Download The American Response to the Russian "Opening" of the 1990s: oil

Wesleyan University
The Honors College
The American Response to the Russian ‘Opening’ of the
1990s: oil investment and U.S. aid
by
Nicolas Joseph Cavallo
Class of 2013
A thesis submitted to the
faculty of Wesleyan University
in partial fulfillment of the requirements for the
Degree of Bachelor of Arts
with Departmental Honors in Government
Middletown, Connecticut
April, 2013
Abstract
The decade after the 1991 collapse of the Soviet Union was a unique period of
U.S.-Russian relations. Americans saw incredible opportunity and risk in the rise of a
new Russian state and economy and thereby responded through intensive investment
efforts and unusual structures of coordination, including the Gore-Chernomyrdin
Commission. However, most scholars summarily describe 1990s American Russian
policy as either a complete failure or total success and disregard the central
importance of oil to the narrative of U.S.-Russian relations. This thesis challenges
that framework and argues that the reality of the decade is somewhere in between; the
United States’ reaction to the 1990s Soviet collapse was a process of convoluted
coordination and limited oil investment success that resulted in neither a wayward
nuclear state nor a new Eurasian partner.
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Acknowledgements
This thesis would not have been possible without the help and support of
many in the Wesleyan community. However, I would first and foremost like to thank
my parents for the opportunity to study at Wesleyan in the first place, inspire me on
this topic, help me travel to a number of locations for my research, and for their
unwavering care and encouragement throughout the entire process.
Additionally, I would especially like to thank my friends Ivan Stoitzev, Rosa
Hayes, Julie Edwards, and Taran Catania who were all incredibly supportive and
essential to my writing process. All three of you inspired me to work on a project that
oftentimes seemed insurmountable and humored my conversations of Russian oil and
governmental structures. I would never have survived the many late nights, analysis
of convoluted Russian structures, or unending spring break of work without you. You
all are true friends and I cannot thank you enough.
Finally, I must profusely thank my advisor, Peter Rutland. I am unsure that
many other professors would have been so accepting of my unorthodox work
schedule or returned insightful comments so quickly. Your guidance, support, and our
discussions are the basis of this thesis. It has been an incredible experience to work
with someone so knowledgeable of the specificities of this subject and a titan of the
literature himself. Your name has opened doors for me at places I would never expect
and the entirety of my primary source material is owed to your incredible
connections. I could not have completed this project without you.
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Table of Contents
List of Abbreviations ............................................................................................ vi
List of Interviewees ..............................................................................................vii
Introduction ............................................................................................................. 1
Evidence ............................................................................................................3
Literature Review ................................................................................................... 8
Chapter 1 — Russia: An Introduction ........................................................... 17
Historical Background ....................................................................................18
The Utility of Oil .............................................................................................24
Conclusion ......................................................................................................27
Chapter 2 — Investing in the New Russia .................................................. 29
Soviet Beginnings ............................................................................................30
A New Russia ..................................................................................................32
Legislative Events ...........................................................................................33
Oil and FDI ......................................................................................................36
The 1998 Crisis ................................................................................................40
Conclusion .......................................................................................................43
Chapter 3 — U.S. Companies in Russia ....................................................... 44
The Majors and Everyone Else ........................................................................45
The Effect of Corporate Culture ......................................................................50
Major U.S. Petroleum Investment Projects and Challenges ............................53
Minor U.S. Petroleum Investment Projects .....................................................59
Failures and Overcoming Difficulties ..............................................................61
Conclusion .......................................................................................................69
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Chapter 4 — The U.S. Government Wants to Save Russia .................... 71
U.S. Aid to Russia Aid.....................................................................................73
The Gore-Chernomyrdin Commission Aid .....................................................79
Clinton’s Energy Strategy for Russia ..............................................................84
The Reality of Aid ...........................................................................................93
Government Analyses of U.S.-Russian Bilateral Assistance Aid....................96
Criticism of Aid .............................................................................................100
Criticism of Energy Policy.............................................................................102
Conclusion .....................................................................................................103
Chapter 5 — Policy Framework: The ‘Garbage Can’ Model ...............105
A Selection of Available Models ...................................................................106
A Better Framework ......................................................................................111
Limitations .....................................................................................................115
Chapter 6 — Conclusion: the American blunder?...................................117
Defining Success and Failure.........................................................................121
Appendix 1......................................................................................................... 128
Appendix 2 ........................................................................................................ 131
Appendix 3 ........................................................................................................ 132
Bibliography ..................................................................................................... 134
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List of Abbreviations
BDC – Business Development Council
CIA – Central Intelligence Agency
CPC – Caspian Pipeline Consortium
CRS – Congressional Research Service
CTR – Cooperative Threat Reduction
DOE – Department of Energy
DOC – Department of Commerce
EBRD – European Bank for Reconstruction and Development
EXIM – Export Import Bank
FDI – Foreign Direct Investment
FREEDOM- Freedom for Russia and Emerging Eurasian Democracies and Open Markets
FSA – FREEDOM Support Act
FSU – Former Soviet Union
GAO –Government Accountability Office
GCC – Gore-Chernomyrdin Commission
GDP – Gross Domestic Product
GOR – Government of Russia
HIID – Harvard Institute for International Development
IFC – International Finance Corporation
IMF – International Monetary Fund
JV – Joint Venture
NATO – North Atlantic Treaty Organization
NIS – Newly Independent States
NSC- National Security Council
OPEC – Organization of the Petroleum Exporting Countries
OPIC – Overseas Private Investment Corporation
OVP – Office of the Vice President
PAF – Petroleum Advisory Forum
PSA – Production Sharing Agreement
SEC – Securities and Exchange Commission
SEED – Support for East European Democracy Act
TDA – Trade and Development Agency
USAID – U.S. Agency for International Development
USRBC –U.S.-Russia Business Council
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List of Interviewees
I have had the opportunity to interview a number of individuals who observed or
participated in the American reaction to the ‘opening’ of Russia during the 1990s. I
am indebted to their thorough analysis, insightful comments, and incredible
generosity. I was truly amazed at the number of experts willing to give up hours of
their time for an unknown undergraduate student interested in the subject. Thank you
for weathering my questions and emails over the months.
Dan Cloud: Currently at Princeton University, Dr. Cloud started the investment fund
Firebird Management, LLC, a leading investor in the early days of the Russian
‘opening.’
Bud Coote: Currently a senior energy analyst for the Central Intelligence Agency, Mr.
Coote has worked in the CIA’s energy office for the past few decades. His
suggestions for further contacts led to conversations with most of the individuals
listed below.
Jeff Barnett: Senior Director of Policy and Programs at the U.S.-Russia Business
Council in Washington, D.C.
Shamil Yenikeyeff: Dr. Yenikeyeff currently resides in Oxford, U.K. as a Research
Fellow at the Oxford Institute for Energy Studies and is a Senior Associate Member
at the Russian and Eurasian Studies Center at St. Antony’s College, University of
Oxford. During the 1990s, he worked in the Russian parliament as advisor to the
Chairman of the subcommittee for the organization of the state authority system in
Russia.
