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50–308 CC






APRIL 30, 1998

Printed for the use of the Committee on International Relations

BENJAMIN A. GILMAN, New York, Chairman
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HENRY J. HYDE, Illinois
CASS BALLENGER, North Carolina
EDWARD R. ROYCE, California
JAY KIM, California
TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri
SAM GEJDENSON, Connecticut
TOM LANTOS, California
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PAT DANNER, Missouri
BRAD SHERMAN, California
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
MARK GAGE, Professional Staff Member


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    The Honorable Federico Pena, Secretary of Energy, Department of Energy
    Ambassador Steve Sestanovich, Ambassador at Large for the New Independent States, U.S. Department of State
    Ambassador Richard Morningstar, Special Advisor to the President and the Secretary of State and Coordinator of Assistance to the New Independent States, U.S. Department of State
    Mr. Don Pressley, Acting Assistant Administrator for Europe and the New Independent States, U.S. Agency for International Development
Prepared statements:
The Honorable Benjamin A. Gilman, a Representative in Congress from New York, and Chairman, Committee on International Relations
The Honorable Doug Bereuter, a Representative in Congress from Nebraska
The Honorable Christopher Smith, a Representative in Congress from New Jersey
The Honorable Federico Pena
Ambassador Steve Sestanovich
Ambassador Richard Morningstar
Mr. Don Pressley
Mr. Charles J. Pitman, Chairman and President of Amoco
Mr. William Ichord, Vice Presidemt of UNOCAL
Mr. E.N. Zana, Managing Director, Eurasia, Chevron
Mr. Frank Verastro, Senior Vice President, Government Affairs, Pennzoil
Mr. Mike Stinson, Vice President, International Business Development, Conoco, Inc.
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Ms. Julia Nanay, The Petroleum Finance Company
American Council of Teachers of Russian/American Council for Collaboration in Education and Language Study
Ross Vartian, Executive Director, Armenian Assembly of America
Additional material submitted for the record:
Questions from the House International Relations Committee answered by Secretary Pena
Questions from the House International Relations Committee answered by Ambassador Sestanovich
Questions from Mr. Gilman answered by Ambassador Morningstar/Acting Assistant Administrator Pressley
Questions from Mr. Hamilton answered by Secretary Pena

House of Representatives,
Committee on International Relations,
Washington, DC.
    The Committee met, pursuant to notice, at 10:10 a.m. in room 2172, Rayburn House Office Building, Hon. Benjamin A. Gilman (chairman of the Committee) presiding.
    Chairman GILMAN. The Committee will come to order, and Members please take their seats.
    Good morning, ladies and gentlemen. This morning our Committee on International Relations will be taking testimony from several distinguished official witnesses on the U.S. role in the Caucasus and Central Asia.
    I am very frankly pleased with the caliber of our witnesses this morning. We have with us today our U.S. Secretary of Energy, Federico Pena; two of our State Department's ambassadors, our ambassador for the New Independent States, Steve Sestanovich, and our Coordinator for U.S. Assistance to the New Independent States, Ambassador Richard Morningstar; and last, but not least, our Acting Administrator for the New Independent States at the U.S. Agency for International Development, Mr. Don Pressley.
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    Welcome, gentlemen; and welcome, panelists. We particularly want to welcome Ambassador Sestanovich, who will be testifying after Secretary Pena. I understand that this will be Ambassador Sestanovich's first appearance before a congressional committee in his capacity as Ambassador at Large for the New Independent States, and I am pleased that it will be before our House International Relations Committee. We will try not to leave too many scars behind.
    Secretary Pena, I want to thank you for making time to join us this morning. Your efforts as our Secretary of Energy in support of the U.S. initiative to try to bring to reality the East to West pipeline corridor out of the Caucasus and Central Asia have been fairly intense in recent months, especially at the end of last year. It appears that if this initiative is to bear any fruit after you leave your current office, it will be due in large part to your efforts.
    I hope that this hearing will help illuminate how important developments in Central Asia and the Caucasus can be for our Nation. As I am certain our very qualified witnesses will point out, it isn't just the energy resources of those regions that should concern us here, a thousand miles away. It is the general stability of those geopolitically sensitive regions. It is the progress of democratization in nations that have never truly known it in the past. It is the impact that the transport routes, commerce and pipelines out of those regions will have with regard to countries like Turkey and Iran, for good or for bad.
    This Committee has tried to conduct a steady review of those issues in these two regions over the last 3 1/2 years. Over the course of this Congress and the prior Congresses, the Committee has conducted five oversight hearings on our assistance programs for the New Independent States. We have also held two oversight hearings on our foreign policy toward the New Independent States during that same period.
    The Committee also held what I believe was a very important hearing on U.S. interests in the Caucasus region late in the last Congress, and our Subcommittee on Asia, under the chairmanship of Congressman Doug Bereuter, has now held two hearings on U.S. assistance and U.S. interests in Central Asia during this Congress.
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    At the same time our Committee has dispatched staff delegations to the two regions and has supported an important congressional delegation to the Caucasus and Central Asia at the end of last year, headed by a respected former Member of this Committee, Rules Committee Chairman, Jerry Solomon.
    Today we will pick up this important oversight review once again, focusing on both the Caucasus and Central Asian regions at a time when an important range of pressing issues must be addressed by our policymakers and diplomats in those two regions.
    And, once again, I am pleased that our four witnesses have taken time this morning from their busy schedules to appear and give us the benefit of their thinking.
    Chairman GILMAN. At this time I would like to recognize the Ranking Member of our Committee, Congressman Lee Hamilton, the gentleman from Indiana, for any opening statement he would like to make.
    Mr. HAMILTON. Mr. Chairman, thank you very much. I think this will be an excellent hearing, and I am delighted that we have an opportunity to focus on this issue. You have called together an outstanding group of witnesses, and I want to join you in welcoming each one of them.
    I want to say a special word to Secretary Pena, because he is going to be leaving office soon, and I just want him to know my personal appreciation for his marvelous service as the Secretary of Transportation and now Secretary of Energy. You can be very proud of your service to the country, and we certainly wish you well in your future assignments.
    Mr. Chairman, I concur with all that you said. I want to just add one other simple point, and that is we have a lot of expertise out here this morning on this Caspian Basin, Caspian oil problem. And I want to hear from them, because there are a lot of complexities involved in this region of the world for American foreign policy. But I am also very much aware that the private sector has a lot to contribute in our knowledge of this area as well, and I hope at some point we will have the opportunity to hear from the American commercial interests that are involved, because I know they have been actively involved in the region as well. So I hope we can schedule that at some point in the future.
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    Chairman GILMAN. Thank you, Mr. Hamilton. Do any of our Members have——
    Mr. HAMILTON. May I just say one other word? I am going to have to leave to give testimony for just a few minutes on another matter of importance to my State, and I apologize for that, but I will be back as quickly as I can and pick up from there.
    Chairman GILMAN. Mr. Bereuter, our distinguished Chairman of the Subcommittee on Asia and the Pacific.
    Mr. BEREUTER. Mr. Chairman, I would like to do a couple of things: to thank you for holding this important hearing and to welcome and express appreciation to our distinguished witnesses, led off by Secretary Pena. I join Congressman Hamilton in the commendations to you for your service to the two departments of our government, and I would ask unanimous consent that my entire statement be made a part of the record to expedite the proceedings.
    Chairman GILMAN. Without objection.
    [The prepared statement of Mr. Bereuter appears in the appendix.]
    Chairman GILMAN. Mr. Sherman.
    Mr. SHERMAN. It seems that for whatever reasons, God decided to put oil in the most difficult parts of the world, and our focus now on Central Asia is reminiscent of the focus of the Middle East earlier this century and our continuing focus on the Middle East.
    I think that we should avoid the mistakes we made in the 1950's when our State Department focused too much on oil and not enough on American values gradually thereafter, coalescing in the 1967 war; after which American policy in the Middle East has focused on American values and our natural relationship with the only democracy in the Middle East, Israel.
    Once again, we look toward another area of the world that will be an oil-exporting area and a complicated area, and we should again not focus on oil to the exclusion of American values. It will be best for our values and best for our oil policy if we recognize that democracy and justice must be our guiding lights.
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    The East-West pipeline will naturally flow either through Armenia or very close to the old battle lines between Armenia and Nagorno-Karabakh forces and those of Azerbaijan. For that pipeline to be safe, we need peace between Nagorno-Karabakh and Azerbaijan. The best way to get there is for the United States to recognize Nagorno-Karabakh as an independent and sovereign state, and then to use its good offices to negotiate a peace with Azerbaijan. That peace will lead not only to prosperity for the region, but also help see us through our energy needs well into the next century.
    Thank you, Mr. Chairman.
    Chairman GILMAN. Thank you, Mr. Sherman.
    Are any other Members seeking recognition? If not, we will now recognize Mr. Pallone, who has asked to sit in on the hearing.
    Mr. PALLONE. Mr. Chairman, I appreciate your allowing me to participate this morning, and let me just be very brief in an opening statement.
    The hearing is on U.S. policy in the Caucasus and Central Asia. I know this Committee has paid a lot of attention to that, and I appreciate that.
    You know I co-chair the Armenia Caucus, and my main concern here today is with regard to that country. Armenia, I believe, is making progress on democracy. They recently had an election for President. They rejected a Communist, I would say, someone who previously was the Communist party leader, and the new President has also embraced market reforms and wants even better relations with the United States.
    I am concerned, however, that, as Mr. Sherman said, the U.S. role in negotiating the settlement of the situation in Nagorno-Karabakh has not been effective. The new President has made it quite clear that he is in favor of a negotiated settlement, but he is going to take the line that requires direct negotiations between all the parties, including Nagorno-Karabakh. And I am afraid that the Administration's role in terms of the Minsk group to settle this conflict has basically been to ignore the concerns of Nagorno-Karabakh, not really hear or allow for their participation, and not really recognize the nature of Nagorno-Karabakh as a state that is sovereign and controls its territory.
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    But I just want to say last, if I could, Mr. Chairman, I know that some of the concern today is over the Silk Road Strategy Act, your legislation. I think the idea of trying to bring all the Caucasus nations together for infrastructure purposes, whether it is energy needs, as Secretary Pena is going to mention, or others is a good one. But I don't believe that in the context of accomplishing that goal we should be repealing—or watering down section 907 of the FREEDOM Support Act, because that would simply allow, if you will, Azerbaijan to not suffer any consequences of its blockade of Armenia. And if we are going to have the Caucasus nations work together on energy and other infrastructure issues, there should not be blockades, and countries should not be rewarded because they have been continuing with the blockade.
    So again, I want to express my appreciation for this Committee in taking so much interest in the Caucasus area. But I also think it is very important that the United States pay more attention to the concerns of Nagorno-Karabakh and also keep in place section 907.
    And thank you again for letting me participate.
    Chairman GILMAN. Thank you, Mr. Pallone.
    We will now proceed with testimony. Secretary Pena, please feel free to summarize your testimony, which, without objection, will be inserted into the record in its entirety.
    Secretary Pena.


