is a substantial political change in the U.S., the oil and gas industry gets up on its tip-toes and says, ‘Aren’t we about to have a change in policy?’ You saw this with the Bush-Cheney election in 2000; the industry thought now was the time it would happen. You saw it after the [2001] invasion of Afghanistan, with certain cooperation and contact between the U.S. and Iran. You’re seeing it now with the advent of the Obama administration. So this is something that the oil and gas industry is always waiting for – that change.

Q – You are saying that this is nothing new.

A – It is nothing new.

Guest Column: America's Ostensible Ally in Baku

Next week, Dmitry Medvedev travels to Japan for his first G-8 summit as president of Russia. But before that, he is on a three-day trip to Azerbaijan and Turkmenistan. If the West hasn't taken note of that, it should -- Vladimir Putin and now Medvedev have neatly cemented strong relationships with the oil- and natural gas-rich Caspian countries of Kazakhstan, Azerbaijan and Turkmenistan, nations that during the 1990s the U.S. sought to bring into the Western fold. These countries continue to be strategically important, both because of the tight energy supply, and because of the energy independence they can provide to Europe. In an email exchange, my friend Tom de Waal -- co-author of the classic Chechnya, and author of the trenchant Black Garden -- told me that in The Oil and the Glory I overplayed Azerbaijan's alienation from Russia. His argument was compelling, and I asked him to expand it into a guest column. The result follows.

By Tom de Waal

Russian President Dmitry Medvedev arrives in Baku today.

In the West, there is a widespread assumption that Azerbaijan is an ally, and in the same anti-Russian camp as Georgia. I think that is a misperception. Azerbaijan is now developing a foreign policy of “complementarity,” which used to be the aspiration of the Armenians – be on good terms with everybody and get the best out of everybody. The model here is Kazakhstan, rather than Georgia.

Actually this was always the case. I suspect the Azerbaijanis have always been good at delivering the message in Washington, “You are our main ally and friend” and then going to Moscow and repeating the same refrain. Heydar Aliyev, the first post-Soviet Azerbaijani president (and father of the current president), was careful to keep good relations with Russia; before he talked seriously to Western partners about the non-Russian Baku-Ceyhan oil pipeline, he got a Russian oil pipeline in place – the so-called Early Oil line from Baku to Novorossiisk. Aliyev also wanted to give the Iranians a stake in the offshore Azerbaijani oil consortium, known as AIOC, but was of course over-ruled by the Americans. Aliyev kept his good contacts in Moscow, but was held back by Boris Yeltsin’s personal antipathy to him -- although he did successfully bury the hatchet with another Gorbachev-era reformer who had been his enemy in the Politburo, Eduard Shevardnadze.

Once Vladimir Putin came to power, Aliyev made it a strategic priority to rebuild relations with Russia. Aliyev was very successfully at charming the Putin Kremlin, and his daughter, Sevil, made a useful marriage with a well-connected Moscow Azerbaijani, Mahmud Mammadquliyev. The elite-level relationship has deepened under his son, Ilham Aliyev.

Medvedev, with his background as former chairman of Gazprom, the Russian natural gas giant, now speaks the same language of money and energy as the Azerbaijani elite. They must find it a relief not to have to bother with all that talk of democratization and human rights that enters conversations with Western politicians.

The Georgians enjoy the access they get in Washington but I wonder if they secretly envy the lobbying power in Russia of people like Vagit Alekperov, the Azerbaijani chairman of Lukoil, who have made sure that Azerbaijan doesn’t suffer the kind of boycotts, visa bans and border closures that the Georgians do.

The price for Azerbaijan is that it will not pursue NATO membership, which would alienate Russia, but I believe that is not a big priority for the country’s elite. The Azerbaijanis now feel secure enough because of their vast and growing oil wealth. Moreover, NATO standardization would also threaten to bring unwelcome transparency to the notoriously corrupt Azerbaijani armed forces.

This is not a love-match but a marriage of interests—as indeed is the Azerbaijani-U.S. relationship. Both Baku and Moscow are still capable of actions that hurt ordinary people:

In Azerbaijan, the authorities have needlessly banned the re-broadcasting of Russian television channels, barring Russian-speaking pensioners who cannot afford satellite television from their only form of entertainment; in Russia, the authorities have played to a xenophobic constituency by stopping Azeris from trading at markets. The newspaper commentariats in both countries continue to exchange hostile remarks, and men like former Azeri presidential adviser Vafa Guluzade continue to blame all of the country’s ills on the Russians.