Guy Caruso: Mr. Caruso currently holds the position of Senior Adviser in the Energy
and National Security Program at the Center for Strategic and International Studies in
Washington, D.C. During the 1990s, Mr. Caruso worked for both the Department of
Energy and International Energy Agency, as Director of the Office of Oil and Natural
Gas Policy and Director of the Office of Non-member Countries, respectively.
Leonard Coburn: During the years following the Soviet collapse, Mr. Coburn held a
variety of roles at the Department of Energy, eventually serving as Director of the
Office of Russia and the NIS from 1996-2003. He is currently an independent energy
consultant at Coburn International Energy Consultants, LLC, after working for the
federal government for more than 3 decades.
Holly Nielsen: Ms. Nielsen is currently a partner at Baring Vostok Capital Partners, a
Moscow-based private equity firm. During the 1990s, she was the first managing
partner at the law office of Baker Botts in Moscow from 1992-4 and worked under
Harvard University’s direction from 1995-7 as a senior advisor to the nascent Russian
Securities Commission.
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Dan Stein: Mr. Stein has worked in a number of veins in the federal government over
the past few decades. He is currently the Senior Advisor of the Bureau of Energy
Resources at the Department of State and previously served as the Europe and
Eurasia Regional Director at the U.S. Trade and Development Agency during the
1990s.
Other interviews were conducted ‘on background;’ while some analysis from these
conversations may be used in this thesis, the interviewees’ names have been withheld.
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Introduction
Vladimir Putin: “The thirst for change is a natural, driving force of progress”
(Varadarajan, 2012)
The decade after the 1991 collapse of the Soviet Union was a unique period of
U.S.-Russian relations. After years of nuclear hostilities and competition, Americans
saw the fall of their old communist foe as a triumph for democracy, the free market,
and American hegemony. The prospect of reshaping great power relations with a
strategic partner on the Eurasian continent excited policymakers that had lived in the
shadow of a Soviet nuclear threat since the 1950s. The U.S. government thereby
directed a large bilateral assistance effort to champion reform of the burgeoning
Russian state and economy. Simultaneously, Western businesses and investors leapt
at the chance to participate in Russia’s emerging market, especially given the nation’s
incredible oil wealth. The American reaction to the rise of a new Russian state
resulted in a decade of reformist struggle characterized by unprecedented political
focus on the facilitation of oil development.
From the first meeting between U.S. President Bill Clinton and Russian
President Boris Yeltsin, American optimism was tangible; we had ‘won’ the Cold
War and now the United States was going to guide Russia into a new era of
globalized prosperity. Bureaucrats and businessmen alike aimed to capitalize on the
opportunity of the Russian ‘opening’ to partake in the birth of a new market and
nation. However, the Soviet legacy that pervaded the new Russian governance
structures and investment environment limited the efficacy of American advances.
Even the tantalizing oil industry could barely be tamed by Western executives
looking to expand their portfolios. As a result of oil companies’ frustrations and the
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United States’ larger strategic goals for a stable Russia, the American government
would coordinate its efforts to attempt to facilitate the resurgence of the Russian oil
industry through multiple channels.
The U.S. reaction to the rise of the new Russia is encapsulated by this
coordination and focus of American businessmen and bureaucrats around Russian
oil.1 However, few scholars of 1990s U.S.-Russian relations delve into the topic in
their analyses of the failures and successes of the decade. Yet oil is essential to
parsing the relationship between the two nations and crucial to the context of the
Russian state. With the largest ‘proved reserves’ outside of the Organization for the
Petroleum Exporting Countries (OPEC) consortium and 12.8% of the world’s total oil
production as of 2011 ("BP Statistical Review of World Energy," 2012), Russia’s
power as a world producer means it is extremely important to world energy supplies
and international oil prices (Grace, 2005). Additionally, energy tax revenues have
historically provided a major portion of government revenues, estimated currently at
about 50 percent ("Rosneft: supermajor in the making?," 2013). Investigating the
United States’ Russian policy of the 1990s is thereby incomplete without an analysis
of the two nations’ energy relationship surrounding oil.
To that end, this thesis will explore the U.S. reaction to the collapse of the
Soviet Union and the ‘opening’ of Russian oil up until the end of the Clinton
Administration. Examining U.S. companies’ investment experience in Russia and
relationship with bureaucrats of both nations’ governments depicts one half of the
decades’ travails. Discerning the reactive policy process and aid structure, aimed at
1
While natural gas is a decidedly important commodity in Russia’s recent geopolitical history, the gas
market is completely different from oil and markedly “less volatile,” since it relies on extremely
expensive export facilities or massive pipeline systems spanning continents (Rutland, 2006).
2
transforming Russia into a stable and democratic partner, will illuminate the second
partition of 1990s events: the causal pathways behind the U.S. government’s
priorities and projects of the decade. The confluence of these two streams amidst a
unique period of opportunity, insecurity, and cooperation resulted in a decade of
middling U.S.-Russian relations; Russia became neither a new nation ready to bow to
American partnership nor a wayward nuclear state that destabilized the region.
EVIDENCE
Detailing the U.S. reaction to the collapse of the Soviet Union is problematic
given the subjects involved. Policy documents of the U.S. government are extremely
difficult to uncover, even with the advent of the Freedom of Information Act. U.S.Russian relations are still a sensitive topic and requests for documentation releases
typically take several years to process. In that regard, one must attempt to glean U.S.
policy objectives from a conglomerate of sources from the decade. Rhetoric from the
Bush and Clinton Administrations in the form of press releases, speeches, and
campaign efforts reveals the public priorities espoused by both Presidents as the
decade wore on. U.S. government research and auditing agencies provide useful
documentation and analyses of Russian bilateral aid efforts and the coordination of
American policy (or lack thereof).
Beyond these public documents, however, the investigative process becomes
more difficult. Senior officials from the decade who participated in the policy
formulation and implementation process are either still working for the federal
government and therefore unable to speak on the record, or are difficult to track down
and do not want to share their experience. Luckily for the author, a few retired
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government actors were willing to explain their role in formulating the United States’
Russian interaction.
Additionally, much of this thesis’s support is based upon the archives of the
Department of Energy’s Russian and Eurasian Affairs Office, which generated and
aggregated a wide range of documents throughout the 1990s. The trove of thousands
of pages provided an invaluable resource for evidence of the work, objectives, and
coordination of multiple federal agencies participating in the United States’ Russian
relationship. The documents include previously unreleased diplomatic cables,
interagency policy memo drafts, and communications between U.S. oil company
representatives and government officials detailing the variety and depth of interaction
between the public and private sector actors in the policymaking process (See
Appendix 3 for a full list of documents).
Examining U.S. energy companies’ reaction to the ‘opening’ of the nascent
Russian economy is a similarly challenging process. Gleaning information on
investment projects, taxation changes, and publicly-known difficulties is simple
enough through financial reporting from most major newspapers during the decade.
But to delve into American executives’ goals and mindsets is much more daunting.
The oil industry is notoriously secretive and few firms openly declare their
investments’ difficulties or negotiating travails, given that they are publically traded
companies with a share price to maintain. The best resources that detail energy
corporations’ Russian strategy are only available from a few authors who have
managed to tease out information from interviews with industry experts or former
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CEOs. Their anthologies provide a rare look inside the minds of many of the
industry’s movers and shakers of the decade.