    Secretary PENA. Thank you very much, Mr. Chairman. And let me thank you and Members of the Committee for holding this hearing in an area and about a topic which is becoming much more important for our country and for the world.
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    I appreciate your accepting my formal testimony for the record, and let me present what I hope will be abbreviated summaries of that more complete testimony.
    Chairman GILMAN. Without objection, your full testimony will be entered into the record.
    Secretary PENA. Thank you, Mr. Chairman.
    Mr. Chairman, my testimony is focused today on our policy in the Caspian region, but it is in the context of the Administration's Comprehensive National Energy Strategy which was announced very recently. Our Comprehensive National Energy Strategy has five goals: to improve the efficiency of our overall energy system; to ensure against energy supply disruptions; to promote energy production and use in ways that respect our health and environmental values; to expand future energy choices; and to seek international cooperation on global energy issues.
    Our policy in the Caspian region specifically embodies two of those five goals: ensuring against energy supply disruptions and seeking international cooperation on global energy issues. Both goals reflect our view that the development of diverse, stable and reliable sources of energy is important to our national security and to the global economy.
    In the Caspian region, we have five objectives designed to help achieve these two very broad goals. First is energy security. Bringing Caspian-based energy supplies into the global market supports the U.S. energy security agenda. While estimates of the size of regional oil and gas reserves vary widely, the Caspian is potentially one of the world's most important new energy-producing regions. Although the Caspian may never rival the Persian Gulf, Caspian production can have important implications for world energy supplies, particularly in diversifying resources among producing regions of the world.
    Second, we believe that rapid development of the region's energy resources and trade linkages among the countries are critical to the independence, the prosperity, the democracy and stability of all the countries of Central Asia and the Caucasus.
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    Third, we continue to support U.S. energy companies' investments around the world. In the Caspian region, we believe these companies will help unlock energy resources, as U.S. technology is unrivaled, and our companies employ the highest environmental protection measures. Working together, we can assure the appropriate balance between maximizing production and environmental stewardship.
    Fourth, we are concerned from an energy security standpoint about proposals that would force more oil to the Strait of Hormuz or result in increasing vessel traffic through the Turkish Straits. We do not want to see the Bosporus become a potential choke point for a significant share of the world's oil supplies, which would heighten environmental concerns and possibly impede the development of Caspian energy.
    And finally, let me particularly focus on our fifth objective in the Caspian, and that is to foster viable and reliable alternatives for export of the region's resources, particularly avoiding transit routes through Iran and routes that force more oil into the Persian Gulf or the Black Sea. Our Caspian strategy is centered around promoting export routes for Caspian resources along an east-west corridor, promoting the potential for regional gas exports and evaluating these infrastructure projects based on commercial factors.
    Let me address those three. Our support of multiple routes stems from our belief that it is in the commercial interest of companies operating in the Caspian States and in the strategic interests of the host states to develop multiple oil and gas routes to international markets, avoiding excessive reliance on major competitive suppliers for transit routes.
    To implement the east-west pipeline strategy, I led a Presidential mission last fall to five Caspian region capitals. The work we accomplished has since guided the Administration's efforts in working with key regional leaders and the private sector. We believe that an east-west energy corridor incorporating trans-Caspian oil and gas pipeline segments with a route from Baku, Azerbaijan through the Caucasus to Turkey is the optimum solution. It provides benefits to several transit states as well as energy-producing countries. The oil line would proceed to the Mediterranean Port of Ceyhan, and the gas line would serve the growing gas market within Turkey.
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    It would benefit the countries of Central Asia and the Caucasus as well as Turkey. It matches hard-currency markets with energy supplies and connects the eastern and the western side of the Caspian Sea. The corridor could also serve Russian's commercial needs, offering Russian goods and services better access to attractive markets. The east-west corridor also includes routes to Asia.
    Finally, this corridor also addresses squarely the environmental issues associated with the Bosporus.
    While much effort and publicity has been focused on oil pipelines, development of natural gas pipelines is of equal importance to the states of the region. Turkmenistan, in particular, faces financial stress because of an inability to export its gas. Uzbekistan has the potential for greater gas exports, and both Kazakhstan and Azerbaijan could have exportable surpluses of natural gas early in the next decade.
    A natural market for this gas is Turkey, which is currently facing gas shortages and plans to increase gas imports more than fivefold by the year 2010. Caspian gas exports to Turkey could provide producing states with a hard-currency market, and Turkey's commitment to purchase gas could underpin the financing for those pipelines.
    During his recent visit to Washington, Turkmen President Niyazov signed an agreement with the Trade and Development Agency to proceed with a trans-Caspian feasibility study, which will be carried out by a U.S.-led consortium. His action represents significant progress toward success of our Caspian strategy.
    Potential pipelines must be commercially viable in order for the private sector and the international financial community to move forward. We have been working very closely with U.S. energy firms who have expressed an interest in a trans-Caspian, Baku-Ceyhan pipeline route. These companies believe that trans-Caspian oil and gas pipelines are economically and technically feasible, that they can compete on a commercial basis with a trans-Iranian line, and that they can be built on a timely basis.
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    We have taken several actions to accelerate the development of the east-west energy corridor, including first intensifying our engagement with key countries, formalizing and regularizing our energy bilaterals, and second, encouraging these governments to establish regional working groups among themselves to address geopolitical and commercial issues.
    We have had a number of discussions with our European and Japanese allies regarding Caspian energy development and transportation. There is a broadly shared sense of the significance of the Caspian Basin, the importance of peace and stability in that region, and the desirability of multiple pipelines.
    We are continuing to engage Russia on Caspian energy development. Caspian issues were discussed at length in the most recent Gore-Chernomyrdin Commission, which occurred here in Washington very recently, and at the G–8 energy Ministerial, which just took place in Moscow. I had the opportunity in both of those sessions to have an expanded dialog with now Prime Minister Kiriyenko.
    To demonstrate our commitment to the east-west energy corridor, we are formalizing our bilateral energy relationships with Azerbaijan, Turkmenistan and Turkey by signing bilateral energy agreements. And we have enhanced the energy dialogs with Russia, Kazakhstan and Uzbekistan under the umbrella of our binational commissions. The primary focus of these partnerships is rapid energy resource development and early action on the Eurasian transport corridor. These partnerships would also be useful in motivating the regional governments to focus on establishing sustainable energy development policies for the longer term.
    The east-west energy corridor, spanning as many as six countries and a number of potential players, is replete with complicated negotiations and equity structures. We have stressed the importance of achieving agreement on concrete project proposals as early as possible, primarily through the multilateral discussions with neighboring states and with the private sector through the establishment of national working groups. Creation of these working groups was one of the major accomplishments of my trip to the region in November and of subsequent visits to the United States from leaders of Kazakhstan and Uzbekistan.
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    These leaders have agreed in principle to support the east-west corridor including the trans-Caspian and Baku-Ceyhan pipeline route and to set up mechanisms within their governments to advance these objectives. To that end, we have seen significant progress. Turkey hosted a meeting of regional foreign ministers in Istanbul on March 1st, and at that meeting Turkey, Georgia, Azerbaijan, Turkmenistan and Kazakhstan issued a joint communique supporting an east-west corridor for transportation of Caspian oil and gas, including trans-Caspian pipelines.
    The Georgians have indicated they plan to host a follow-up meeting in June, and we have suggested that the regional foreign ministers consider intergovernmental arrangements that would create a firm political framework for the east-west energy transport corridor, thereby reducing capital costs associated with these projects.
    In conclusion, Mr. Chairman, let me say that we view as one of the most significant actions that Congress could take to further our efforts in the Caspian the repeal of section 907 of the 1992 FREEDOM Support Act. This statutory restriction on assistance to the Government of Azerbaijan limits our ability to advance U.S. interests in Azerbaijan. When the European Union, Japan, Iran or international financial institutions step in to fill the void, the United States loses influence, and U.S. businesses lose opportunities.
    More generally, we also need the help of the U.S. Congress in structuring assistance to the region to encourage further economic reform and the development of an appropriate investment climate in the region. Continued U.S. Government support through technical assistance is essential in assisting these countries to establish strong market economies, and we encourage the emergence of financially vibrant energy sectors.
    We enthusiastically welcome the dialog we have with you, Mr. Chairman, and the Committee. And we look forward to working with you together in advancing these very important issues on behalf of the United States.
    Thank you very much.
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    Chairman GILMAN. Thank you, Mr. Secretary.
    [The prepared statement of Secretary Pena appears in the appendix.]
    Chairman GILMAN. Just how important are the Caspian oil and gas fields to the supply of energy to our own Nation, and on a global basis in the next century?
    Secretary PENA. Mr. Chairman, we believe that the development and export of the products and the resources in the Caspian is important not only to our national security, but to world security. We have estimated projected demand of oil worldwide to the year 2015 and beyond. We have also estimated the amount of production that would be available worldwide. It is our view that for our own national security purposes, both to ensure that there is a stable and ample amount of world oil in the world market and that we have stable prices over the next several decades, that the production of this oil and gas in the region be made available to the world market as soon as possible. And in that sense, it is very important, I believe, to not only our own national security, but the world's security as well.
    Chairman GILMAN. Thank you.
    Mr. Secretary, what exactly was the commitment made by Kazakhstan's President during his visit to our Nation last November? Did he commit to forego further work on a Kazakhstan-to-Iran pipeline, and was the feasibility of an east-to-west pipeline explored? Did he place a time limit on any such commitment?
    Secretary PENA. There are no specific time limits, Mr. Chairman, that were raised in that particular meeting. Let me say, generally, that there is enormous pressure that is being placed on the leaders of the region, including Kazakhstan. It is our view that the sooner we can begin working together with all of the leaders in the area and with the private sector options for export of product, we can reduce the likelihood that those countries do not have to necessarily go through Iran. That would be the most feasible way to approach this very important subject. Furthermore, the leaders are fully supportive of our effort to build and support trans-Caspian east-west pipelines in order to give them that option.
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    Chairman GILMAN. Mr. Secretary, in March, the foreign ministers of Turkey, Azerbaijan, Kazakhstan, Georgia and Turkmenistan met in Istanbul to discuss that east-west route for oil and gas export pipelines. Do we know if that meeting was fruitful and whether Turkey offered any incentives, such as low transit tariff fees in support of the Baku-to-Ceyhan pipeline? Also, do we know if Georgia has offered any incentives?
    Secretary PENA. Mr. Chairman, I believe that meeting was successful in that the foreign ministers all agreed to support the general proposal we have been discussing, a trans-Caspian, Baku-Ceyhan route. That is a major amount of progress, because up until a year or two ago, it wasn't clear that all the countries, the key countries in the region, were supporting this very important east-west corridor.
    We have urged the leaders of those countries through their working groups to very quickly begin to present their tariff levels, taxing schemes and other arrangements they believe will allow for the private sector to effectively and commercially begin to invest in those pipelines structures. Those decisions have not yet been made, but we have been urging them to try to do it as quickly as possible to meet the October decision that will be made by the AIOC consortium, where it will make a recommendation to Azerbaijan about what it considers to be the main export pipeline route in the east-west corridor.
    So we think if we can synchronize the decisions by these other countries for the broader pipeline, with that decision by AIOC it would be in the best interests of the entire region.
    Chairman GILMAN. Mr. Secretary, one last question. Does the Administration intend to approve an application by Mobil Oil to arrange a so-called swap of oil shipments from Kazakhstan to northern Iran for an equivalent amount of Iranian oil shipped to Mobil customers from Iran via its southern ports?
    Secretary PENA. Mr. Chairman, as we know, there is a provision in the Executive order by the President for oil swaps. This is the first request for such a swap made by a U.S. company. The decision is pending, I believe, in the Treasury Department. No decision has been made thus far, but as far as I know, it is being reviewed very carefully by Treasury.
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    Chairman GILMAN. Thank you.
    Mr. Sherman.
    Mr. SHERMAN. Mr. Secretary, thank you for your service to the country, and thanks for coming here today.
    You speak of a pipeline going to the Mediterranean rather than to the Black Sea, and environmental concerns with regard to oil transportation in the Black Sea and in the Bosporus. Have respected environmental organizations registered a strong belief that we should take the pipeline all the way to the Mediterranean and not transport oil through the Bosporus?
    Secretary PENA. Congressman, I believe there has been some concern on the part of some environmental groups. I don't know the extent to which there has been much involvement by many environmental groups. I can say that having been to Turkey and met with both the President and the Prime Minister and actually reviewed footage of the shipments of product through the straits, that we very much share the concerns of the Turkish Government about accidents.
    There have been accidents that occurred there over the years. There is more and more shipment occurring through the straits. There are some 45-degree turns there that are a bit treacherous. There is one area where it is very narrow.
    We have in the meantime suggested that there be what is called a vessel traffic system put in place in the straits. That has not been done yet. But ultimately, when one looks at the potential volumes that might come through there over the long term, we believe there should be an option to the straits for environmental reasons, and that is why we have suggested this other option and support the Turkish Government suggestion that the other pipeline go through Ceyhan in order to provide a viable option to the straits.
    Mr. SHERMAN. So are we supporting multiple routes, one to the Black Sea and one to the Mediterranean, or are we exclusively supporting a route to the Mediterranean?
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    Secretary PENA. We are supporting multiple routes. For example, the first early route that was commissioned some months ago in November when I was in Azerbaijan actually goes north through Georgia and through Russia to Novorossiysk, but we think that ultimately that will not be enough to carry the amount of product that we see there.
    Mr. SHERMAN. That is a pipeline that goes near Chechnya and dangerous areas in Russia——
    Secretary PENA. That is correct.
    Mr. SHERMAN [continuing]. In order to try to convince us that we can export oil from Central Asia without settling the matter.
    Secretary PENA. I don't know the particular motivation, but you are correct in saying that that line does go through a somewhat precarious area. It is now taking oil, the early oil out of Azerbaijan.
    But again, we think that in the long term, multiple pipelines are the better approach, and that is why we are suggesting this trans-Caspian east-west corridor.
    Mr. SHERMAN. Thank you. My time is up, thank you.
    Chairman GILMAN. Thank you, Mr. Sherman.
    Mr. Bereuter.
    Mr. BEREUTER. Thank you, Mr. Chairman.
    Secretary Pena, how has the section 907 prohibition on U.S. assistance to the Government of Azerbaijan affected your work in encouraging an east-west route for oil and gas pipelines out of the Caspian Sea area?
    Secretary PENA. Congressman, it has affected our work in a number of areas. First of all, there is a sense and a perception that the United States as one entity is not approaching our relationships with the countries in the area in an evenhanded way. There is a sense that there is a discriminatory approach with respect to the assistance we provide to Azerbaijan, because of section 907, and, therefore, we have not been able to move as quickly in resolving some of the pipeline issues.
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    There is still, for example, a concern about a particular route that might be used. I went to Armenia myself met with President Ter-Petrossian, talked to him about this. We think that ultimately, if that issue can be resolved, if 907 can be repealed, and we think that would help in the resolution of the conflicts there, that the east-west corridor pipeline could benefit all the countries in the region. And for that reason, we think 907 should be repealed.
    Mr. BEREUTER. Thank you, Mr. Secretary.
    Speaking of Armenia, it might be a good time to ask you what the U.S. Government is doing, if anything, to help Armenia close the unsafe Metsamor nuclear reactor in Armenia?
    Secretary PENA. Congressman, I would be happy to provide you much more detail about that. Let me say we have been involved in the region, in a number of countries, of securing material. You are aware of our most recent action. In some cases, the work that we do is somewhat confidential until we complete the work, for obvious security reasons. But we would be happy to provide you more information about that particular issue.
    [The reply below was supplied following the hearing.]