But on an elite level, there are plenty of common interests. And consider also an opinion poll conducted by Azerbaijani political analyst Rasim Musabekov in Azerbaijan in February 2008.

Asked to name the three nations friendliest to Azerbaijan, 89% of Musabekov’s respondents unsurprisingly named Turkey. But Russia came in second place with a 20% vote of approval, well ahead of the United States, which was named by 5.7%, just behind Iran and on the same level as Ukraine.

This suggests that, on the street level, Russia and Russians remain popular with ordinary Azeris. They are still on the same wavelength in a way that Americans or Europeans will never be.

What's the Book About?

Shawn Miller of Critical Compendium had a slew of questions about The Oil and the Glory. Here is his interview.

Becoming Like the Soviets - Part II

While researching The Oil and the Glory, an amusing story I heard again and again from the oilmen and diplomats who found themselves on the Caspian Sea was the ubiquity of eavesdropping. As they sought their lucrative deals or carried out statesmanship, they would find KGB microphones hidden behind portraits in their hotel rooms, and dug into the walls of their offices. Somehow the Azeris were able to surveil them even in five-star hotels all the way in London.

The Westerners described a resultant atmosphere that was paranoid, poisonous and wholly over the top.

Once, two Britons in Baku – BP’s Terry Adams and Ambassador Thomas Young – had something confidential to discuss, too confidential to risk being overheard indoors, and went for a rainy walk along the shoreline. Their privacy seemed assured — few cars or people were braving the nasty weather. Just then, a small Soviet-made Lada stopped fifty yards ahead of them, and a sheepdog with a big collar jumped out. The dog trailed after the men, making them suspicious. “When the dog’s tail would go up, Tom would say, ‘Careful, it must be transmitting,’” Adams told me. As bizarre as it sounded, the story took on a life of its own, and it helped convince many other oilmen that most if not all conversations were being recorded.

The foreigners began to treat it as a game. They would tailor their conversations with the express purpose of manipulating government negotiators. Some of the locals themselves tried to confound the bugging by dropping crumpled-up notes on the floor to caution foreign guests to watch their mouths.

Meanwhile the foreigners resorted to code names in hopes of confusing those listening in. One member of Azerbaijan’s loyal opposition was dubbed “Loyal Avis” by the Pennzoil team. Another who wore alligator shoes became “the Big Bopper,” and a third who owned a house near the president’s was known as “the Landlord.” A fourth who was in the local KGB was “the Lamp.”

As we see in today’s New York Times, the Bush administration set off on an eavesdropping campaign within two weeks of taking office, in February 2001. We can debate the merits of becoming like the Soviets, which I've blogged about previously.

But I can tell you after years of researching the KGB experience that in this respect it doesn’t work, at least not for long – shrewd listenees find a way to disguise their conversations, and conduct their genuine ones out of earshot.

Photo: tanakawho
Rights: Creative Commons

Business Week Names The Oil and the Glory A Top-10 Business Book of the Year

Thanks to Business Week for the recognition. SL

Meanwhile, On the Field of (Pipeline) Battle

The Europeans have supplied fresh entertainment for spectators of the ongoing East-West pipeline war. It comes in the form of an announcement by BP and Norway's Statoil that they have double the reserves they initially estimated at a huge offshore Azerbaijan natural gas field. That makes the underdog Western side a more serious contender in the battle for economic influence in Europe.

The Caspian Sea occupies its accustomed key role in the events.

For almost a year, Russia and the West (Europe and the U.S.) have been circling one another. At stake has been dominance over Europe's energy supply. Russia, which already supplies more than 30% of Europe's oil and natural gas, wants to build up that formidable position. The West wants to shrink it. The two goals are incompatible, so a diplomatic and economic battle have ensued.

Russia's Vladimir Putin has taken the lead by getting Turkmenistan and Kazakhstan to sign away their natural gas exports and fire sale prices, and to agree to help build a new pipeline to take the supplies north to Russia, and then on to Europe.

Europe and the U.S. have countered by suggesting that Turkmenistan and Kazakhstan instead ship their natural gas west, and on to Europe, where a pipeline called Nabucco would be built to supply the continent. But they are late to the game, and have suffered valid skepticism about their ability to harness sufficient natural gas to justify Nabucco.

The new announcement by BP and Statoil comes from across the Caspian, in Azerbaijan. The companies say they may be able in the next few years to start exporting the natural gas equivalent of an extra 150,000 barrels a day of oil from an offshore field they control.