As a result of these resources, this thesis was able to build upon criticism of
the U.S. reaction to the collapse of the Soviet Union throughout the 1990s. However,
the purpose of this work is not specifically to determine whether the government’s
attempt to aid Russia was successful or not. It is clear that Russia is today a stable
state, albeit an authoritarian one, that survived the 1990s rather than transformed
because of it. The central point is that the United States reaction to the 1990s Soviet
collapse was a process of convoluted coordination that demonstrates how oil fits
within a framework of national security, corporate influence, and America’s priorities
in Russian affairs.
The argument is outlined as follows:
Chapter 1 and 2 examine the roots of the new Russia leading up to the 1990s
collapse and provide a contextual basis for analyzing the U.S. experience in Russia
during the years of ‘reform.’ They detail the nation’s inheritance of Soviet legislation,
notorious privatization of state assets, complex regulatory frameworks, and incredible
oil wealth that would define the U.S. experience throughout the subsequent decade.
Though the foreign exclusionary principles were clearly evident in early Russian
legislation, such barriers did not convince Western energy companies that the
emerging market was not worth their trouble.
Examining American oil extraction companies’ experiences in Russia is the
next step. Despite their resources, technology, and management prowess, Chapter 3
details the struggles that Western firms faced with any and all of their efforts to
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capitalize upon the ‘opening’ of Russian oil to foreign interests. Their size and
structure, corporate culture, and individual project particulars would limit their ability
to do business in the unusual Russian environment. Given American executives’
troubles, they would turn to the U.S. government, among others, to facilitate success
in such an uncertain market.
Chapter 4 details how American policymakers approached Russia in terms of
‘hard-security’ objectives and promoted many projects, including oil investment
facilitation and the unique Gore-Chernomyrdin Commission, with the ulterior goal of
stabilizing the new nation simply to provide an effective government that could
guarantee the security of thousands of nuclear weapons. However, the U.S.
government would struggle in Russia with problems of coordination, contradictory
projects, and a demeaning ideological approach to Russia relations. Analyzing the
criticism of the American government’s 1990s Russian interaction leads to a
discussion of how policy is created and implemented within such a complex
organizational framework of actors.
Chapter 5 attempts to place the U.S. government’s Russian policy narrative
within a classical theory of policy process. In the end, the “Multiple Stream’ Model
(colloquially named the ‘Garbage Can’ theory) comes closest to explaining the
American reaction to the collapse of the Soviet Union. The unprecedented events of
1991 prompted choices and solutions within the federal government that resulted in
security-tinged and disparate policy decisions that affected the U.S.-Russian
relationship throughout the decade. The Multiple Stream Model aids us in clarifying,
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understanding, and simplifying the organizational anarchy of the American
government.
The U.S. reaction to the ‘opening’ of Russia in the 1990s is too often
summarily criticized as a failed policy. The hope of this author is that the argument’s
progression will demonstrate the exceptionality of U.S.-Russian relations during the
decade and uncover the central importance of oil in the narrative. As a result of the
initial optimism and opportunity surrounding Russia in 1991, American policymakers
employed unusual structures of cooperation that deserve serious scholarly attention.
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Literature Review
Over the past three decades, an immense volume of scholarly research has
been dedicated to Russia and its emerging challenges, recent transformation, and
growing energy industry. However, there are few works that focus on U.S.-Russian
relations or attempt to detail U.S. energy policy towards Russia specifically.
Explaining and critiquing the American response to the 1990s ‘opening’ of Russia
through the lens of the oil industry thereby becomes difficult. There is simply little
information on even the most notable aspects of United States’ policy during the
1990s; for example, the Gore-Chernomyrdin Commission, arguably the preeminent
institutionalization of cooperation between the two nations throughout the decade, is
barely covered in many major works on the period. In that regard, it is necessary to
piece together disparate groups of literature around Russia’s transformation and
foreign investment, the nation’s oil industry, and U.S. aid and energy policies to
enable a fuller understanding of U.S.-Russian interaction during the period.
Perhaps the richest body of work on 1990s Russia focuses on the nation’s
transformation from a piece of the Soviet Union to an independent, market-oriented
country. Many authors delve deeply into the chaotic economic changes of the decade,
detailing the minute legislative progress, political intrigue of the Duma, or examining
street-level changes that evince Russia’s plodding progress towards capitalism—as
Dutkiewicz calls a ‘wrenching transformation’ (Åslund, 1989; slund, 199 ;
Dutkiewicz & Trenin, 2011; Hass, 2012). Another core of academics attempts to
deconstruct the Russian reformation and identify the unique early taxation, banking,
and criminal systems that arose following the collapse of the Soviet planned economy
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(Cuddy & Gekker, 2002; Gustafson, 1999). Still others prefer to focus on the
economic struggles of the 1990s through micro-level trends from the unique
perspective of an academic advisor, integral to the Western effort of Russian
transformation (Gilman, 2010; Sachs & Pistor, 1997).
Such works provide an essential framework for contextualizing U.S. attempts
to work in Russia and reform the nation’s tumultuous situation. Depictions of
Russia’s economic transformation crucially portray the basic hurdles that the nascent
market economy faced after the Soviet Union’s collapse—challenges that the U.S.
would attempt to overcome with aid disbursements, investment facilitation, and
advisory assistance. But in order to understand the nation’s relationship with the
United States, the plethora of weaknesses of the Russian system must be examined in
relation to the epistemic communities thriving in the post-Soviet world—those of the
American aid delegation, the ‘reformers’ in Yeltsin’s cadre, and the new oligarchs.
Their interaction resulted in a system of unequal power and influence that
characterized the post-Soviet landscape.
There is a separate camp of authors that focus on the institutions and
regulations that rose to prominence during the decade. They detail the legislative
decision making and governance structures of the economic transformation in terms
of domestic power and influence (Chaisty, 2006; Frye, 2000). Other works narrow
this viewpoint to specifically examine corporate governance in the new transitional
Russia, as compared to other Newly Independent States (NIS) (Mickiewicz, 2007).
These evaluations are critical to understanding the uncertainty of the Russian
legislative and regulatory frameworks that the U.S. government and businesses tried
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to operate within. In reality, only a small band of new Russian elite was able to
navigate the complexity of the ever-changing environment and capture the immense
riches available during the decade.
The extraordinary transfer of wealth that occurred through a number of
vehicles under the Yeltsin Administration is a dramatic story of the sale of incredibly
valuable state assets to the select and well-connected few. The cronyism uncovered
by Russian and Western correspondents alike paved the way for a rash of accounts of
the ‘looting of Russia.’ This focus on the new upper echelon of Russian society is a
definitive theme of the literature, with numerous books relishing the story of a ‘wild
ride’—the chaotic, corrupt, and unjust transfer of wealth into the hands of the wellconnected through various forms of privatization (Freeland, 2000; Goldman, 2003;
Hoffman, 2003; Klebnikov, 2000). Janine Wedel contributes a different outlook on
the new economic elite and utilizes the touch of an anthropologist and countless
interviews to examine the networks of power and influence that led to the creation of
a ‘shadow elite’ (Wedel, 2009). But in all cases, the image of plundering oligarchs
somewhat overshadows the analysis of strategic implications of such power
concentration. Russia’s reorganization of its richest soviet inheritance—incredible oil
reserves—was the leading vehicle of wealth. It also attracted the serious interest of
the West.