    The U.S. Government is currently engaged in a range of activities to improve the safety of the Metsamor reactor. We have also provided Armenia with short-term assistance to meet emergency energy requirements and longer-term assistance to improve efficiency and develop alternative energy resources.

    Mr. BEREUTER. May I suggest, Mr. Secretary, that it would be good to reach out to Armenia to help them with this nuclear reactor issue? I think it is a relevant issue in this whole discussion of energy.
    And may I just close by asking you if you can tell us if you know anything, at this point, about the World Bank finance study done by a German firm on the Baku-to-Ceyhan pipeline route? Is it done? Do you know anything about it? Can you summarize the results of that study?
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    Secretary PENA. Congressman, I do not know if that study has been completed. I would be happy to get back to you with an answer in writing.
    Mr. BEREUTER. Thank you. Both of those items would be helpful to me.
    Secretary PENA. I will do that.
    Chairman GILMAN. Thank you, Mr. Bereuter.
    [The reply below was supplied following the hearing.]

    It is my understanding that the World Bank-funded feasibility study of the Baku-Ceyhan oil export route option is in the final stages of completion. I also understand that the Government of Turkey expects to be sharing the results of the feasibility study with the countries of the region and with the United States and other interested parties in the near future, possibly in June.

    Mr. Hamilton.
    Mr. HAMILTON. Secretary, would you describe this area as important or vital to U.S. interests?
    Secretary PENA. Congressman, I would say that the area is both vital and important. I hate to answer your question that way. But if you are giving me an option, I would say it is vital and important.
    Mr. HAMILTON. I want to get a sense of what priority we put on this region. Presidents don't use the word ''vital'' casually. Vital means vital. And it means that we have to have access to it. And as you described it as vital, that sends a real signal, I think, to all of us.
    Now, I am interested in how we are going to pay for these pipelines. You have recommended an east-west route, and I know that one of the routes also being discussed is through Iran, which you rejected in your testimony. I understand that the east-west route that you are talking about is probably twice as long and would cost approximately twice as much as its southern route, and that there is a real question about its commercial viability.
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    What money, what subsidy, is the U.S. Government prepared to put into this east-west pipeline?
    Secretary PENA. Congressman, let me first respond to the first part of your question. I would suggest that we still need to look at some of the numbers that are being discussed by various companies and also continue to examine the length of various pipelines that are being considered. And I have a very complicated chart in front of me, which I would be happy to present to you. But in some cases, it is true that the one possible east-west pipeline route will be more expensive.
    Let me answer your second question. The U.S. Government is not going to finance these pipelines. These pipelines have to be financed by the private sector.
    Mr. HAMILTON. They have to be commercially viable.
    Secretary PENA. That is correct.
    Now, of course, there are entities like OPIC, Eximbank , that will be involved, as they are normally in any commercial deal around the world, but the U.S. Government is not going to finance these pipelines.
    Mr. HAMILTON. OK. Is it your view that the east-west pipeline that you favor now is commercially viable?
    Secretary PENA. It is. That is my view.
    Mr. HAMILTON. And you reach that view, I presume, on the basis of your conversations with the oil companies that are directly involved?
    Secretary PENA. That is correct, both with U.S. construction and engineering companies, with U.S. oil companies, who are now engaged in significant conversations with the countries in the region.
    Mr. HAMILTON. There are several companies out there, of course, competing for Caspian oil. Why isn't it in the U.S. national interest here to just stand aside and let the marketplace figure out this is the best place and way to get the oil to the market—let the market work, in other words. Why is that not in the best interests of the United States?
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    Secretary PENA. Congressman, I believe we are respecting the market in allowing the market to work. And, of course, as you said, and as I have affirmed, these deals have to be commercially viable. So, for example, the market has allowed for the first early oil pipeline which involves a number of U.S. companies. That is the AIOC consortium, which we support. The market has allowed for the Caspian the CPC option, which is in the north from Kazakhstan to Russia, which involves Russian companies and U.S. companies.
    Mr. HAMILTON. Suppose the market determines that the southern route through Iran is best?
    Secretary PENA. Ultimately, if whatever option we have proposed is not commercially viable, we expect it will not be built, but we think the ones we have proposed are commercially viable.
    Mr. HAMILTON. And if the southern route is commercially viable, would you support that?
    Secretary PENA. We cannot support that, Congressman.
    Mr. HAMILTON. And why not?
    Secretary PENA. Because our policy in Iran is that we do not support the investment in energy in Iran, because of the conduct of Iran. And second, we think it would be imprudent for the countries themselves to rely so much on a competitor. Iran itself has enormous resources. And so, therefore, we think it is not good policy, for example, for Turkmenistan to rely on the export of its gas through a country which itself has a significant competitive amount of gas.
    And so we think that for the national security purposes and concerns of the countries in the region, multiple pipelines are a more prudent approach for all the countries.
    Mr. HAMILTON. So our position as a government is multiple pipelines except one? We don't want it going south.
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    Secretary PENA. That is correct.
    Mr. HAMILTON. I know my time has expired, but let me ask one other question. There are a lot of actors, it seems to me, on Caspian policy within the U.S. Government now. And the question really is who is in charge of U.S. policy toward Caspian energy and pipelines? I know the President is, but what official has principal responsibility here?
    Secretary PENA. Congressman, if I were to describe the hierarchical relationship, I would say, first of all, that there is very direct involvement by the National Security Council. There is also a very strong involvement by the Vice President's office, because of the binational commission meetings that are held between the Vice President and a number of the countries involved, and then all of us, the State Department, the Commerce Department, the Department of Energy and the agencies who are also testifying here today, work in concert with those gentlemen. And I think we have a fairly effective group in place to further our policy.
    Mr. HAMILTON. Well, let me just say that when you answer a question like that, it makes me nervous, because you have given me, one, two, three, four, five agencies or offices in the government. And what that usually means is we don't have very direct control. My experience is that when you are developing new policy, you are much better off to have an official in charge and that there be very clear lines of responsibility.
    It is my impression, Mr. Secretary, that that does not exist today. On most questions, if I have a question about policy, I know who to call. I don't know who to call today. And now, maybe you have got it worked out. I hope you have. But those of us who work on the outside need a little better sense of clarity of organization and of lines of responsibility.
    Secretary PENA. Congressman, it is a very fair question. Let me do this. If I could respond to the Committee in writing to give you a much more specific sense of how the organizations are structured, I think that would be, hopefully, helpful to you.
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    Mr. HAMILTON. That would be helpful, I appreciate that. Thank you for your testimony.
    [The reply below was supplied following the hearing.]

    The Administration's lines of responsibility for Caspian policy are clear and straightforward. Caspian policy is coordinated by a Senior Interagency Group, chaired by the National Security Council (NSC), and consisting of representatives from the Departments of Treasury, State, Commerce, Energy, Central Intelligence Agency (CIA), Environmental Protection Agency (EPA), Agency for International Development (AID), Export-Import Bank (Ex-Im), Trade and Development Agency (TDA), Overseas Private Investment Corporation (OPIC), and the Office of the Vice President (OVP). Work is carried out in three Interagency Working Groups that report to the Senior Interagency Group chaired by the NSC. They are: the Foreign Policy Working Group, chaired by the Department of State; the Commercial Policy Working Group, chaired jointly by the Departments of Energy and Commerce; and the Financial Issues Working Group, chaired by Treasury. Each of the agencies mentioned above is represented in the three working groups.
    While the interagency Caspian working group process has served us well to date, as we move forward it is now clear that the number of tasks and the complexity of the tasks facing us is likely to proliferate. In these circumstances, it could be desirable for the White House to identify and empower a single Caspian coordinator with overall authority to assign responsibilities, track progress, and hold the interagency groups accountable for achieving specific objectives.

    Chairman GILMAN. Thank you, Mr. Hamilton.
    Mr. King.
    Mr. KING. Thank you very much, Mr. Chairman.
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    Good morning, Mr. Secretary. It is a pleasure to have you here. I would like to follow up on your opening statement regarding section 907 and also the answers you gave to Congressman Bereuter as to the Administration's belief that it impedes your ability to influence Azerbaijan.
    What specifically do you intend or do you think the Administration will do to bring about the repeal of 907, and has the Administration considered exercising its waiver authority?
    Secretary PENA. Congressman, first of all, starting with Secretary Albright and a number of members of the Administration, we have all testified before various committees urging the Congress to repeal section 907. We have made those statements in other public fora, and we will continue to urge the Congress to take that action.
    The characterization of 907 as providing a waiver for the Administration, we have been told by the legal staff, may not be as precise as we think it is. There have to be legal determinations made under section 907 before the provisions of 907 can take effect.
    We believe that a much more clear and effective way of addressing this issue is to simply have a straightforward repeal of 907 so that we don't have to go through this process of making certifications and essentially legal conclusions about standards that have been put into the current section 907.
    Mr. KING. But it is your clear belief that it is impeding your ability to function in the region?
    Secretary PENA. That is our judgment, Congressman. I can tell you based on my own personal conversations with leaders in the region, particularly with leaders in Azerbaijan, they raise this consistently in all of our meetings as an impediment, as a statement or suggestion that perhaps the United States is not dealing with all the countries in the region equally, fairly and in a balanced way, and continue to raise this as a major sore point in our discussions.
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    Mr. KING. Thank you, Mr. Secretary.
    Mr. Chairman.
    Chairman GILMAN. Thank you, Mr. King.
    Mr. Hastings.
    Mr. HASTINGS. Thank you very much, Mr. Chairman.
    Mr. Secretary, thank you for your testimony. Let me just as immediate background give you the benefit of my personal experiences that somewhat parallel your own. You were in the region 2 weeks previous to Mr. Solomon that I traveled with, and we met with many of the interlocutors that you met with during the course of our visit.
    In response to the Ranking Member Mr. Hamilton's query with reference to the pipeline through Iran, let me offer to you a suggestion that came from the President of Turkmenistan and ask you to respond briefly to it, if you will. What he says to us is, he has two million Turkmen that live in Iran, and it becomes virtually senseless for him not to consider oil and gas exchange in spite of Iran's significant amount of oil.
    Let me make it very clear. I am not a patron of Iran or I have a set view with reference to sanctions, but realistically you must expect that Turkmenistan is going to do business with Iran, because Turkmen already are doing business with Turkmen living in Iran.
    What is your reaction to that kind of thinking in a general way regarding the pipeline in Iran?
    Secretary PENA. Well, Congressman, you have raised obviously a very cogent concern that Turkmenistan has. And when I was there, we were simply a few miles from the Iranian border, you can really see it over the mountains. Our main concern is that we believe it would be a bad governmental policy for Turkmenistan or any of the other countries in the region in the area of energy, because of the enormous importance that energy would play in that region today and in the future, to rely on Iran for two reasons.
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    One, Iran is a competitor, and it seems to me that if you are dealing with a competitor, you don't want to put, ''all of your eggs in one basket''. And so, therefore, you ought to support multiple pipelines. And that is why I think President Niyazov signed an agreement to undertake a feasibility study of the trans-Caspian route, to look at that as another option. And second is our own national security concern, and that is the continued conduct of Iran, and, therefore, we think it is inappropriate for us to support, through energy investments the economic development of Iran, given the kinds of activities that Iran continues to engage in. So for those two reasons, we think it is more sensible and more appropriate for Turkmenistan to have other options.
    Mr. HASTINGS. I heard you say in response to Mr. Hamilton that the Administration was not going to—or at least we are not going to pay for the pipeline. But given the Administration's vocal and public support for the east-west line, is there not the danger that after having convinced all the parties of the need for this pipeline, we may then be in the position of having to pay for it since no other nation or commercial enterprise appears ready and willing to do so?
    And I guess what I am interested in is what precisely is the Administration willing to do financially to build the east-west pipeline, and about how much would such a pipeline cost?
    Secretary PENA. Congressman, again the U.S. Government is not going to finance, build these pipelines. They have to be financed by the private sector. We think that key to that commercial viability will be the terms that will be required by countries like Turkey and the other transit countries. We have been urging them through the formation of these working groups to, as quickly as possible, present to the private companies terms, tariffs, all the portions of the agreements that we normally see in these sorts of agreements in such a fashion so these investments can be commercially viable; otherwise they will not be able to attract not only investment by the companies themselves, but by international financial institutions. And they are working on that.
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    And so we believe based on our own estimates and our discussions with the private sector and the countries involved that this is doable. It is a question of getting the countries together to make those decisions, provide those terms, have the negotiations with the private sector and do the deals, and I think that is the process that they are involved in today.
    Mr. HASTINGS. Mr. Chairman, I thank you very much.
    Chairman GILMAN. Thank you, Mr. Hastings.
    Mr. Berman.
    Mr. BERMAN: Good morning, Mr. Secretary. And we are going to miss having you around Washington. And I won't get into all the appreciation you did for our earthquake problems back in 1994.
    But I guess I just want to explore an issue that was raised in a way by the Ranking Member, Mr. Hamilton. In terms of what it does for the countries involved, we think there are political and international and stability benefits from pushing the pipeline, the middle option, or however we are describing it today, the——
    Secretary PENA. East-west.
    Mr. BERMAN: The east-west pipeline. I guess it ends in the Black Sea or the Mediterranean.
    Secretary PENA. Mediterranean.
    Mr. BERMAN: Right.
    To what extent, and apart from all of the other very important considerations, but to what extent would a decision to waive ILSA have in creating a push by a number of different oil companies to go with what might be the cheapest option, the southern option, in the recognition that the constraints are off and thereby undermine our interest in the east-west pipeline?
    Secretary PENA. Congressman, as you know, the Administration, and obviously this is a decision that Secretary of State will be making in terms of ILSA, is reviewing the ILSA issue and trying to reach a final decision. And so I don't want to——
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    Mr. BERMAN: I don't want to get into the foreign policy issue so much, I want to get——
    Secretary PENA. I understand that. I will answer your question, but I first want to premise, state, I don't want to try to speculate about what might or might not happen. But let me answer your question generally.
    Obviously in making a decision there, one of the issues among many issues is the extent to which more companies will be encouraged to invest in Iran and what impact that would have in the ultimate construction of a pipeline through Iran.
    Mr. BERMAN: Who said this?
    Secretary PENA. I am saying, among a number of concerns, is the extent to which allowing more companies to invest in Iran will have an impact on a pipeline being built in Iran. Clearly, that is one of a number of factors that one would look at in trying to make a decision about that subject.
    So the answer is, without responding to a hypothetical, yes, there is a concern that the more that there is other access to investment in Iran, the more likely it is that a pipeline through Iran would become——
    Mr. BERMAN: The alternative.
    Secretary PENA [continuing]. The alternative as opposed to the one we are recommending.
    Mr. BERMAN: I just hope that factor is remembered as we come to a decision on this issue.
    Thank you very much, Mr. Chairman.
    Chairman GILMAN. The gentleman's time is expired. Thank you.
    Mr. Pallone.
    Mr. PALLONE. Thank you, Mr. Chairman.
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    I obviously disagree with the Administration on the repeal of section 907. Mr. Secretary, section 907 was put into place because of the continued blockade by Azerbaijan of Armenia and Nagorno-Karabakh, and that blockade has resulted in Armenia not being able to get energy supplies. I mean, Armenia is suffering because it has no energy source, other than the nuclear power plant, which is very old and is going to have to be replaced in a few years.
    So I don't think there is any justification for repealing section 907, as long as the blockade continues and Armenia continues to suffer with a lack of energy supplies, among other things.
    What I don't understand, and this is my question, is if the goal is peace and stability in this region, if the goal is to try to create infrastructure between the countries so that they cooperate and work together, it seems to me that, rather than talking about repeal of section 907, which would just indicate to Azerbaijan that they continue the blockade and leave Armenia out of future economic development and cooperation in the region on energy and other issues, that it would make more sense for the United States as part of its energy policy to basically try to encourage ending the blockade, and by these multilateral agreements or U.S. policy insisting that if there is going to be pipelines, if there is going to be aid from the United States for economic development, that Azerbaijan stop with the blockade and they work with Armenia, and even to go so far as to insist that one of these multiple pipelines go through Armenia.
    What better way to encourage cooperation between these countries then to eliminate this problem that Armenia has and Nagorno-Karabakh has with the lack of energy resources? Why aren't we doing that? Why aren't we encouraging a pipeline through Armenia? Why aren't we insisting that that be part of the U.S. strategies in order to bring these countries together?
    Secretary PENA. Congressman Pallone, let me say that I think we are all trying to get to the same place, and that is that we find a way to use energy as the glue that brings all these countries together, and that helps all countries economically, politically and to allow them to continue to be independent. The question is, what is the best way to accomplish that goal.
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    You have a particular perspective that the blockade should be lifted first before 907 is changed or other actions occur. We have a different view. We think that a better approach here is to change 907 so that we can have the parties continue to work together, and you know there are significant efforts going on now. We believe there is a way for Armenia to benefit from the energy potential. In fact, in my meeting with the President of Armenia, we talked very specifically about if peace can be brought to this area, if we can resolve these issues, there will be ways that pipelines can be brought into Armenia to support Armenia and its needs.
    And you are right, they are suffering from not having natural gas. They had gas cut off some time ago. It is a constant problem.
    And so I think we differ in how we get to that goal, but we all agree that bringing peace and stability in the region, using these energy resources as a way to support all the countries in the region, including Armenia, is the ultimate solution. The question is how do we get there.
    Chairman GILMAN. The gentleman's time is expired.
    Thank you, Mr. Secretary, for your time, and we wish you well in your future endeavors.
    Secretary PENA. Thank you very much, Mr. Chairman.
    Chairman GILMAN. Our next witness is Ambassador at Large for the New Independent States, Stephen Sestanovich. Our new Ambassador at Large for the Independent States is responsible for our policy toward not just these eight countries, but for Russia, Ukraine and others as well.
    He comes from a distinguished academic background, most recently as a member of the Carnegie Endowment, and has served at our NSC and State Department. I note that he is also a veteran of the Congress, having once worked for Senator Moynihan.
    Welcome, Ambassador Sestanovich.
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    Ambassador SESTANOVICH. Thank you, Mr. Chairman.
    Chairman GILMAN. You may put your whole statement in the record or summarize, whichever you deem appropriate.
    Ambassador SESTANOVICH. I would like to summarize, as well as ask that my full statement be in the record.
    Chairman GILMAN. Without objection, the full statement will be inserted in the record. Please proceed.