That's because the companies discovered a new reservoir of natural gas at the giant Shah Deniz field. They did so by drilling the deepest well ever in the Caspian -- 7,300 meters below the seabed.

The companies had already expected to export a peak volume of the natural gas equivalent of 150,000 barrels a day of oil from Shah Deniz. Now they say the new reservoir seems likely to supply that much or more. So, in all, Shah Deniz will export the natural gas equivalent of more than 300,000 barrels of oil a day.

Some of the new gas will be absorbed locally. But the Russians are no doubt scowling, and the Europeans and Americans smiling, at the prospect that the remainder could go on to Europe through proposed Nabucco.

Photo by: Cadd
Photo rights: Creative Commons

Steve on NPR's Fresh Air

Listen to the Terry Gross interview with Steve

Putin's Show: An Opening on the Caspian

Yesterday's Caspian Sea summit in Tehran was decidedly the Vladimir Putin show, but the ostensible common front oddly enough seems to have revealed an opening for a spoiler. The West ought to climb through.

The main news of course was the states' rejection of being used as a staging ground to attack Iran. That's a very real issue, as the word has been on the street for almost a year that U.S. offensive plans against Iran included possible land attacks from both Azerbaijan and Afghanistan. If true, it would be downright unneighborly not to go along with Putin's proposed declaration against such an attack; Azerbaijan's Ilham Aliyev specifically couldn't disrupt the bonhomie and say, "Sorry, fellas, but we have to punch Mahmoud's lights out."

Yet, given Russia's similar peacenik act in Serbia in 1999, Putin's reach for the moral high ground this time wasn't all that surprising.

The more interesting topic I think regarded the issue of controlling activities on the Caspian. In the guise of environmentalism, Russia has long urged that all five Caspian states be vested with a veto against any work on the sea by any of its neighbors.

The actual reason for Moscow's supposed concern for sturgeon and seals is control of the region's oil and natural gas -- as long as no pipeline is built across the sea, Kazakhstan and Turkmenistan are effectively bottled up, and subject to a Russian stranglehold on energy exports.

Tehran was no different. Putin told the other presidents, "Projects that may inflict serious environmental damage to the region cannot be implemented without prior discussion by all five Caspian nations." Read AP account.

Yet, according to the AP account, his fellow former Soviet leaders were noticeably non-commital on the topic. Kazakhstan's Nursultan Nazarbayev, for example, said only that "pipeline routes need to be coordinated with nations whose territory they cross." That logic would not preclude building a cross-sea line, say, from Turkmenistan to Azerbaijan, as long as both agreed.

Russia, of course, expresses no such ecological concern when it regards Nord-Stream, its natural gas pipeline project across the Baltic Sea.

This is a hunch, but it could be that Kazakhstan and Turkmenistan are a bit fed up with, and not a little suspicious over, Putin's turns of glad-handing and subtle pressure to consign their energy future -- and independence -- to Russia.

As it stands, the eastern Caspian states are effectively in Russia's pocket because of the absence of trans-Caspian pipelines west to export their oil and especially natural gas free of Moscow's interference.

It's long been in their interest to commit to construction of that route. And it's in the West's interest -- particularly Europe's -- to make it happen once that commitment is made.

A Caspian Deal: Tea Anyone?

There has been fanfare leading into Tuesday's meeting of the leaders of the Caspian nations, and their discussion again of the vexing question of whether they are neighbors of a sea or a lake. Let's hope the tea and meals are tasty in Tehran, because there will be no breakthrough.

The main reason: None of the main antagonists are going to capitulate.

Lots of people rightly find humor in the sea-or-lake issue, which ostensibly determines how a body of water is treated in terms of the littoral nations' rights. Apart from its amusement value, however, it's pointless to debate on the merits of the various sides, because each produces its chosen group of long-ago treaties, laws and precedents to make points that are instantly dismissed by the other interested parties.

Instead, it's easiest to look at interests:

Iran and Russia generally fall into the same camp, but for different reasons (Iran wants title to more sea than it would deserve by a purely quantitative count of its coastline; Russia would like to control all activities on the sea, but will settle for halting any cross-sea pipeline that would further weaken its stranglehold on oil and natural gas exports from the region).

It's principally the idea of that trans-Caspian pipeline that will scuttle any deal. Azerbaijan in my opinion will never agree to a prohibition on a pipeline in the sea, and Kazakhstan and Turkmenistan won't either if they are smart. Yet Russia won't agree to any pact that doesn't preclude a pipeline.