Though the stories of corruption, manipulation, violence, and fortune are
compelling and detail how Soviet era assets came to auction, this generalized view of
privatization often neglects oil’s primacy in the story. Li-Chen Sim’s authoritative
work, The Rise and Fall of Privatization in the Russian Oil Industry, specifically
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focuses on the redistribution of Soviet-era petroleum assets through rare interviews of
both prominent oil executives and key Russian ministers of the decade (2008). With
these unusual sources, Sim delves into the intricacies that define the dramatic changes
of petroleum in Russia throughout the decade. Michael Ellman’s compilation
similarly explores the connection between privatization, Russia’s oil wealth, and its
political system through examination of both money flows and economic data (2006).
Another forthcoming work details the transformation of the industry and battles
between Russian corporations, regional governments, and the state throughout the
decade (Yenikeyeff, 2013, in press). But besides this research, there is little scholarly
analysis that enumerates how Russia’s transitional period shaped the oil industry as a
whole—even Sim spends little time discussing the role of Western corporations or
American officials. Regardless, this foundational analysis of Russian oil assets is a
useful tool for understanding the fundamental changes in the industry during the
decade.
With a basis of understanding of Russia’s complex transitional experience,
one can contextualize U.S.-Russian energy relations within a period of incredible
economic hardship and unprecedented makeover of the petroleum sector. Beyond
that, it is essential to understand the extreme environment of both opportunity and
uncertainty that investors faced when attempting to enter the Russian market. While
most research incorporates a large-frame perspective on foreign direct investment
(FDI) in Russia and describes a discouraging picture of investment constraints, the
opportunities and barriers for interested parties, and ‘untapped potential’ (ArtisienMaksimenko
Adzhube , 199 ; Dyker, 1995), some cut straight to detailing specific
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difficulties within the oil industry, describing an unstable environment characterized
by ‘two steps forward, one step back’ due to a complex political regime and Western
contractual demands (Bayulgen, 2010; Watson, 1996). Petroleum corporations
concerns and interest in the Russian market are especially evident in the intricacies of
their strategies for the emerging market.
Estimating the views of oil companies in relation to the Russian opportunity in
the 1990s is somewhat of a treasure hunt. Industry ‘white papers’ and a company
executive’s analyses provide two of the few depictions of how Westerners
approached the Russian situation of both opportunity and risk (Lawrence, 2003;
Nicandros, 1993). However, these are limited in their one-sided view of Russia from
the perspective of investors looking to enter the nascent market. The oil business is
notoriously secretive, and one must glean from authors’ rare industry interviews and
Russia-specific anecdotes of anthologies focused on a single company (Coll, 2012) or
the entirety of the petroleum economy (Yergin, 2011). There is also a limited
selection of articles that detail the individual characteristics of various oil projects
during the 1990s (Bradshaw, 1998; M. J. Sagers, 1994) and one can glean
information about the Russian oil industry’s changes, U.S. companies’ involvement,
and specific details of foreign projects simply from news reports in the Western and
Russian press. Overlaying these cases of investment with the regulatory changes
during the decade provides a more complete picture of the complexity of Western
interactions with the 1990s Russian oil ‘opening.’
Delving into the specificity of the Russian oil industry’s flaws and regulatory
quagmire is necessary to comprehensively analyze what the 1990s ‘opening’ meant to
12
both Western businesses and the U.S. government. The collapse of the Soviet Union
was an extraordinary opportunity for the region’s crumbling oil industry. To that end,
many technically proficient writers, consultants in the industry themselves, detail the
state of the Soviet infrastructure and the opportunities and trends of the industry
through the early 1990s (Grace, 2005; IEA, 1995; M. J. G. Sagers, John D., 1993).
Other authors focus on the travails of individual Russian companies, utility of oil to
the Russian state, and the structural mutations of the industry throughout the decade
(Alekperov, 2011; Lane, 1999; Sakwa, 2009). But in terms of U.S. interactions and
perceptions of Russia, there are extremely few works that place multinational oil
companies amidst the complex domestic industry.
While these are excellent resources for discerning overarching trends of the
industry, there is only one seminal analysis of Russian oil that wholly focuses on the
intersection of legislation, history, industry, and Western involvement (Gustafson,
2012). Gustafson’s Wheel of Fortune is the most recent titan of the literature and
provides the most thorough analysis of the intersection of the Russian transformation
and U.S. companies in the literature today (2012). But even his work stops short of a
specific analysis of the U.S. government’s involvement and advocacy for Russian oil
investment facilitation.
One of the most difficult topics to uncover is the United States’ energy policy
and strategy in Russia at large. There are few resources that delve into the subject and
even hallmark institutions of cooperation throughout the 1990s are rarely mentioned.
The Gore-Chernomyrdin Commission was the embodiment of the U.S.-Russian
relationship under President Clinton yet is only briefly covered by a few scholars of
13
Russian relations. One of the most specific analyses of the two nation’s bilateral
structures of cooperation by the Carnegie Endowment still fails to deeply analyze the
successes and failures of the Commission or place it within the scope of a larger
policy process (Rojansky, 2010). The Commission is otherwise mentioned
tangentially in a number of larger works concerning U.S. relations with Russia on the
whole, but all shy from explicating its importance to U.S.-Russian energy policy at
large (Dubinsky, 2013; Goldgeier & McFaul, 2003; Talbott, 2002).
Simply put, U.S. policy towards Russia is a topic that has received more
criticism than coverage, although none with specific interest in the oil industry or
government facilitation of business connections. Detractors see U.S. aid efforts
through different lenses, but all agree on the ultimate failure of American efforts in
Russia during the 1990s. They contend that the American policy missteps were a
result of policymakers’ views of Russia as an unequal partner and idealistic vision of
an overly optimistic future of cooperation (S. F. Cohen, 2001; Simes, 2007; Wedel,
1998).
Ironically, the best critical analyses of the U.S. government’s actions in Russia
during the 1990s come from government agencies themselves. Auditing and research
arms such as the Government Accountability Office (GAO) or Congressional
Research Service (CRS) produced a number of detailed criticisms, prompted by
congressional requests, that provide excellent surveys of coordinative efforts and the
American aid process (GAO, 1995c, 2000; Tarnoff, 2002, 2003). However, these
reports do not focus on oil or efforts to facilitate energy relations with the new Russia
14
and simply outline the organization and efficacy (or lack thereof) of U.S. bilateral
assistance to Russia.
America’s overarching energy policy is a similarly challenging topic to
discern from the available literature. In one of the only comprehensive anthologies of
U.S. energy policy with a focus on Russia, former technocrats explain America’s past
misses and future priorities as a major energy consumer (Jan H. Kalicki & Goldwyn,
2005). But though they describe America’s ‘failure of political will and leadership’
and stress the importance of energy security’s intersection with foreign policy, they
neglect to add the caveat that they themselves were part of the leadership that failed
to successfully determine America’s Russian energy diplomacy during the 1990s.