    Ambassador SESTANOVICH. Mr. Chairman, thank you for your welcome. Thank you for the opportunity to discuss with you and your Committee our policy toward the Caucasus and Central Asia. It is a pleasure and an honor to be here, as you noted earlier, for the first time.
    Secretary Pena has discussed our strategy for developing an east-west transport corridor for energy and our broader Caspian basing policy. Ambassador Morningstar and Acting Assistant Administer Pressley for AID will focus on our assistance programs in the Caucasus and Central Asia.
    I would like to discuss U.S. foreign policy interests toward Central Asia and the Caucasus in general. Our approach starts with a recognition of the region's strategic importance to the United States, and not only because of its abundant energy resources. We have diplomatic, political and security reasons for being involved in the Caucasus and Central Asia as well as other economic interests.
    A strategy toward the Caucasus in Central Asia has four main elements. First, strengthening modern political and economic institutions and advancing market democracy; second, conflict resolution; third, energy development and the creation of an east-west energy transport corridor; and, fourth, security cooperation. I want to discuss each of these elements of our strategy in my remarks today.
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    But before I do so, let me begin by noting how different and how much more ambitious the policy that I will describe for you is from anything that could have been contemplated in December 1991 when the Soviet Union broke up. At that time, many observers questioned the longtime viability of the new states of Central Asia and the Caucasus.
    Today, we deal with governments that have far more confidence about their economic prospects and political stability and far fewer doubts about their ability to protect their sovereignty. The transformation of U.S. relations with these states is particularly striking. When we first opened embassies in Central Asia and the Caucasus, we envisioned small posts that would be able to get by with minimal resources. Our posts are now bursting at the seams.
    Our assistance under the FREEDOM Support Act in fiscal year 1998 targets $250 million in aid to the Caucasus and approximately $90 million to Central Asia. Central Asia alone has received approximately $3.1 billion in aid since 1992.
    Let me now turn to the first of the key elements to our policy in this region, the strengthening of modern political and economic institutions. These issues, the emergence of democratic pluralism, the protection of human rights, the creation of a functioning market system, are fundamental to the future of the Caucasus and Central Asian states, as they are around the world, and they are key determinants of the kind of bilateral relations we can have with them. These are not just general goals, they figure prominently and concretely in all of our high-level exchanges with the leaders of the region.
    Last week's visit of Turkmen President Niyazov, for example, led to the release of prisoners of conscience, produced a commitment to free and fair elections in 1999 and 2002, as well as to agreement on the establishment of an OSCE office in Ashgabat that will focus on democracy-building and respect for human rights.
    A second element of our policy toward Central Asia and the Caucasus is regional cooperation and conflict resolution. Since 1991, the United States has worked actively to promote cooperation among the Caucasus in Central Asian states, and the resolution of conflicts within and among them. The states of the region welcome American diplomatic involvement. Our efforts have borne some fruit. Cease-fires have taken hold in all the region's major conflicts, but much more needs to be done to bring lasting peace and genuine regional cooperation.
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    To this end, we will continue our very active involvement in two diplomatic initiatives to resolve conflicts in this region. First, the so-called Minsk process under the OSCE, in which the United States served as one of three cochairs in an effort to resolve the Nagorno-Karabakh conflict. After a pause made necessary by Armenia's Presidential election campaign, we are hoping that the Minsk process can be reinvigorated.
    Second, we will remain involved in the efforts of the so-called Friends of the Secretary General to find a formula to resolve the Abkhazia conflict in Georgia.
    A third element in our policy toward the region relates to economic reform and Caspian energy development and market access. An east-west Eurasian transport corridor will foster not only economic development, but also regional cooperation. It promotes the independence and sovereignty of these new nations. It is key to preventing Iran from undermining the kind of Central Asia we are seeking. It offers important commercial opportunities for U.S. businesses, which have already invested heavily in the region. It supports U.S. objectives in relations with a close ally, Turkey.
    Effective diplomacy will be essential to realizing an east-west Eurasian transport corridor. It is virtually without precedent and history for pipelines to be built across so many international boundaries and involving countries with so little history of cooperating with one another, so little independent history of any kind for that matter.
    The fourth key pillar of U.S. strategy in the Caucasus and Central Asia is regional security cooperation. The United States is actively promoting creation of the Central Asia Peacekeeping Battalion made up of troops from Kazakhstan, Uzbekistan and Kyrgyzstan.
    The United States has also initiated security dialogs with the Caucasus states. We have made security and nonproliferation a significant part of the work of our joint commissions with Kazakhstan and Uzbekistan. We will be expanding our dialogs on these topics with Kyrgyzstan and Turkmenistan in the near future. Our efforts are aimed at helping these countries to create effective border controls, to participate fully in bilateral and international arms control and nonproliferation programs, to better control imports and exports, and to develop modern military-civilian relationships.
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    Mr. Chairman, one expression of Congressional interest in Central Asia and the Caucasus has been the introduction of a proposed Silk Road Strategy Act in both the House and the Senate. We welcome this increased attention to the region. As I have discussed, we believe we are already pursuing an active and comprehensive policy toward the region that corresponds fully to the principals and objectives stated in the bills that have been proposed.
    We agree that Central Asia and the Caucasus have strategic importance for the United States. We do, however, have concerns that the Silk Road Strategy Act could create confusion with regard to this FREEDOM Support Act, which has served us so well since 1992. We are ready to work with you to address this and other concerns about the bill.
    Let me close by saying a word about this Administration's opposition to section 907 to the FREEDOM Support Act and related provisions in our appropriations act that restrict assistance to Azerbaijan. As Secretary Albright and Deputy Secretary Talbott have testified before Congress, section 907 remains an obstacle to our diplomacy in Azerbaijan and the Caucasus in general.
    I want to be absolutely clear on one point; nothing in the Administration's call for 907's repeal implies any change in our position on Armenia. To the contrary, our support for Armenia is clear, and this remains a fundamental element of U.S. policy toward this region. Yet in our role as a Minsk Group cochair, we need to be seen by all parties as a balanced mediator.
    It is understandable that 907 is seen by some to raise doubts about U.S. evenhandedness vis-a-vis Azerbaijan and Armenia in negotiations on Nagorno-Karabakh. We do not believe that 907 has advanced the objective its supporters intended when it was passed in 1992. To be blunt, it has not brought us closer to a lasting peace in the Nagorno-Karabakh conflict.
    Mr. Chairman, this Administration is deeply engaged in supporting the independence, sovereignty and prosperity of the Caucasus and Central Asian states. Our Caspian-based energy strategy is a key component of that effort; so are our political support for regional peace, our work on behalf of democracy and human rights, our security cooperation and our assistance programs.
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    We look forward to continuing to work closely with Congress on behalf of the goals and objectives that we clearly share. Thank you, Mr. Chairman, again for the opportunity to be here. I would be pleased to respond to your questions.
    Chairman GILMAN. Thank you, Mr. Ambassador.
    [The prepared statement of Ambassador Sestanovich appears in the appendix.]
    Chairman GILMAN. Ambassador Sestanovich, in response to a question from our Committee hearing on the Caucasus held in July 1996, the State Department wrote, and I quote: ''Iran has objected to Azerbaijan's good ties with Israel and has exerted pressure on the Government of Azerbaijan to distance itself from Israel and the United States.''
    Mr. Ambassador, is Iran continuing its efforts in that regard, and what is the state of Iranian-Azerbaijian relations at this time?
    Ambassador SESTANOVICH. Mr. Chairman, Iran has a rather consistent policy about anybody's relations with Israel. I think their position on this is rather well known, and they make it clear throughout this region. Iranian-Azerbaijian relations are complicated. Congressman Hastings earlier referred to the fact that there are Turkmen who live in Iran. There are many Azerbaijans who live in Iran as well. These are two societies that are deeply interpenetrated. They are as well international rivals in economic and political terms.
    I think the most important fact about Iranian and Azerbaijian relations has to do with Azerbaijan's desire to establish its independence over the long term in energy terms. That is a policy which we believe can be well served by the kind of energy transportation corridor out of the region that we support.
    Beyond that, Iran is seen in Azerbaijan as a disruptive presence, which supports subversion of that society. Our consultations with the Government of Azerbaijan are aimed at enhancing and strengthening Azerbaijan's ability to pursue an independent policy.
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    Chairman GILMAN. Thank you, Mr. Ambassador.
    Earlier this month Assistant Secretary of State Stu Eizenstat stated that the United States strongly opposes any pipeline across Iran, and that a Turkmen gas pipeline in Turkey ought to cross the Caucasus, not Iran. However, last July, Turkmen officials felt that they had received a so-called green light from U.S. officials on their proposal to build a gas pipeline from Iran to Turkey.
    Can you tell us how this discrepancy occurred?
    Ambassador SESTANOVICH. Mr. Chairman, I have heard Turkmen officials use different colors for the light that they think they saw. Some of them said it was a blinking yellow light; others were convinced that it was bright green. Our position has been rather clear on this. The light is, as far as we are concerned, bright red. And I have myself said to President Niyazov last fall when I traveled through the region and met with him in Ashgabat that our position on this is absolutely clear. We oppose a pipeline through Iran to transport Turkmen gas to Turkey.
    I might say, though, that I didn't find President Niyazov had any great trouble with our reasons for this. He understands perfectly well that substituting his earlier reliance on Russia as a transit route for the export of his energy with reliance on Iran as a transport route for his energy is no very good deal. He understands that he needs alternative routes that better protect his independence, as well as simply giving him and Turkmenistan the revenue that the country needs.
    Chairman GILMAN. Mr. Ambassador, one last question. U.S. officials have stated that we and our Nation do not see the Caucasus and Central Asia as a future American sphere of influence, in order to assuage Russian concerns; however, have we made it clear to Russian officials that those countries are not to be considered a Russian sphere either?
    Ambassador SESTANOVICH. Absolutely, Mr. Chairman. Both publicly and in our diplomatic conversations. It is, from our point of view, one of the overriding goals of our policy toward this region that it not be part of anybody's sphere of influence. That doesn't mean that the countries of this region should not have good relations with Russia. It does mean that Russian influence, which is an understandable concern given the history of the Soviet Union, has to be exercised in legitimate ways, conforming to international law, respecting the sovereignty of these states.
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    Chairman GILMAN. Thank you very much.
    I must apologize, I am being called to another hearing. I am going to ask Congressman Bereuter if he would be kind enough to chair the remainder of the meeting.
    Mr. Bereuter.
    In the meantime, the Chair recognizes the Ranking Minority Member for any questions he may have.
    Mr. HAMILTON. Thank you very much, Mr. Chairman.
    Mr. Ambassador, we welcome you for your first testimony.
    Ambassador SESTANOVICH. Thank you.
    Mr. HAMILTON. You heard Secretary Pena a moment ago describe our interests in this region as both important and vital. And in the very first page of your testimony, you describe it as of strategic importance. Why do we have such a variety of vocabulary here?
    Ambassador SESTANOVICH. We wrote——
    Mr. HAMILTON. Can you describe the U.S. interests? Why do we have such a variety of vocabulary in describing the U.S. interests? Why can't we get together?
    Ambassador SESTANOVICH. Congressman Hamilton, I think the variety in vocabulary may just reflect multiple authorship of different statements and late clearance deadlines. Let me suggest to you that it doesn't in any way reflect a disagreement about the nature of our stake in this region. If Secretary Pena were still here, I would say to him, well maybe ''very important'' is a good alternative to ''vital.'' But I don't think it would——
    Mr. HAMILTON. Now we have four descriptions.
    Ambassador SESTANOVICH. We have four. And I think we can keep going, but I don't think it reflects a disagreement. What we are trying to do is find different words to describe a very large stake and a concern about——
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    Mr. HAMILTON. Would you accept the word ''vital''?
    Ambassador SESTANOVICH. If it is good enough for Secretary Pena, it is good enough for me, sir.
    Mr. HAMILTON. Do you draw any distinction between ''strategic'' and ''vital''?
    Ambassador SESTANOVICH. Let me tell you what I mean by ''strategic.'' The future of this region obviously will have a lot to do with a strategic interest of the United States, and that is the diversification of global energy supplies. It will have a lot to do with another strategic interest to the United States, and that is how the broad expanse of the former Soviet Union emerges into the international community as a group of sovereign states that are integrated into international institutions enjoying good relations with other states of the international community, including with us, and not a source of conflict that threatens our interests in a multiplicity of ways.
    This is a big, historic—I don't think it is—I will toss in another word to our discussion of this, historic transformation. We have a big stake in how it turns out.
    Mr. HAMILTON. I don't want to make too much of the words but let me say that I think precision in articulating U.S. interests in an area is very important for many reasons, and I appreciate your comments about it.
    I wanted to ask you about Russia, too. You have a few paragraphs in your statement about Russia, and you indicate that we reject the idea of spheres of influence. Russia today has troops in this region. They are stationed in Armenia. They are stationed in Georgia. There are Russian troops in the region. Do we object to that?
    Ambassador SESTANOVICH. We certainly object to it, Congressman.
    Mr. HAMILTON. And that is pursuant to bilateral agreements, as I understand it?
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    Ambassador SESTANOVICH. That is right. And that is the crucial fact.
    Mr. HAMILTON. Yes. So it is OK?
    Ambassador SESTANOVICH. Where those countries consent freely, an important test.
    Mr. HAMILTON. So in these cases, Georgia and Armenia, we have no objection to the Russian military bases in those countries?
    Ambassador SESTANOVICH. Our position is that these are states that are free to make the kinds of international choices that sovereign states all make.
    Mr. HAMILTON. So we have no objection to those troops under these circumstances?
    Ambassador SESTANOVICH. Congressman, the really crucial test is free consent.
    Mr. HAMILTON. Well, I know. And I am asking you specifically, do we have free consent in these two instances?
    Ambassador SESTANOVICH. I think both of the governments in question review this issue from time to time. In the case of the Georgian Government, it is a more sensitive and controversial question.
    Mr. HAMILTON. Look, my question is simple. No. 1, do we object to Russian troops in Armenia and Georgia today?
    Ambassador SESTANOVICH. We think that the governments of those countries have the right and are able to exercise the right to ask the Russian forces to leave. As long as they have that right, there is no objection that can be raised to them. But let me say this issue does arise from time to time in Georgia in connection with a renewal of a mandate for the Russian——
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    Mr. HAMILTON. Let me make sure I understand. We have no objection today, under present circumstances, to Russian troops in Armenia and Georgia?
    Ambassador SESTANOVICH. In the sense that these governments have the right to make this choice.
    Mr. HAMILTON. I am not talking about their governments. I am talking about our government, the United States of America. Do we object to Russian troops in Armenia and Georgia today?
    Ambassador SESTANOVICH. We don't have a separate position on that from those governments.
    I could add that the crucial issue in the case of Georgia is whether the——
    Mr. HAMILTON. So we support the troops' presence there?
    Ambassador SESTANOVICH. Congressman, if you will allow me to recall a question about——
    Mr. HAMILTON. You just said a moment ago our position is the same as the host governments. And if that is the case—they are not objecting. They have entered into a bilateral agreement, and I am just trying to figure out whether we think it is good or bad. I am trying to figure out whether we think it is good or bad for those Russian troops to be there.
    Ambassador SESTANOVICH. There is a difference between not objecting and supporting. I would like to exploit it. We don't object.
    Mr. HAMILTON. OK. Oh, boy. It took me a lot of work to get that. But I got it. OK. I guess my time has gone.
    What do you think is the goal of Russian policy in this region today?
    Ambassador SESTANOVICH. I think Russians are divided on that question. If you listen to Russian debate on the issue, you hear a spectrum of views ranging from people who will openly tell you they want to reconstitute the Soviet Union to others who believe that Russian interests in this region over the coming period are going to be rather minimal.
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    Mr. HAMILTON. We would all understand there would be differences within the government of attitude and opinion toward this region. What is the policy today of the Russian Government?
    Ambassador SESTANOVICH. The policy of the government is to advance a variety of political and economic interests. It is to—if you read Russian Government statements—to prevent a kind of destabilization of the region that would be threatening to the southern border of Russian.
    Mr. HAMILTON. I will conclude with this. I have gone way beyond my time. I appreciate the Chairman——
    Do you think the Russian Government is seeking direct control over this region in these countries?
    Ambassador SESTANOVICH. I don't think, if you look at their policy or their statements right now, you would come to that conclusion.
    Mr. HAMILTON. You would not come to that conclusion.
    Ambassador SESTANOVICH. You would not come to that conclusion.
    Mr. HAMILTON. Thank you, Mr. Chairman.
    Mr. BEREUTER. I exercised some discretion here, because I wanted the answers for the record.
    I think the U.S. Government ought to object to Russian troops in Armenia or Georgia or any other country in the region, and I am very much inclined to introduce a resolution to that effect which will give you a very clear sense of Congress's unanimous view on that. I think it might be very helpful.
    Because he has another appointment, I am going to yield the balance of my time to Mr. King, and I will take his time later.
    Mr. KING. Thank you, Mr. Chairman.
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    Mr. Ambassador, going back to the points that have been mentioned before, Mr. Sherman, Mr. Pallone and Mr. Bereuter and myself, regarding the whole issue of Armenia and Azerbaijan, Nagorno-Karabakh, I would really like to put a few issues on the table.
    I know Mr. Pallone talks about the blockage by Azerbaijan, which is certainly a very legitimate point to be raised.
    I would also, though, refer—earlier this year we received a memorandum of justification from the State Department where it talks about the actions taken by Armenia, Nagorno-Karabakh being inconsistent with the principles of the Helsinki final act.