So the meeting is hopeless in terms of a certain settlement -- Azerbaijan, Kazakhstan, Turkmenistan and Russia will continue to develop their oilfields at will. Washington will persist in trying to get Turkmenistan and Kazakhstan to build a cross-sea pipeline. And Russia will push the states not to build one.

On the other hand, the weather will be lovely (84 degrees fahrenheit; 29 celsius).

Greenspan and the Caspian

As part of the publicity for his memoir, just out today, Former Fed chairman Alan Greenspan has given a slew of interviews. In a chat with Bob Woodward of The Washington Post, he accents the knife's edge on which the world economy rests because of tight oil supplies, and inadvertently provides an argument for why the Caspian Sea is strategically important.

In the Post interview, according to Woodward, Greenspan said that the disruption of even 3 to 4 million barrels a day of oil could translate into crude prices as high as $120 a barrel; the loss of anything more would mean "chaos" to the global economy, Greenspan said. Read story

That is precisely the volume of oil exports expected from the Caspian -- from Kazakhstan and Azerbaijan combined -- after about a decade. The main fields involved will be Tengiz, Kashagan and Karachaganak in Kazakhstan, and offshore Baku in Azerbaijan.

As it appears now, much of this oil will pass through the East-West oil corridor championed by Washington, with its hub in Baku. It is why the U.S. has put so much diplomatic weight behind relationships with Georgia, Azerbaijan, Kazakhstan and Turkmenistan.

Oil prices are largely decided on the margin -- those last 3 to 5 million barrels of total daily world demand. In the next decade, the flow of Caspian oil will produce the equivalent of that margin.

The Pirate of Prague's Newly Restored Grin

Incredible as it seems, Viktor Kozeny could indeed ride again.

Accused of bribing Azerbaijan leaders, the Harvard-educated, lavish-living Kozeny has sat for almost two years in a Bahamas jail fighting extradition to the U.S. But now a U.S. prosecutor says the government may have to drop most charges against him. The reason -- the statute of limitations.

If it does, and Kozeny is freed or lightly sentenced, it will put a bow around the charmed life that he has led the last 17 or so years, in which he masterminded two of the most controversial investment schemes of the Gorbachev and post-Soviet era.

This story actually broke last month, but appears to have been largely overlooked. Tip to Paul Sampson for pointing it out to me. Here is the first paragraph of an AP story: NEW YORK — The government is seeking to resurrect its case against three men accused of offering hundreds of millions of dollars to top officials in the former Soviet republic of Azerbaijan to get favorable treatment in oil deals. Read story

Steve's comment: The 43-year-old Kozeny is famous for investment schemes in which lots of people lose most of their money.

He first attracted attention in the early 1990s when he swooped into his native Prague and persuaded hundreds of thousands of Czechs to invest their state-issued privatization vouchers with him, and become fabulously wealthy. Almost all lost most or all of their money, but Kozeny left the country worth tens of millions of dollars and never returned. For that Fortune magazine dubbed him "The Pirate of Prague."

Kozeny bought lavish homes in London, the Bahamas and elsewhere with the money.

Next, he turned up on the Caspian Sea. He decided that there were even greater earnings to be had, particularly in Baku. In 1997, he threw a now-famous party in Aspen, Colorado, where he persuaded some of America's most savvy investors and their friends that they could own, then flip, the state oil company of Azerbaijan, or Socar.

Those who tossed in a bundle totalling more than $200 million included Wall Street hedge fund doyen Lee Cooperman, former Senate Majority leader George Mitchell and Frederic Bourke of the Dooney & Bourke luxury handbag company.

The problem, as (almost) anyone who has set foot in Azerbaijan knows, is that there is no way the Azerbaijan government would part with its cash cow.

In October 2005, U.S. prosecutors charged Kozeny and two of the investors with bribery and money laundering. Specifically, the government said that the defendants provided financial incentives to a "senior Azeri official" (the late President Heydar Aliyev) in order to privatize Socar.

In June of this year, a U.S. district judge said the statute of limitations had passed on charges against Kozeny's two co-defendants, and dismissed most of them. And in an appeal last month, prosecutors said that, if the decision holds, most charges will also have to be dropped against Kozeny.

The appeal hasn't been decided yet. But those who follow the Azerbaijan case always wondered -- why, given Kozeny's history, did so many smart people entrust so many millions with him? To a person, his investors replied that they felt they had done their due diligence.