That said, their charge that the upper echelons of government were too preoccupied
with ‘great-power relations’ and conflict prevention during the 1990s is the leading
argument for the skewed U.S. energy experience in Russia. Peter Rutland’s section of
the edited collection ‘Russian Energy Power and Foreign Relations’ is one of the few
academic analyses that begins to examine U.S. energy policy towards Russia, and
concurs that energy has played a modest role in overall relations (Perovic, Orttung, &
Wenger, 2009). These two works provide some of the only scholarship focused on
U.S. energy policy in Russia throughout the past few decades.
Given the disparate sections of literature on the subject of Russian reform, oil
and U.S. policy during the 1990s, this research intends to draw from each grouping
and add additional primary source analysis to provide an aggregate picture of how the
U.S. approached Russia, and specifically its fabulous oil wealth. The inclusion of
prior authors’ work primarily serves to enhance the understanding of the difficult
15
context of 1990s Russian reform. Examining original policy material, sensitive
diplomatic cables, press releases, and interviewing energy experts will elucidate the
implications of the Russian ‘opening’ on U.S. government and investors’ actions.
Overall, determining the American reaction to the Soviet collapse will synthesize
previous scholarship with a new focus on oil in order to better understand and
examine the U.S. policymaking process throughout the 1990s.
16
Chapter 1
Russia: An Introduction
To many, the collapse of the USSR is a moment that defines the end of the
20th century. The world’s second hegemonic power suddenly cast off its communist
structures, embraced democracy, and even made steps towards a free market
economy. This one-in-a-lifetime context characterized Russia’s interaction with the
United States throughout the decade of transition. Westerners expected a monumental
replacement of the nation’s backward communist undertones with a gleaming free
market that would inspire economic growth anew. Instead, ‘reform’ in Russia
proceeded at a sluggish pace and the average Russian citizen struggled throughout the
1990s. In a now-infamous story, several of the most prized assets of Russia’s Soviet
inheritance were sold off by the struggling state and landed into the hands of a few
well-connected men—the result of dynamic domestic interaction between the newly
created Russian government, a new group of rising ‘oligarchs,’ and the Soviet-era
managers.
Russian politics and personalities certainly dominated the transformation
process, but to only take a domestic perspective misses the United States’
involvement in attempting to decide Russia’s economic and energy future. American
oil companies and the U.S. government participated in the ‘opening’ of Russia and
saw the fall of communism as a tremendous opportunity—financially, strategically,
and politically. They devoted enormous resources to ensure that they did not miss the
chance to capitalize on a languishing Soviet oil industry. This priority would shape
17
American policy towards the end of the twentieth century and points to larger
implications about the United States’ goals for the new Russia.
HISTORICAL BACKGROUND
To fully grasp the conditions that led to the unique period of U.S.-Russian
interaction during the 1990s, it is essential to begin with the economic and political
context of Russia as the Soviet empire crumbled. The switch from communism to
democracy and capitalism was by no means simple, swift, or easy on the Russian
population. The transition began in Mikhail Gorbachev’s final days as president of
the Soviet Union, when he initiated liberalizing reforms that abolished long-standing
state ministries with perestroika (reconstruction) and encouraged political openness
(Åslund, 1989). But rather than inspire economic growth, the policies had a
destabilizing effect on the stagnant Soviet economy as the government increasingly
lost control (Goldman, 2003, p. 13). After a failed coup attempt by hard-liner
communists and military personnel, many Soviet republics began fleeing the Union
and declaring independence ( slund, 199 ). By late December of 1991 the transition
was complete; the USSR was replaced by the Commonwealth of Independent States
(CIS).
The disappearance of the Soviet Union caused a dramatic economic crash that
plunged both the new Russian government and its people into financial catastrophe.
The disintegrating planned economy, once a bastion of Soviet economic might,
forced citizens to scrounge for basic goods and services that were no longer being
delivered to Russia from its far-flung Soviet republics. Furthermore, the nation was
wracked by unorganized decentralization attempts, hyperinflation that wiped out
18
citizens’ savings, and rampant capital flight (Goldman, 2003, p. 14). This ‘transitional
recession’ lasted into the early 1990s—a result of the state-wide institutional collapse
and an adverse supply shock from the price fluctuations (Dutkiewicz & Trenin, 2011,
p. 52). Such dire circumstances would foster the state’s willingness to collude with
Russia’s new economic elite to stabilize the currency, market economy, and
government budget.
To stifle the chaos, Russia rushed to pursue deep market reforms and revive
the failing economy. The first democratically-elected president, Boris Yeltsin, and his
economic advisors moved swiftly to dismantle the intricate Soviet planning system
and remove government economic control at every point possible ( slund, 199 ).
Formally known as “shock-therapy” and touted by Western academics, the strategy
failed to sufficiently address the lack of institutional mechanisms necessary to
promote normal market interactions. As the then-chairman of the Federal Reserve
Alan Greenspan explained, “the dismantling of the central planning function in an
economy does not, as some had supposed, automatically establish a free-market
entrepreneurial system” (Greenspan, 1997). While the reformist policies did have the
ulterior success of undermining old Soviet leadership and reinforcing Yeltsin’s
support amongst Russia’s new financial elite (Sim, 2008, p. 27), the legislative and
bureaucratic division in the early days of the Russian Federation was simply too
difficult for Yeltsin to dominate and push through any drastic reorganization. Russia
did not have the decades of capitalist tradition to support its new market economy.
Given the halfhearted decentralization progress, the economy continued to
disintegrate for years after the USSR’s collapse. From 1991 to 1998, official Russian
19
figures suggest that the nation’s GDP fell by more than 0% (Goldman, 2003, p. 14),
a staggering figure when compared to the 30% fall in U.S. GDP from 1929 to 1933
during the Great Depression ("Encyclopaedia Britannica online," 1999). Why did
seven years of reform fail to reverse the decline? There are competing economic and
political theories (Sachs & Pistor, 1997; Stiglitz, 2003), but some suggest that the
reformist government and its Western economic advisors attempted to apply
academic market theory yet failed to account for the unique situation of Russia’s
Soviet legacies (Rutland, 2012). They should have heeded the complexity that the
famed economist John Maynard Keynes alluded to in 1925: “the economic system of
Russia has undergone such rapid change that is impossible to obtain a precise and
accurate account of it” (Goldman, 2003, p. 20). In the effort to continue the transition
to a free market, the reformers plowed ahead—this time with privatization.
The disorderly nature of the transition to privately-owned corporations was
characterized by three distinct and wildly different phases. Each program to divest the
Russian state of its soviet assets was dominated by a different subset of the Russian
elite and plagued by backroom dealings, fiscal and legal manipulation, and in some
cases outright foul play (Wedel, 2009). Soviet-era managers struggled to re-take their
personal fiefdoms and resisted privatization of the oil industry so forcefully that
Anatoly Chubais, then Prime Minister to Yeltsin, had to personally intervene and
advocate for a presidential decree delineating the reorganization of the Soviet
oilfields into independent (but state-owned) firms in 1992 (Gustafson, 2012, p. 107;
Sim, 2008, p. 19). These struggles were indicative of the forces at work behind the
privatization process. Though the initial plans were intended to engender popular
20
participation by the Russian population, state divestment soon became riddled with
cases of questionable transfers of wealth.