    I am also aware that recently, maybe you could add on to this, Azerbaijan has been helpful to the United States intercepting sensitive materials coming from Russia to Iran. And as a follow-up to what Mr. Bereuter was saying before, the Administration is talking of repealing 907, the position which I support.
    But, also, looking at all the variety of interests here, is there also something at the same time that can be done to provide direct assistance to Armenia which will be a counterbalance to that so it doesn't appear that we are taking sides?
    And I know that no analogy is exact. I am thinking of the recent talks in Northern Ireland where the United States served a role of taking more disperate interests and finding enough common ground among all of them to try to bring about a resolution in a region. I am just wondering if any of that is applicable here and what could be done regarding Armenia and Nagorno-Karabakh which could justify, in a political sense, the repeal of 907.
    Ambassador SESTANOVICH. I appreciate the question, because I think it provides an opportunity to reiterate the U.S. strong interest in good relations with Armenia and its strong established support for Armenian independence, economic revival.
    It is Armenia that has received the highest per capita assistance in the entire former Soviet Union. This is an expression of strong American support that will continue.
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    You asked about an analogy to Northern Ireland. We have been actively engaged in a peace process that has some analogies to the mediation process that produced such good results in Ireland. We have been, in participation with other countries, trying to find a formula for negotiation among the parts that would move beyond a cease-fire to a real peace that would enable them to cooperate with each other and enjoy the advantages of regional growth.
    This is all fully consistent with a desire to repeal section 907. As I said in my remarks, we are strong supporters of Armenia and will continue to be so.
    Mr. KING. Thank you, Mr. Ambassador.
    Mr. BEREUTER. Ambassador, we have a vote on, a single vote. I think we will take a 10- to 12-minute recess. Both Mr. Sherman, myself, and perhaps Mr. Pallone, have questions. So we would appreciate your indulgence. The Committee will be in recess for 12 minutes.
    Mr. BEREUTER. The Committee will come to order.
    Without objection, I will submit a statement from the Honorable Chris H. Smith for the record of this hearing.
    [The prepared statement of Mr. Smith appears in the appendix.]
    Mr. BEREUTER. Since Mr. Sherman is not back, he will be protected. But I will ask questions at this point.
    Ambassador, has the Russian Government yet responded positively to an extradition request from the Georgian Government for the return of its former security chief, Mr. Egor Giorgadze, who is suspected of involvement in the first assassination attempt against the Georgian President Shevardnadze in 1995?
    Ambassador SESTANOVICH. Congressman, I believe that the Russians response to this extradition request is to say that he is not in Russia.
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    I can add to this only one bit of information. The last time I was in Moscow there was a press article saying that they would be responding positively to the extradition request, which of course implies that he is in Russia. I can try to get you further information on that.
    Mr. BEREUTER. This man is in Russia, the Russian Government knows where he is, and I think we ought to insist on his extradition to Georgia for the involvement in the assassination attempt or alleged involvement.
    I thought about what I am going to say next, and I am going to say it nevertheless, because I think it is accurate and needs to be said. I am convinced that elements in the Russian Government are attempting to assassinate President Shevardnadze, and they should understand in the Government of Russia that there will be severe consequences in U.S./Russian relations as long as they persist in this. I hope you will convey that to the Russian Government as a sentiment of one Member.
    Ambassador SESTANOVICH. I can only concur in the thought both that loss of President Shevardnadze would be a disaster for his country and for the region and that any efforts of that kind are appalling.
    Mr. BEREUTER. I am convinced that the attempts to assassinate him are ongoing and that they involve elements of the Russian Government.
    Ambassador SESTANOVICH. As you may know, Congressman, immediately after the assassination attempt against him in February, we sent a team out there in order to help in any way we could with the investigation.
    Mr. BEREUTER. I know that is the case. That is important. I wish you would redouble your effort as well as to deal with the Russian Government diplomatically in addressing the gravity of the concern about the activities within that government to assassinate President Shevardnadze.
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    Mr. Ambassador, what are you able to tell us about the shipment of about $1 billion in Russian heavy weapons to Armenia and Nagorno-Karabakh that took place over the 1994–96 period? What kind of weapons were shipped and where exactly did they go?
    Ambassador SESTANOVICH. What we know about this shipment actually comes from Russian sources. As you may know, there was a public controversy involving an investigation by the Russian Duma into these reports. There was an agreement to conduct an investigation, and there was going to be a report on the outcome of it. I have not seen that report, and I don't know that it has ever been released, at least as it—when it first emerged this was a kind of a quarrel between the Duma and the executive branch.
    I don't know the details of any particular kinds of equipment that were transferred, but I can certainly try to find out some more information for you on that.
    Mr. BEREUTER. Would you arrange that? I assume this would be a classified briefing. We appreciate knowing what our assessment is of how much weaponry went. We know the value approximately. We don't know where it is. We don't know exactly the type it is. We know it has gone to Armenian Karabakh.
    Mr. Ambassador, does Armenia pay anything toward the upkeep of Russian bases, troops and border guards on its territory in cash or subsidies under bilateral agreements or treaties with the Russians? What is the number of the Russian military personnel and border guards in Armenia? How many military and border guard bases or facilities does Russia maintain in Armenia?
    That is all. It is a simple question—or two or three.
    Ambassador SESTANOVICH. I want to give you precise information on that.
    Mr. BEREUTER. I would appreciate if you would provide that for the record; and, if it is classified, we will, of course, handle that by a separate, classified briefing.
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    Ambassador SESTANOVICH. Sure. I can give you an anecdotal bit of information on this.
    Mr. BEREUTER. Alright.
    Ambassador SESTANOVICH. A couple years ago, when President Ter-Petrossian of Armenia was in town, he spoke at the Carnegie Endowment where I was then employed. And he was grilled on this subject by people in the audience who talked about the Russian forces there. He reacted dismissively to this idea. He said, these are a few thousand guys. What are you thinking about? These, you know, do you think it has some impact on us? That is, at least, the——
    Mr. BEREUTER. Probably reserve it as some sort of militia—unorganized, I imagine—with no weaponry other than slingshots?
    Ambassador SESTANOVICH. Putting into the years to gain their eligibility for their pensions was his clear implication, sir, but I can't tell you that that applies to the entire force there. He was pretty relaxed about it. But I wouldn't want to let it go at all. We will get you some more information.
    Mr. BEREUTER. Thank you.
    One final question, Mr. Ambassador. Russia has sought, ultimately with success, revisions in the flanking provisions of the Treaty on Conventional Force, the CFE, in Europe, so that it could deploy greater numbers of weapons in the North Caucasus part of its territory around the separatist region of Chechnya. However, at the same time, Russia sought to maintain a large number of its conventional weapons on bases in the south in the now independent states of Georgia and Armenia.
    Why would it not have been simpler for Russia to simply withdraw its weapons based on such foreign territory and still stay within the flank limits, if it wished to increase its weapons deployment on its own territory?
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    Ambassador SESTANOVICH. It would have been simpler in a sense, Congressman. There is rather a lot of debate in Russia today about the need to pull back forces of this kind, because many Russian experts allege that Russia simply cannot afford these deployments. It is a rather lively issue as Russians debate the size of their forces over the long term. They are looking at a very substantial reduction in the overall size of their armed forces—both for budgetary reasons and because of reduced missions—and given that the detachments that they have in some of the NIS countries are frequently discussed as candidates for that kind of pullback.
    Mr. BEREUTER. Ambassador, thank you very much.
    Mr. Sherman, you are recognized.
    Mr. SHERMAN. Thank you, Mr. Chairman.
    As long as there is discord in the Caucasus, it opens the doors for Russians, as I have stated earlier. I think the recognition of Nagorno-Karabakh is the first step toward peace and stability in the area.
    I know, Ambassador—and, by the way, welcome to our Committee and your assignment—that you mentioned that 907 in your view has not been effective.
    I would point out, first, it is effective in conveying for the entire world our dedication to the values of democracy and the value that you should not strangle one of your neighbors because it happens to be a landlocked country.
    But the other thing I would point out is that 907 really hasn't been given a chance. For 907 to achieve its objectives, Azerbaijan must regard it as a permanent part of our policy; and, unfortunately, the State Department has for many years undermined the effectiveness of 907 by calling for its repeal. It is disparaging to Armenia and otherwise giving hope to Azerbaijan that it can continue aggression and strangulation with impunity.
    We have talked about all the different directions this oil could go in, except one, and that is the possibility that China would be a market for this oil. Do we have political objections and are there practical obstactes to the export of oil from Central Asia and natural gas from Central Asia to the People's Republic of China?
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    Ambassador SESTANOVICH. You phrased a number of interesting questions. If I could just start first with China. I think the practical obstacles, it is generally acknowledged, to a pipeline going east from the Caucasus and Central Asia are enormous. This is typically discussed in energy circles as a pipeline that could only be built—in the short term, on the basis of an overwhelming strategic judgment by the Chinese Government that it needed this for energy security. It is not generally treated as commercially viable.
    Mr. SHERMAN. Thank you. I think my other statements were more along the lines of statements rather than questions.
    Ambassador SESTANOVICH. Can I pick up on one of those?
    You spoke about the importance of creating an environment in which governments don't feel the need for external forces to support their security. We completely concur with that sentiment. And our policy in this region in attempting to address some of the regional conflicts that have made governments feel insecure is directed precisely at the long-term goal that you describe. We don't think that governments are able to choose completely freely if they have got a war in their territory or on their borders. But governments make decisions like that if they are faced with that kind of danger.
    We are hoping to contribute, as we can diplomatically and in other means, to the emergence of a peaceful environment in the Caucasus of Central Asia, in which that kind of insecurity doesn't prey on the decisions of governments.
    Mr. SHERMAN. Mr. Chairman, if I could ask one more question.
    Mr. BEREUTER. I had several additional minutes, so please proceed.
    Mr. SHERMAN. Thank you.
    When Yugoslavia was put together after World War I, that international border between it and the surrounding states was fully legitimate and resulted from decisions of justice and self-determination supported by this country and President Wilson. When the territory of Nagorno-Karabakh was nominally included within the borders of Azerbaijan as an autonomous region within Azerbaijan, that was done by Joseph Stalin as part of a murderous plan to control territory by causing ethnic conflicts among people in the Caucasus and other parts of the Soviet Union.
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    So, clearly, the inclusion or the joining of Nagorno-Karabakh to Azerbaijan was far less legitimate than the joining of Bosnia and Slovenia and Croatia and to the other states of Yugoslavia.
    When Croatia, Slovenia, and Bosnia declared their independence, our State Department was a little reluctant to recognize those states but finally came to the intelligent conclusion that states that were operating as self-governing states, states that reflected a desire of their people for independence, should be recognized.
    Yet when Nagorno-Karabakh broke the far-less-legitimate ties between itself and Azerbaijan, the State Department has consistently for 10 years refused to recognize Nagorno-Karabakh.
    Can you identify any element of international law and of American values which would cause us to recognize the independence of Bosnia, Croatia and Slovenia over the objections of the Yugoslav Government while refusing to recognize the now 10-year-old, functioning, independence-supported-by-its-people state of Nagorno-Karabakh?
    Ambassador SESTANOVICH. Congressman, we have believed that the interests of the United States and of our allies, friendly states and international peace are best served by respecting the territorial integrity of the states that emerged out of the former Soviet Union. There are many borders that could be inquired into for their origins in the decisions of Lenin, Stalin, Khrushchev, Brezhnev. I mean, there is a long history here and everybody has got a beef.
    The states of this region can be thrown into chaos if borders are up for grabs; and it is very easy for all borders to be up for grabs. The principle that we have subscribed to in the OSCE and before that in the CFCE, since the agreement on the Helsinki final act in 1975, is that border changes should be peaceful and consensual.
    Now, in this case, we have accepted the territorial integrity of Azerbaijan, and that means recognizing Nagorno-Karabakh as part of Azerbaijan. As part of promoting peace in this region, everyone has understood and President Aliyev himself has accepted that Nagorno-Karabakh needs a special status. It needs the highest level of autonomy, which is the phrase that is commonly used.
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    Our judgment is that a peaceful result that can be accepted by all the parties is the only one that will guarantee a long-term, good result.
    Mr. BEREUTER. Thank you, Mr. Ambassador.
    Mr. Pallone, if you could restrict yourself to one question, we need to move to the next panel.
    Mr. PALLONE. I will, Mr. Chairman.
    I just wanted to say, Mr. Ambassador, in response to Congressman King's question, you seem to suggest that the Minsk process, like the situation in Northern Ireland, was somewhat successful and that it would move us beyond a cease-fire toward real peace.
    I think what is happening is you are putting the cart before the horse. I really think that a Minsk group process has essentially been rejected by the new President of Armenia, by Nagorno-Karabakh, and that the Minsk group has almost become irrelevant. We know that Kocharian is going to be meeting with Aliyev in the next week or two or in a few weeks. It may very well be that they work out something themselves and don't even need the Minsk group. But I think that the United States can still play a major role here.
    And this is my question: My experience is that the cease-fire isn't working. There are a lot of violations. The countries don't trust each other. Nagorno-Karabakh doesn't trust Azerbaijan and vice versa, because people are still being killed. Why doesn't the United States forget about the shuttle diplomacy—which has been rejected, essentially—and just try to enforce the cease-fire? Because if the cease-fire was enforced and the parties were separate, they would be more likely to work with each other.
    Why doesn't the United States propose some security guarantees so that the parties would feel that if a settlement was negotiated that the United States would play some role in guaranteeing the peace? Why doesn't the United States essentially tell these areas, you have to sit down and have direct negotiations with Nagorno-Karabakh?
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    I would like to know why we are not doing those things, rather than just talking about this Minsk group process that is leading nowhere and I think may very easily just be bypassed.
    The United States can deal with those easier questions, and I think it would make a difference, and I just don't see the United States doing that. And I would like to know what they are going to do.
    Mr. BEREUTER. Mr. Ambassador, if you can answer that important question briefly.
    Ambassador SESTANOVICH. Quickly. You are right that President Kocharian and President Aliyev are going to meet. In fact, they met yesterday. And they reaffirmed their commitments to the Minsk group process. So we act on that basis. We recognize that the governments have to support it or else the Minsk Group wouldn't work.
    If they were to reach agreements separately, I don't think anybody would be sad about it.
    Mr. PALLONE. What about the cease-fire success?
    Ambassador SESTANOVICH. Let me address those questions.
    Enforcing a cease-fire—the Minsk Group formula precisely involves an attempt to create an effective security environment which will make exactly the kind of cease-fire that you are talking about, a real one, a reality.
    You asked, why don't we insist on direct negotiations with Nagorno-Karabakh? In fact, our position has been to seek a settlement through face-to-face negotiations among the parties, including Nagorno-Karabakh. So far, Nagorno-Karabakh has rejected that approach.
    Mr. PALLONE. What about the security guarantees? What is the United States going to do to guarantee this peace if one is worked out? What are we prepared to do? Armenians think we are not prepared to do anything.
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    Ambassador SESTANOVICH. Our judgment is that a peace that is going to work here is going to have to be one which is not imposed but represents a real agreement among the parties. Now that can involve the extra security provided by peacekeeping forces, and that can be part of the exploration, part of a diplomatic negotiation. But we have no plans to do that.
    Mr. BEREUTER. Thank you very much. Ambassador, I think your first appearance here before a committee was a very important one, and you performed extremely well. We appreciate very much your presence here and your testimony.
    I would like now to call Panel III. And while the gentlemen are approaching the table, I have two unanimous consent requests.
    Without objection, the Committee will submit to our witnesses questions in writing for an expeditious response. The questions will be submitted by the Chairman and Ranking Member and will consist of any questions provided by any Members of the Committee. Without objection.
    And second, at the request of the minority, the Chair seeks unanimous consent to receive for the record a written statement that it has received from the Amoco Corporation.
    [The statement appears in the appendix.]
    Mr. BEREUTER. In the interest of fairness, the Chair will seek unanimous consent to receive for the record a written statement that may be submitted by other U.S. energy companies and by private American organizations. Such statements, of course, need to be relevant to the topics discussed today. They need to be submitted to the Committee by the close of business Wednesday, May 6th.
    Are there objections?
    Mr. SHERMAN. I reserve a right to object, Mr. Chairman.
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    You said that the organizations that could submit statements would be energy companies and what other entities?
    Mr. BEREUTER. And by private American organizations.
    Mr. SHERMAN. Thank you.
    Mr. BEREUTER. Without objection, that will be the order.
    We welcome back to our Committee Ambassador Morningstar, and our Acting Assistant Administrator for AID, Mr. Don Pressley.
    Ambassador Morningstar has served in his current position as Coordinator of the U.S. Assistance to the New Independent States since 1995. Before that, he served as senior vice president at OPIC and has had 20 years of business, legal and policy experience in his career.
    Mr. Pressley has had 20 years of experience in management at AID, holding six overseas posts in that time, including the post of mission director in Poland.
    Gentlemen, thank you very much for your patience and for the testimony that you are about to deliver. We appreciate that patience very much.
    Ambassador Morningstar and Mr. Pressley, your entire statements will be made a part of the record. You may summarize or proceed as you wish.