That rang hollow. The truth was that Kozeny dangled the prospect of an enormous windfall before Aspen's and Wall Street's moneyed crowd -- in addition to great fun and adventure -- and they simply grabbed for it.

Ten years later, there is the prospect of Kozeny going onto his next adventure.

Gazprom: To Fear or Not to Fear

The West often expresses the apprehension that Russia will use its energy for outside political leverage. The answer of course is that it already is -- its oil and natural gas is the source after all of its newfound confidence and influence in Europe. Yet the most vulnerable and victim-prone countries are Russia's former Soviet colonies. The upshot: The Caspian states need to keep up their guard.

Take a look at The Independent of London today, which has a good, long primer on Gazprom. The piece, by Anne Penketh, makes two conclusions: Gazprom is so unwieldy and large that it may end up being a paper tiger; and that, given the combination of Gazprom's management failures and its abiding need for continued profits from Europe, it will end up having to give someone the short end of the stick -- one of its former Soviet brothers.

A key quote for those who follow the non-Russian states comes from Pavel Baev of the International Peace Research Institute: "They are the victims of choice," he tells the newspaper. "A new gas war is predetermined."

Steve's comment: The world caught on to Russia's outside power during the last eighteen months or so when Europe's oil and natural gas supply was disturbed over disputes with Ukraine and Belarus, and the Independent piece focuses on those two former Soviet states.

But the Caspian states and foreigners who work there -- Azerbaijan, Kazakhstan, Turkmenistan and, as a transit country, Georgia -- have witnessed Moscow's willingness to wield the energy club since just a few months after the 1991 Soviet breakup.

Russia starved Georgia of natural gas. It cut off Turkmenistan's access to foreign export markets. It has done the same in Kazakhstan, reducing the value of its giant fields (Karachaganak, one of the world's ten largest natural gas fields, is absurdly reduced to exploitation as an oil field). To its credit, Azerbaijan has responded to Gazprom's threats by going off Russian gas cold turkey, and turning to the local supply.

Transneft's actions in terms of the region's oil exports is well documented and have been discussed previously.

Russia argues that its actions are market-oriented. Maybe. But one must add realpolitik -- Gazprom has been the cudgel to bring feisty neighbors (such as Georgia) into line. And there is no sign that the custom is changing soon.

Counting the Geopolitical Winnings on the Caspian

John C.K. Daly has an interesting article on the latest geopolitical fallout in pipeline politics on the Caspian.

ANNAPOLIS, Md. (UPI) -- The death of Turkmen leader Saparmurat Niyazov last Dec. 21 set off an unseemly but discreet scramble among a number of nations eager for access to the world's fourth-largest reserves of natural gas. Seven months later, the clear winner for the race to control Turkmenistan's energy is Russia, with China as also-ran, while the United States and other Western nations essentially lost. What happened? The answer might be the Realtors' creed, "location, location, location." Read rest of article

Steve's comment: From the mid-1990s, Washington played a brilliant game on the west side of the Caspian, and a massively inept one on the east. The difference was that in Azerbaijan and Georgia, it had strong, far-sighted partners in Heydar Aliyev and Eduard Shevardnadze. In the east, however, Kazakhstan's Nazarbayev and Turkmenistan's Niyazov never joined the geopolitical combat posed by their Azeri and Georgian neighbors, and maneuvered Washington into an embarrassingly absurd diplomatic exercise.

U.S. officials paraded into Astana and Ashkabad to persuade the Kazakhs and Turkmen to do what was manifestly to their advantage -- build an energy pipeline link independent of Russia, and the Kazakhs and Turkmen delivered platitudes on how, yes, they would cooperate before promptly forgetting they had done so.

The recent Kazakh and Turkmen decision to sign a long-term contract for most of their natural gas to Gazprom -- and to build yet another pipeline north to Russia -- appears to be a nail in the coffin for the eastern half of the grand U.S.-backed East-West Energy Corridor to Turkey.

The biggest question is why have Nazarbayev and Turkmenistan's Berdimukhamedov signed such a deal. One answer is that it is the easiest short-term option -- avoid the sparks of geopolitical conflict, and simply sell to one's traditional northern trading partner. They may believe that they retain the opportunity in the future to balance out the increased leverage they have granted to Russia. It is difficult to see how, given the agreement, such a trans-Caspian pipeline could be built any time in the foreseeable future.

Here is an interesting piece on how, contrary to the prevailing wisdom, Italy may not have entirely bet the store on continued good will from Gazprom. Instead, Italy appears to be hedging its bets.