At first, various industries were privatized using publically issued stock
vouchers. U.S. advisers from the Treasury Department and contracted Harvard
University’s Institute for International Development (HIID) played an integral role in
writing the presidential decrees that began the first flow of state resources to private
hands (Wedel, 1998). The plan had the state distribute one voucher worth 10,000
rubles to every Russian citizen that they could exchange for shares in thousands of
newly incorporated companies. The manager of the Bolshevik Biscuit Factory were
convinced to kick off the process and thousands of companies across many industries
followed (Freeland, 2000, p. 66).
However, the Russian population wasn’t truly ready for voucher privatization.
The supply of property on the market was far greater than the national demand,
meaning that the value of an individual voucher slid to about $10 (Dutkiewicz &
Trenin, 2011, p. 16). Furthermore, there was no established Russian middle class and
few domestic investor groups were able to buy the newly-created stocks and
securities (Goldman, 2003, p. 32). Lead Russian economist Yegor Gaidar, his team of
‘young reformers,’ and Western advisors had thereby provided an avenue for wellplaced investors to buy Soviet assets with little competition. The Yeltsin
administration essentially legalized the transfer of state wealth to the soviet-era
directors and a few savvy bankers, the only portion of the Russian population with the
finances, political capital, and tact to take advantage of the sale of state assets
(Freeland, 2000, p. 70).
21
By the time the program gained steam, investors were bundling thousands of
shares to buy the most valuable companies they could find across the country.
Aviation companies, mining corporations, and an indeterminate percentage of oil
assets ended up in the hands of the well-prepared, usually Soviet directors or a small
handful of daring Western investors (Grace, 2005, p. 107). The ‘reformers’ were
complacent to the redistribution that took the place of legitimate market reforms
(Dutkiewicz & Trenin, 2011, p. 19). But the privatization process was still too slow.
The stocks-for-the-masses failure would prompt the administration to move to new
instruments to accelerate the process of turning the nation’s soviet-era wealth into a
market economy.
After the voucher program expired in 1994, the new method of privatization
became direct cash auctions of the most valuable state-owned businesses—including
vertically integrated oil companies created in 1992 (Sakwa, 2009, p. 43). In
comparison to earlier sales, the transition of the prized government industries to
private property proceeded with markedly less transparency. The new alternative
focused on the transfer of wealth to a small handful of powerful investors, rather than
the population on the whole in order to support the beleaguered Russian government
with a quick cash influx. By 1995, a frenzied jockeying for control ensued, in what
became known as the ‘spontaneous privatization’ phase (Sim, 2008, p. 19). The
impatience and desperation of the Russian political elite to privatize the state’s
massive Soviet inheritance triggered a hasty, undemocratic, and poorly policed
handoff of controlling shares in extremely valuable companies.
22
The next suggested method of privatization would come not from the
struggling Russian bureaucrats but a young banker—Vladimir Potanin of
Oneksimbank—on behalf of a consortium of domestic creditors eager to take part in
the marketization of their new country (Klebnikov, 2000, p. 197). In 1995, at a
meeting between the government and banking leaders, he proposed that Russian
financiers extend a line of credit to the Kremlin in exchange for in-trust management
of major state-owned industries, mainly oil and mineral companies (Lane, 1999, p.
62). It was to be an unorthodox fundraising venture to close the gap in the new
Russian state’s ballooning budget, break the hold of the Soviet-era directors on major
industries, and encourage major lending from Russia’s new banks (Sim, 2008, p. 31).
The exchange was, as Gaidar later admitted, a “political pact” that ensured Yeltsin’s
power and the Russian government’s solvency (Freeland, 2000, p. 171). Shortly
thereafter, Yeltsin signed decree 889, “the document that would make a handful of
lucky Russians billionaires” (Freeland, 2000, p. 180).
The ultimate loans-for-shares scheme, as it was nicknamed, detailed an
inauspicious process of exchanging the management of the country’s best natural
resources, including many oil holdings, for a fraction of their real cost. As Potanin
initially envisioned, Decree 889 contracted direct loans to the Russian government in
return for administration of the controlling stocks in 13 major state-owned
corporations, among the nation’s most valuable assets. After the loans expired in
September 1996, the government would have two options: to pay back the loan or sell
its shares at auction as collateral (Freeland, 2000, p. 180). Though championed and
promised as an open and competitive process, these later auctions would transfer the
23
vast Soviet wealth into the hands of a few adept oligarchs, and foreign investors
would be barred from directly participating. The government’s own attempts at
privatization had failed; Potanin’s plan offered new economic fortunes for both the
country and a select group of elite investors.
The voucher program, loans-for-shares scheme, and final rigged auctions of
1996-7 sealed the creation of a new economic oligarchy. However, of all the vast
Soviet resources, the sale of the prized oil infrastructure attracted the most
international attention. Amidst the chaos of the transition to a market economy,
billions of dollars of oil assets were theoretically up for grabs to the highest bidder.
The ensuing wars of opportunity exposed a business environment flawed by Sovietera characteristics, an international community unprepared to do business in Russia,
and an American government eager to shape the nascent capitalist society and create
an economically stable state.
THE UTILITY OF OIL
The U.S. government needed a concrete and organic way to stabilize the
fledgling Russian Federation and support its budget as part of larger reform efforts.
After all, one of the world’s largest nuclear scientific programs and arsenals was now
adrift in the midst of a highly fragile situation. To this end there was no better
solution than to revive the region’s mammoth oil production capabilities. It was a
relatively straightforward calculation: oil is a ‘flexible asset’ in that high levels of
investment usually result in high levels of oil production and therefore high-value
exports (Grace, 2005, p. 213). The new Russian state inherited one of the largest oil
reserves in the world but production had peaked towards the end of the Soviet era in
24
1988 and fell by almost 20% by 1991—meaning that there was a large opportunity
for improvement (Sim, 2008, p. 16). But revitalizing oil production would prove far
more difficult than the American government, international oil companies, and
Western investors realized.
The decline and struggles of the Soviet oil industry pre-dated the foundation
of the Russian Federation and disappearance of the Soviet command economy.
Production needed to be lifted, which could only be the result of increased efficiency,
investment, and technology—three strengths of the large American oil companies
(Gustafson, 2012). But the vast petroleum reserves inherited by the Russian state
were burdened with characteristics that would complicate the sector’s revival. Russia
hadn’t lost much of its oil reserves outright—about 80% of the USSR’s proven oil
fields were located inside Russia proper—but the industry relied on the entire
infrastructure of the Soviet command economy to operate.2 Most of the essential oil
field equipment was produced in Azerbaijan and no longer regularly delivered to
supply the Russian fields after the breakup of the USSR (Grace, 2005, p. 76).
The Soviet planned system was woefully inefficient and improperly suited to
run an oil industry. While Western companies had long ago realized the benefits of
vertical integration, every segment of the Soviet oil industry operated as a separate
entity vying for export licenses, transportation rights, manpower, or materiel; the
companies were geared toward gaining funding from the central planners, rather than
maximizing profits from their wells (Grace, 2005). Beginning in the 1980s, there was
little capital available from the Soviet state and the oil industry’s exploration process
2
However, vast new fields would soon be discovered in the Caspian region, increasing international
competition for strategic control of the region’s resources and export lines.