    Mr. BEREUTER. Ambassador Morningstar.

    Mr. MORNINGSTAR. Thank you, Mr. Bereuter.
    Your comment about my having past legal experience earlier this morning, being here reminded me a little bit of the motion session, waiting for our turn to testify or to have our hearing.
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    But I am very pleased again to have the opportunity to speak with you today about the Administration's assistance programs in the Caucasus and Central Asia. I will be, let me say, almost mercifully brief. It will just take a few minutes with respect to the summary of my testimony.
    As Secretary Pena and Ambassador Sestanovich have just described, it is very much in the national interest of the United States to help these countries develop and to have independent and market-based democracies that form a zone of prosperity and stability, rather than one of poverty and conflict.
    Our assistance effort is the primary tool of the U.S. Government for accomplishing these objectives; and it is, therefore, a critical element in U.S. policy toward both the regions of the Caucasus and Central Asia.
    I will say that our programs are well founded in the Caucasus. And, in fact, relative to the other new independent states, Georgia and Armenia are disproportionately funded. I am not going to say overfunded, but I will say disproportionately funded.
    By having this money for these countries, it has allowed us to develop full range of activities in Georgia and Armenia that promote political and economic reform. However, I need to point out that the large earmarks for the Caucasus, outside of Azerbaijan and Ukraine, have left us, I believe, and I strongly believe, with inadequate funding, for our analogous programs in Central Asia, as well as, I might add, for our efforts particularly with respect to the private sector in Russia. And it is for this reason that our overall budget request of $925 million, I submit, should be improved.
    It is especially important that we expand our efforts to restructure and to attract investments to the oil and gas sector in the Caucasus and in Central Asia. Such assistance will not only help to promote long-term economic growth in these countries, it will also encourage the development of an east-west transport corridor.
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    The pipeline feasibility study being conducted by the Trade and Development Agency, which we have talked about earlier today, and AID projects to develop the oil and gas regulatory framework in these countries, I think, are key. As Secretary Pena and Ambassador Sestanovich have already explained, establishing this network of pipelines is a central objective of U.S. policy in this region.
    We also need to do more, particularly in Central Asia, and I might add Azerbaijan as well, in the area of partnerships and exchanges, private sector development, health and democracy building.
    While it is true that progress on democratic and market economic reform has been slower in Central Asia than elsewhere in the NIS, it is also the case that our continued engagement with the governments of these states is making the situation better than it would otherwise be.
    It is significant, I think, in this regard, that the Government of Uzbekistan, for example, which has not been at the forefront of democratic reform, has been one of the staunchest proponents of training and economic exchanges. The Government of Uzbekistan has put millions of dollars of its own money into academic exchanges, and I think these types of activities will ultimately create the foundation and the constituency for economic and political change in the future for these countries.
    Finally, I guess, maybe it is unnecessary for me to say a lot about section 907 after what has already been said, but I do think that section 907 continues to block us from fully extending to Azerbaijan the types of assistance programs that we are implementing in Armenia and Georgia, and that section 907 thus prohibits us from helping the Government of Azerbaijan to reform its tax and budgeting systems, develop sufficient capital markets and encourage the growth of the private sector. And such assistance, I would argue, would help to improve the investment climate, encourage the development of the east-west transport corridor, and foster the long-term economic growth and stability of Azerbaijan. And all of these objectives are in the national interest of the United States.
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    Moreover, building a prosperous and stable Azerbaijan will improve the chances of reaching a lasting settlement over Nagorno-Karabakh.
    Section 907, again, not to repeat what the prior witnesses have said, I do believe, and again from personal experience, creates the perception—not the reality, but the perception—that we cannot be an impartial and honest mediator. The Administration has stated before it remains firmly opposed to section 907 and calls on Congress to repeal this provision.
    We look forward to working with Congress on all of these issues, and thank you, Mr. Chairman.
    Mr. BEREUTER. Thank you very much, Ambassador Morningstar.
    [The prepared statement of Mr. Morningstar appears in the appendix.]
    Mr. BEREUTER. And now Mr. Don Pressley, would you please proceed?