25
for new fields became “savaged;” at the time of the USSR’s collapse, more wells
were going off line than were being drilled (Grace, 2005, pp. 41, 74). By the later
1990s, Russian oil production—at 6 million barrels/day (b/d)—was down to about
half of its peak in 1987 (Grace, 2005, p. 66). The decline of USSR/Russian oil
production was a trend with causal roots a decade before the Soviet downfall, but
could not have come at a more inconvenient time for the Russian economy.
These fundamental difficulties crippled the industry into the early 1990s and
caused severe strain on the new Russian state. Government coffers were seriously
reliant on oil tax revenues and a declining industry meant large income losses
(Gustafson, 1999, p. 197). Yeltsin’s administration realized the potential of the oil
sector in aiding Russia’s revival and solving cash shortage difficulties and thus
implemented a series of directives to transform the industry into a free market,
corporatized system. The early decision in 1991 to reorganize the entire sector into
Rosneftegaz, a state-centralized oil holding company as a ‘voluntary association’
would mark the beginning of the transition to a Western system of management
(Lane, 1999, pp. 16-17). This weak association would protect the industry and lead to
vastly different outcomes than other Russian businesses during privatization, in
particular compared to the consistently state-controlled gas sector (Sim, 2008, p. 18).
Given the U.S. and Russia’s mutual understanding of both the weakness and utility of
the Soviet oil industry, the American government moved quickly to involve
themselves with Russia’s energy development. The U.S. had a plethora of oil
companies interested in exploring Russia, which fit well with larger reform and
stabilization objectives.
26
American oil companies and investors recognized the opportunity of the
reorganization of such a tremendous oil industry and quickly moved to become
involved in the early days of the Russian ‘opening.’ Despite the heavy risks and
dangers associated with investing in a market with few codified taxation policies or
property protections, there was reasonable enthusiasm regarding Russian oil projects
from U.S. companies early on. Russia has the largest “undiscovered, technically
recoverable, conventional oil resources” in the world, a tantalizing prospect for
portfolio-conscious Western producers watching the Russian government begin to
auction off Soviet oil holdings (Grace, 2005, p. 183). Americans knew that there was
great potential in the Russian fields, especially with the addition of advanced Western
geological technology. Though some claim that the “Russians did not mind if
foreigners took over the beer and candy industries,” oil was an altogether “different
matter” (Grace, 2005, p. 166; Gustafson, 2012, p. 154). American companies were
about to enter an investment climate that they were largely unprepared for, despite
their federal backing.
CONCLUSION
The 1990s were an unprecedented decade in Russian history. Almost
overnight, the country was suddenly attempting to cast off its Soviet characteristics
and promote free market reforms that would revive its blundering economy. In the
end, the rush to privatize state assets led to a poorly managed transfer of incredibly
valuable resources to the well-connected few through a number of backdoor
agreements. Amidst economic collapse, messy privatization, and the administration of
‘shock therapy,’ the U.S. government and American companies responded to the
27
opportunity and risks of Russia. American energy companies, already interested in
the prospect of investing in Russia’s Soviet oil inheritance, would fit into the larger
American goals of stabilizing the new nation’s economy by revitalizing exports and
providing a source of revenue to the struggling Russian government. However, the
Soviet legacy of the Russian Federation’s investment laws would provide major
hurdles for foreigners attempting to enter in the emerging market.
28
Chapter 2
Investing in the New Russia
Stabilizing Russia through American oil investment would prove to be a
difficult enterprise. From the beginning, Russia was an imperfect market that
languished for much of the 1990s in a state of perpetual transition with rampant
inflation, a lack of many key market mechanisms, and a fragmented regulatory
structure. And while the Russian government was open to the idea of billions of
dollars of foreign direct investment (FDI) in order to counteract its domestic capital
shortage and reverse a tumbling GDP (Artisien-Maksimenko
Adzhube , 199 , p.
3), regional governments, regulatory agencies, and Soviet-era managers were
inhospitable to foreign control—especially of prized Russian oilfields.3
While the opening of Russia’s vast assemblage of industries, resource
reserves, and manpower was tempting to western interests, many quickly became
distrusting of both the nascent economy and new administrative regime. Russia’s
Soviet legacy and complex political environment slowed the creation of an attractive
business climate and prevented many foreign companies from confidently investing
in Russia or fully realizing the potential of the new market until after the Ruble
demise of 1998. As a result of the ever-changing regulations and levies post-Soviet
collapse, Western companies required high-level relationships and clear cut contracts
to operate in such a risky investment environment. Rectifying Americans’ insecurity
3
In 1992, Yeltsin heralded that Russia hoped to “accommodate foreign investment to the tune of
hundreds of billions of dollars” (Greenhouse, 1992)
29
thereby dominated much of the United States’ dealings, both political and economic,
with Russia throughout the 1990s.
SOVIET BEGINNINGS
Though many scholars blame Russia’s early inhospitable market on the pace
or style of reform post-collapse, the Soviet Union’s lasting structures and economic
legacies are also accountable for the nation’s inability to garner Western trust
throughout the early 1990s. As Russian productivity and economic power waned in
the 1970s and 80s, Communist officials recognized an economic ‘pre-crisis situation’
and attempted to build an economy that could compete and integrate with world
markets (Åslund, 1989, p. 14).4 In the late 1980s through 1991, then-General
Secretary Mikhail Gorbachev’s government began to incorporate market mechanisms
that would reverse Russia’s economic decline.
Given the political danger associated with drastic alteration of party policy,
reforms were slowly introduced and carefully presented. With Gorbachev’s March
1985 resolution came hints of change; in his 5 year plan, he detailed a number of
significant economic adjustments to encourage foreign investment and introduce
western technologies to the aging and declining Soviet infrastructure (ArtisienMaksimenko
Adzhube , 199 , p.
; Åslund, 1989, p. 27). Subsequent Communist
Party plenum addresses were used to convince his colleagues of the USSR’s need for
economic improvements. With caution, legislative adaptations were rolled out,
including limited opportunities for foreign investment (Åslund, 1989, p. 144).
4
exports to the OECD dropped by about 40% in value from 1984-86 partly as a result of collapsing
world energy prices (Åslund, 1989, p. 136)
30
The first iteration of any possible direct foreign involvement in Russia, the
Soviet Joint Venture (JV) legislation, had curious limitations and benefits in its initial
form as part of a handful of financial, structural, and regulatory reform decrees
implemented in the summer of 1987. Under the new regulation, foreigners could own
up to 49% of a given JV with a Soviet counterpart—yet the measure failed to specify
further legal details or government guarantees (Bayulgen, 2010, p. 126). The decree
did stipulate, however, that foreign investments were required to have a top
management composed of Russians, were separate from the national economic plan,
and granted a two-year tax holiday on profits (Artisien-Maksimenko
Adzhube ,
1996, p. 48). Though by no means a comprehensive or straightforward investment
doctrine, the 1987 decree depicted the first glimmer of foreign possibility in a
previously closed business environment.
The next phase of Soviet economic evolution relaxed restrictions, enabling
further foreign possibilities. By 1988, a number of limits on trade and ownership were
removed from the new Joint Venture law and all businesses were open to trade and
investment with foreign markets (Artisien-Maksimenko
Adzhube , 199 , p. 9).