    Mr. PRESSLEY. Thank you, Mr. Chairman.
    I, too, appreciate the opportunity to submit my statement for the record and give some very brief remarks at this time.
    I would also like to acknowledge the presence in the audience of Mr. Glenn Anders, who will be our Mission Director in Central Asia stationed in Almaty. He looks forward to the opportunity to meet you and your colleagues out there in the hopefully, very soon future.
    Mr. Chairman, our strategy with regard to Central Asia and the Caucasus is threefold: one, to support economic and democratic reform so foreign investment is attracted to the region and channeled wisely; two, to focus on the potential for modernization and regional cooperation that can come from the wise management of extractive resources in the region; and, three, to complement overall American efforts, public and private, to engage in this strategically important region.
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    During the last years of the Soviet Union, the Silk Road region was largely untouched by the political and economic reform initiated by the Gorbachev regime. Therefore, these countries are really just now putting into place the elements of a market economy; and, as you might expect, each country in the region is at varying stages on the road to reform.
    In the transition to a market economy, our approach has been sequential. First, our intent was to facilitate short-term economic stabilization. Second, we begin to privatize, at a minimum, small- and medium-sized enterprises; and, third, we wanted to establish financial markets and to develop an appropriate legal infrastructure for commercial activities.
    Thus, we have facilitated privatization, transparent and efficient tax policies and collection methodologies, functioning capital markets, sound banking practices, and similar basics needed in a market economy.
    Further, we find in the Caucasus and Central Asia a broad spectrum of governance, ranging from the most promising of democracies, such as Georgia and Kyrgyzstan, to those still authoritarian, such as Turkmenistan. To assist these countries along the path to democracy, we offer direct assistance to independent media outlets and to those organizations advocating wide-ranging freedom of information.
    Where once democracy efforts focused on free and fair elections, we have opened up people's thinking about democracy to include the importance of civic organizations, advocacy groups, professional associations, think tanks and any institutions which proffer ideas, and press governments increasingly for accountability and openness. And we have programs in place for the modernization of Parliaments to increase their professionalism, integrity, and responsiveness to citizens.
    Our overall strategy, particularly where authoritarianism still lingers, is to support democratic ideals at the grassroots level until they can ultimately reach the upper echelons of these nations, thus making centralized control harder to sustain.
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    This region has assets, however, that may well hasten the pace of reform; and, as a result, we are dedicating significant resources and expertise to the extractive industries. Possession of energy resources can be a dramatic incentive for modernization, and it can be an inducement like no other for regional cooperation.
    Conversely, missteps in handling oil wealth can produce dangerous neighborhoods, restive populations, environmental travesties, unwise investments, corruption and diversion of wealth.
    Our challenge, therefore, is to demonstrate that private foreign investors will enter the market, stay, and expand in numbers largely where there is transparency, reasonably fair business practices, sound economic principles and sophisticated interlocutors who can, and will, close a deal.
    We have tailored our assistance in this region accordingly, in effect, to link prosperity, modernization and public policy to one another. To be specific, we have an array of experts and advisers in the region working on improving the legal and regulatory framework for oil and gas exploration, production and transportation; and building institutional capacity and talent to draft and negotiate international agreements, and to regulate development and transportation of resources identifying future markets.
    We are providing advice on oil pipeline economics, including pricing, contracting, financing, taxing and tariff methodologies.
    Let me close my remarks, Mr. Chairman, by thanking this Committee for placing the emphasis it does on the legendary Silk Road region. All along, we have felt that Central Asia and the Caucasus present intriguing challenges. Just as they have historically, to this day these nations exist in a precarious part of the world. Their geography and their potential wealth offer grand possibilities, but their geography and their wealth also make them susceptible to enormous pressures from within and from without.
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    USAID's goal is to expose these once-secluded nations to modern mechanisms and methodology, to integrate them into western institutions and to encourage regional cohesion. We are eager, just as you have heard from other U.S. agencies before me, to maintain a vital and vibrant presence on the modern-day Silk Road, as the dividends and worldwide repercussions associated with their economic, social and democratic development are still of legendary proportions.
    Thank you, Mr. Chairman, I look forward to working with you.
    Mr. CAMPBELL. [Presiding.] Thank you, Mr. Pressley, and thank you, Ambassador Morningstar.
    [The prepared statement of Mr. Pressley appears in the appendix.]
    Mr. CAMPBELL. My colleague and friend, the Chairman, expressed his disappointment that he had to leave. Congressman Bereuter asked me to expressly put on the record that he wished that he could have stayed, that the timing just was not convenient, and that he will read your testimony with great interest.
    Out of deference and hopefully some politeness to my colleague who was here longer than I, since I came just more routinely, instead of going first, I will yield and give to my colleague from California the first round of questions.
    Mr. Sherman.
    Mr. SHERMAN. Well, thank you, Mr. Campbell.
    I would like to comment a little bit about Ambassador Sestanovich's response to my earlier question. I asked him whether there was any element of justice or international law that would cause one to recognize the independence of Bosnia, Croatia and Slovenia and not recognize Nagorno-Karabakh.
    And while his answer was interesting, what was most interesting was that there was no element of justice and no element of international law. That would lead one to recognize those three New Independent States—that declared their independence from Yugoslavia, while at the same time not recognizing the independence of Nagorno-Karabakh.
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    As to section 907, I know it restricts giving aid to Azerbaijan. It would be difficult to convince the American people that we should be using their taxpayer money to give aid to Brunei. The focus here is that these states, including Azerbaijan, are oil-rich. If the private sector really believes that, then you would think that Azerbaijan could borrow money to meet its needs without leaning on the American taxpayer. If indeed, as some have alleged, the statements about the amount of oil in Azerbaijan and in some of the other New Independent States are wildly exaggerated, then we are telling the American taxpayer, we have to get involved in this region because there is oil; but, in fact, the states are unable to convince the private sector to lend them money in anticipation of developing that oil. Especially Azerbaijan, which has already demonstrated substantial oil reserves, should not need American financial foreign aid any more than Brunei, Saudi Arabia or the United Arab Emirates.
    And, Ambassador Morningstar, as you know, you were here in late March, actually March 26. As part of our report, with the assistance of the Ranking Member, I submitted six questions for the record, and I wonder—obviously I haven't received answers yet. About when will you be answering those questions?
    Mr. MORNINGSTAR. Let me answer that question and make a few comments with respect to your earlier comments.
    Mr. SHERMAN. I have a limited amount of time, so I will just ask you to answer that question.
    Mr. MORNINGSTAR. The answer to the question is very shortly. I have now reviewed the drafts of all of the answers, and you will have those shortly.
    Mr. SHERMAN. My time is short, and I do just want to focus on one question with the Chairman's permission, and that is this Congress provided and appropriated $12.5 million of aid to the people in Nagorno-Karabakh. And I informally heard from your staff, but perhaps you could detail for the record what steps have been taken so that money will be spent to meet the needs of the people in Nagorno-Karabakh.
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    Mr. MORNINGSTAR. I can do that, and certainly Mr. Pressley can add to that.
    We have now obligated $3.3 million of assistance and have notified Congress of actually an additional $11.7 million, which brings the total to $15 million, not $12.5 million. That assistance will focus on three areas: vaccination for children, repair of shelter, and smaller microbusiness loans. The majority of that money will go directly to Nagorno-Karabakh.
    I want to tell you, I just want to make clear on the record that the language of the statute and the language of the report talks about victims of the Nagorno-Karabakh conflict, and we recognize that a very major portion of that $12.5 million or $15 million or even more should go to Nagorno-Karabakh. But what we did is we sent out an assessment team to look at the needs in Nagorno-Karabakh and in the areas immediately surrounding it, and we came up with this program. Mr. Pressley may want to make some additions to that.
    Mr. PRESSLEY. Indeed, we will be focusing on the victims of the conflict, and we will be using a very respected and knowledgeable nongovernmental organization that has been working actively in this region to identify those with the most pressing needs and to move quickly to assist them in the ways that Ambassador Morningstar has laid out, focusing primarily on shelter, health services and income generation.
    Mr. SHERMAN. That list with $11.7 million that you have notified Congress, is that a public document that you can provide me a copy of it, and that I can provide to——
    Mr. PRESSLEY. Certainly it is. It is a notification to Congress, and we will be delighted to give you that.
    Mr. SHERMAN. Of the $15 million or over $15 million that you are talking about, what portion of that will be spent within Nagorno-Karabakh?
    Mr. PRESSLEY. It is difficult for us to tell you that at this time, because it will very much depend upon this organization going on in and starting to work and developing a better feel for exactly where the greatest needs are. But we certainly, as Ambassador Morningstar indicated, expect and anticipate that most of it will be spent within Nagorno-Karabakh.
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    Mr. SHERMAN. Thank you.
    Mr. CAMPBELL. The Chairman of the Committee, Ben Gilman.
    Chairman GILMAN. Mr. Campbell, thank you for chairing the Committee in my absence. I have been going back and forth to another meeting and I may have to leave yet again.
    Let me ask, Mr. Pressley, what exactly is AID doing to support our Nation's initiative to bring together the Governments of the Caucasus and Central Asia in support of the pipelines out of those two regions following an east to west route?
    Mr. PRESSLEY. Mr. Chairman, we have set up, through the mechanism of the national working groups that Ambassador Sestanovich mentioned, a set of programs of advising these governments how they can create the legal and regulatory framework that will attract private investment to that region. As you heard earlier, we have no intention of funding or supporting the commercial operations, but we do think it is important to use our technical assistance to help these countries create the proper regime in which foreign investment makes sense and it will attract the kind of capital that is necessary for that region.
    Chairman GILMAN. That sounds like it makes sense.
    Ambassador Morningstar, did you want to comment at all?
    Mr. MORNINGSTAR. No, I think that that is right, and that we have been working diligently now for the last year and a half, I would say, with a special initiative to do that. And again, I would emphasize the Trade and Development Agency feasibility study, which I think will be very important. And we are willing to go further with respect to technical assistance in connection with pipeline design and other issues as they come up.
    Chairman GILMAN. Let me ask both panelists, what specifically are we doing to further democratize Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan through our AID programs?
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    Mr. PRESSLEY. Mr. Chairman, if I could start with that. As I mentioned in my opening statement, we can focus a great deal on developing the civil society and the civic organizations that can enhance democracy from the grassroots up. We have supported independent media. We have supported the development of civic societies and professional associations that can be advocates for change and that can support true democracy at that level.
    In addition to that, we have developed programs of technical assistance that can help the Parliaments of those countries become more responsive to their citizens and be able to play the kind of role and counterbalancing role to authoritarianism that we would hope Parliaments would play in that region.
    Chairman GILMAN. Ambassador Morningstar.
    Mr. MORNINGSTAR. I can just maybe briefly add to that from a more overall standpoint of the various agencies. I mentioned in my opening statement while you were unavoidably gone that the whole area of promoting democracy in Central Asia is as important as any activity that we can do in that region, and that because of our engagement in that way, that I think we are going to make a lot more progress over the long term with respect to democracy, certainly, than we would do otherwise.
    I think we need a lot more money than we have had in areas like partnerships; working with NGOs; exchanges, both economic and business; training; providing of microcredit; doing those kinds of things that are going to create the constituencies for change in that region. And one encouraging thing, and I have mentioned Uzbekistan as an example, but I think it is also true in the Central Asian countries, the governments are very anxious to have that kind of training and to have as many exchanges as possible. And I think that is what going to make the change over the long term, and we need to take advantage of that now, and we need to have the funding to do it.
    Chairman GILMAN. Thank you very much.
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    I want to thank our panelists for being with us today. I want to thank Mr. Campbell for chairing the balance of the hearing. I apologize for having to go on to another meeting.
    Thank you very much, Mr. Campbell.
    Mr. CAMPBELL. [Presiding.] Thank you, Mr. Chairman. I will put into the record your kind comment.
    Out of courtesy, I would like to recognize the gentleman from New Jersey for the next round of questions.
    Mr. Pallone.
    Mr. PALLONE. Thank you, Mr. Chairman.
    With regard to the Nagorno-Karabakh aid again, Mr. Ambassador and Mr. Pressley, my understanding is that none of this targeted aid has actually arrived yet. And what I wanted to ask you is I know you said it has been obligated, but when can we expect the aid to be sent? Is there any danger that the funds would be reprogrammed if the May 30th or some other deadline passes?
    And then, finally, I know you said that most of the money will be spent within Nagorno-Karabakh. I feel that the Appropriations Committee was pretty much clear that it should all be spent there. But even if you disagree with that, which I think you do, are we talking, you know, 60 percent, 70 percent? I mean, I would hate to see that it wouldn't be, you know, at least 80 or 90 percent, although I feel it should all be there. Just those three questions, if you could.
    Mr. PRESSLEY. If I might start. As Ambassador Morningstar indicated, we have turned over to the organization that is going to be handling this, Save the Children Federation, the funds so that they can begin work. And my understanding is they intend immediately, within the next 2 weeks, to start operations. They will be focused, of course, heavily on the victims of the conflicts, as they should. And we will see from that where the need is the greatest and how we can most effectively spend this money that the Congress has made available to us.
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    It is very difficult for us to tell you at this point in time a precise percentage of allocation, but we assure you that is how we are focusing on it, and we will get back to you as soon as we are able to better show more precisely where the funds will be spent.
    Mr. PALLONE. Now I think I better understand. So basically you are saying that this Save the Children Fund or Federation is going to make a decision about where to spend the aid. They could decide to spend more or less in Nagorno-Karabakh proper?
    Mr. PRESSLEY. That is right, because, as you indicated, our understanding of the legislation is that it goes to the victims of the conflict. And if they happen to be just on the other side of a Nagorno-Karabakh border, but still in great need of assistance, then we have authorized this organization to go ahead and spend those funds for those victims.
    Mr. PALLONE. There is no danger that the money could be reprogrammed because of the deadline of May 30th; in other words, now that it has been obligated, that danger ceases to exist?
    Mr. PRESSLEY. That is correct.
    Mr. PALLONE. OK.
    Mr. MORNINGSTAR. Maybe I can amplify on that part of it a little bit and also some of the other questions. There is no chance that money would be reprogrammed; none. That May 30th deadline refers to $43 million—what amounts to $43 million of what was set up as a regional Caucasus fund over and above the Georgia earmark, the Armenia earmark, and the $12.5 million for victims of the conflict, plus an additional $9 million, I might add, and that if the Secretary certifies that because of no progress in peace that that $43 million can be reprogrammed, it will, and Central Asia may be a likely recipient of that. But it will have no effect at all with respect to the monies that you are talking about.
    With respect to the rate of spending, let me say first that the first $300,000 that has gone to the ICRC, the International Committee of the Red Cross, is now being spent, and part of that is Nagorno-Karabakh, and it is for vaccination for children.
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    Second, you gave me an opportunity to make a point that I guess I always would like to make. Yes, we want to get the money out as quickly as possible, but we have to do it responsibly. And I believe that going back to 1994, when there was the major appropriation, that both Congress and the Administration made a big mistake in pushing money out too fast, and I think that that created some problems of inefficiency. But I can promise you that this is moving very quickly, and we will do it in a responsible and in an efficient manner.
    Mr. PALLONE. Mr. Chairman, I don't have another question, but I just wanted to thank Ambassador Morningstar. I know that last year, you actually came before this Committee and said that you were in favor of sending direct assistance to Nagorno-Karabakh. I don't know why in the course of the proceedings before the Appropriations Committee it seemed like eventually the State Department came down against that, even though you were in favor of it. There always was an inconsistency there, which I never could understand. But I appreciate the fact that you were supportive.
    Mr. MORNINGSTAR. Well, thank you. But let me just respond. I don't think there is an inconsistency. The State Department, whoever it is, me, whoever else is talking about it, is perfectly willing to spend money in Nagorno-Karabakh. The only point that I want to keep making, and it is consistent with what I said last year, is that the money should go there according to what the need is, and we have to make an assessment as to what that need is, which we have done, and make sure that the money is being spent responsibly.
    A major portion of the monies we have been talking about will go to Nagorno-Karabakh, but I don't think there is anybody in the State Department that would say that assistance, particularly humanitarian assistance, should not go into Nagorno-Karabakh.
    Mr. PALLONE. Thank you.
    Mr. CAMPBELL. I thank the gentleman.
    On my own time, I have an inquiry first for Ambassador Morningstar. You mentioned the projects that you would like to fund that you are not able to fund because Armenia and Georgia are disproportionately funded. I was trying to use your word precisely. You do not say ''underfunded.'' You do say ''disproportionately funded.'' It would help me to have a few specific examples. I think it is a good point you make, I share largely your concern about earmarks.
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    I am worried about using domestic politics, rather than need, as a guide in U.S. aid programs. And so if you could give me some examples, I direct this first to Ambassador Morningstar, what you would like to fund but just can't under the existing system, that would be helpful.
    Mr. MORNINGSTAR. Let me start with Russia and then go to Central Asia. Our budget for Russia for fiscal year 1998 we have actually increased from $95 million to $130 million. That again compares to a $92.5 million earmark for Georgia, an $87 million earmark for Armenia, and a $225 million earmark for Ukraine.
    I would submit that from a national security interest standpoint, Russia is critically important. And we have embarked on our Partnership for Freedom Initiative over the past year, which Congress, I think, has strongly endorsed, and that includes principally providing monies to the private sector, as well as partnerships in exchanges, microcredit programs, regional initiatives and the like in Russia. We can do a lot more of that.
    I funded—I shouldn't say I—we funded the first three regional initiatives in Russia out of monies that we were able to retrieve from 1994–1995 money. We did not provide it out of the 1998 budget. We need to be doing more of these activities, whatever the policy differences we may have at any point in time with the Russian Government, and I have made this point probably five times before this Committee, we need to be doing those things that build the private sector and build up constituencies within the country looking toward long-term change, just as I was talking about Central Asia in the same type of context.
    And we can't do all of those activities. I would like to do more regional initiatives. We would like to see more microcredit programs set up, more small lending programs set up, more training for business people, even more exchanges. And I would say the same for the Central Asian countries, because those are the activities in those countries that are going to make a difference because they are not moving ahead as quickly in economic reform, for example. But we can plant the seeds that are going to make those changes possible over time.
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    Mr. CAMPBELL. Thank you, Ambassador. I take your point then that of the potentials, it is Russia that you would put as most—what is the opposite of disproportionately funded—disproportionately unfunded.
    Mr. MORNINGSTAR. I think Mr. Hamilton made the point when I appeared in March that the per capita budget for Armenia was $25, and Russia it was something like, you know, under 50 cents. And I think that is pretty dramatic when you are talking about a country that is so crucial to our national security interests.
    Mr. CAMPBELL. I appreciate your point very, very much, and I know it is not your assignment within the State Department, but I would just ask you to think this through when you advise your office superiors on aid to Africa as well. I serve on that Subcommittee, and when you begin to do the per capitas, it is shocking.
    Mr. MORNINGSTAR. Let me just say for a second, in deference to Mr. Pallone, I am not saying that Armenia needs to have less money. The question is the disproportion, and that is why the higher overall budget.
    Mr. CAMPBELL. You have been very, very clear on that. I don't think there is any ambiguity.
    Mr. Pressley, I put the same question to you, and then one additional one, and then I am concluded. The additional question, so you might want to combine the two, is I understand and applaud the programs you have been describing. At the more basic level, however, such as inoculation of children from disease, provision of clean water so as to prevent disease, and famine relief, those are, if you will, the very basics, then you try to build the infrastructure so you don't have the next famine and so that disease doesn't spread.
    With that basic level I would like to have some description of what you are doing in the New Independent States and the Caucasus.
    Mr. PRESSLEY. Thank you, Mr. Chairman. I would like to focus on the Central Asian and Caucasus countries in the sense of the imbalance that has occurred through the earmarking process. As we noted earlier, these are brand new nations, and nations very strategically located with very important resources, and they have asked us for a wide range of help, from those very basics that you just mentioned to helping them set up market economies, to helping them develop a functioning governmental system that is based upon democratic principles.
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    And without the minimum funds that we have requested from the Congress, we have been unable to give all of the assistance that they have asked us for. So we have had to make some very tough choices and pick and choose and try to do it in a sequential way, just as you have noted.
    Now, I am very pleased to advise you that under the $925 million request for funding that we have asked for 1999, we would more than double our health activity. We are asking for an increase, the largest increase of all, for health activities, and we would plan to allocate quite a bit of this to the Central Asian countries and the Caucasus.
    Our strategy in this regard is primarily to use the partnerships of American health organizations and American hospitals who are very eager to set up with hospitals and health organizations in those countries the demonstration and activities that would go right to helping the children and the mothers and the people of the country.
    We are not trying to do this top down, we are trying to do it bottom up through using the great expertise and enthusiasm that American people have for helping people at the very basic levels. And so we have these what we call hospital partnerships, and we are going to expand that so that it is more than just hospitals; it is clinics, it is nurses, it is doctors' associations all working together to try to help these people.
    Mr. CAMPBELL. Just one final question. On family planning, population control, it seems to me, is an essential part of the basics we talked about. Can you speak to me what we are doing to assist family planning in these areas?
    Mr. PRESSLEY. Yes, I can. Actually most of these countries are having decreasing populations.
    Mr. CAMPBELL. So it is not a problem?
    Mr. PRESSLEY. So family planning is another problem in another sense. They have relied too heavily on abortion as their method of preventing growth in their families, and so we have worked very hard to show them that there are alternatives to that. And we have made available through privatization of the pharmaceuticals and through our support for family practice in clinics a broad choice for them to have.
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    And this has been very well received in these countries. They have something they call the Red Apple Program, which makes alternative contraceptives available. And the decrease in abortion has been quite dramatic in those countries, and the increase in the reliance on other programs has been equally dramatic.
    Mr. CAMPBELL. Mr. Pressley, thank you. I am most taken by the point that where we assist family planning, abortion rates drop. This point has to be made often and persistently. I know the Administration believes that, and I try to make that case as often as I can on the floor of the House.
    Gentlemen, thank you very, very much. Ambassador Morningstar, and Mr. Pressley, we are grateful for your testimony.
    I have been handed a note which I will read because it expresses my own views as well, but also that way I don't get it wrong, that we would like to thank not only our witnesses, but also some of the hardworking liaison people who helped the Committee organize our hearing today, and they include Melanie Kenderdine and Phil Mandel, at the Department of Energy, Kathleen Murphy at AID, and Francisco Palmieri and Randy LeCocq at the State Department.
    This hearing of the International Relations Committee of the House of Representatives is adjourned.
    [Whereupon, at 12:50 p.m., the Committee was adjourned.]


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