Taxation laws were strengthened, a new Ministry of Foreign Economic Relations was
created in January 1988, and foreign exchange restrictions were loosened (ArtisienMaksimenko
Adzhube , 199 , p. 50; Åslund, 1989, p. 137). The trend of
liberalization continued with the allowance for completely foreign-owned
corporations in 1990 and increasingly detailed legislation on foreign investment in
July by both the Russian Republic and Soviet governments (Artisien-Maksimenko
Adzhube , 199 , p. 50). The reforms that Gorbachev ushered in during the 5 years
31
preceding the Soviet collapse formed the foundations of a soon-to-be Russian
capitalist economy.
Without a doubt, the reforms of 1987-1991 were quite extraordinary. The
creation of new institutions of economy forced the Soviet Union to break from the
fundamentals of communism and the complex distribution of resources of the past
(Hill & Gaddy, 2003, p. 60). The disappearance of many Soviet-era ministries and
advent of modern institutions of bureaucratic governance signaled new leadership,
democratization, and decentralization of power (Sim, 2008, p. 17). Though some
optimistically claim that these late 1980s reforms were a brilliant political tool
whereby Gorbachev entwined many western firms’ futures with the success of
Russian reformation, the reality was much more stark (Artisien-Maksimenko
Adzhube , 199 , p. 7). Many view Gorbachev’s 1980s efforts as ‘too little, too late’
and blamed them for enabling back-door privatization, tax evasion, and other
subversive activity (Åslund, 1989). Despite his efforts, the economy continued its
downward slide and the Soviet Union began to disintegrate; it would be gone before
most expected.
A NEW RUSSIA
The collapse of communism and the simultaneous destruction of the Soviet
planned economy threw Russia into an economic nightmare. The Russia Federation
inherited a difficult past;5 there were Soviet-era laws, regulatory agencies, and banks
in place but such systems were so basically different from capitalist foundations that
they were essentially “without significance” to the necessities of a market economy
5
The former head of IMF Russia during the 1990s reflected that “it would have almost been better had
the country started with a completely new political class and institutions” (Gilman, 2010, p. 6).
32
(Artisien-Maksimenko
Adzhube , 199 , p. 12; Frye, 2000, p. 4). Regardless of
Gorbachev’s movements, Russia inherited a business environment with no property
rights, cohesive taxation regulations, stock exchange, modern financial institutions, or
protective legal structure. The Soviet method of trade of the past 70 years suddenly
became obsolete; goods were now to be produced based on market demands and
sales, rather than from directives by the central planners and state budget (Grace,
2005, p. 104). The disorganization of the Russian economic state created a quagmire
for a nation fervently trying to nurture foreign direct investment to support its dated
industries.
A large part of the problem with the transition to a market economy was the
legislative quagmire of the region. Even before 1991, the regulations of each of the 15
republics conflicted with the taxes and statutes of the overarching Union—a contrast
commonly called the ‘War of Laws’ (Cuddy & Gekker, 2002, p. 14). The power
vacuum created by the collapse of the USSR left the region with a similar conflict,
this time between the laws of the Russian Federation and the semi-autonomous
provinces and Republics (such as Tatarstan) (Gilman, 2010, p. 5). Taxes were used
“as a means of control and surplus extraction,” regulations conflicted one another,
and even Russian bureaucrats did not know which law applied ( slund, 1997, p. 1 ;
Cuddy & Gekker, 2002, p. 9). The discord within the new government and
decentralized Russian Federation left American investors at the will of those with
regulatory power.
LEGISLATIVE EVENTS
33
The Supreme Soviet, the early Russian legislative body through 1992,
attempted to continue Gorbachev’s path to economic stability and implement market
reforms. In April of 1992, they legalized individual ownership, private businesses
with the ‘Law on the General Basis of Entrepreneurship of Citizens in the USSR,’
and began the notorious process of privatization ( slund, 1997, p. 15; Chaisty, 2006,
p. 56). The body’s legislative efforts also included provisions ‘On Foreign
Investment’ in 1991, and ‘On subsoil Resources’ in 1992 that tantalized investors
with prospects of an opening economy but did little to effectively insulate projects
from Russia’s meager judicial regime (Chaisty, 2006, p. 175). Meanwhile, rampant
inflation plagued the nation,6 prices were not yet completely liberalized, and the state
budget was a disaster ( slund, 1997, p. 8). The mixed bag of reform and lack of
authoritative direction from the legislative branch would culminate in 1993 with a
new Russian constitution and legislature, the Federal Assembly of Russia.
The transition to a new basis of governance was the result of a stand-off
between Russia’s new President, Boris Yeltsin and the Russian parliament. Ending
with the quite un-democratic shelling of the Russian White House in October of 1993,
Yeltsin quickly dissolved the Supreme Soviet (an unconstitutional order) and pushed
through a new constitution creating a completely new legislative body, the Federal
Assembly of Russia (Chaisty, 2006, pp. 14-15). But regardless of the advent of a new
political system, the state Duma, Federation council, and executive branch were still
in serious conflict.
6
Inflation is estimated at a whopping 2400 percent in 1992 and 830 percent in 1993 (Frye, 2000, p. 4)
34
It was fundamentally difficult to enact laws in the legislature. Lawmakers had
to surpass political hurdles from parliamentary leaders, committees, the executive
branch, political parties, and even domestic lobbyists before anything could be
accomplished (Chaisty, 2006, p. 97). This series of ‘veto players’ meant that few
significant economic issues were ever voted on by the Duma in the early 1990s
(Chaisty, 2006, p. 77). Only after intense external pressure did the body eventually
adopt market regulations, securities conventions, and a clearer tax code later on in the
decade, only to repeatedly return to periods of legislative stagnation. This ebb and
flow of conflict amongst various factions was the result of a weakened democratic
process ‘vulnerable to pressure groups’ and a dominant executive branch ( slund,
1997, p. 37). Despite many Russians conviction for reforms, progress was at an
impasse for much of the 1990s. In short, the leadership enabled little hope for success
and stability with such challenging legal realities.
For all the discussion of Russia’s flawed systems, it is not to suggest that its
citizens were oblivious to their difficult business environment. Soviet leaders in the
late 1980s candidly recognized the problems of their failing economy and ‘commandadministrative system’ (Åslund, 1989, p. 21). Russian businessmen openly
complained about the lack of FDI in the press and were echoed by Anatoly Chubais,
head of the State Privatization Commission and later deputy Prime Minister, in a mid1990s Moscow Times article where he professed his interest and promise to ease tax
burdens (Craik, 1994). Russians and Westerners alike dealt with share dilution and
asset stripping enabled by a flawed and unenforceable judicial system that
35
businessmen couldn’t trust to protect their rights (Mickiewicz, 2007).7 This
unpredictable economy left Russian businesses both unattractive to investors and
capital-poor.
Given the shortfalls of the new Russian economy, why would any investor
find the region attractive? For Western businessmen, untangling the Russian business
environment posed a monumental challenge. Restructuring and privatization were
still an ongoing process and no one was certain if and how foreigners were allowed to
enter the market (Artisien-Maksimenko
Adzhube , 199 , p. 7). Relationships of
the planned economy era still formed the basis of many Russian institutions and lent
Soviet ‘traditions and understandings’ to the modern economy (Cuddy & Gekker,
2002, pp. 4-8). Westerners found that there was simply no culture of respect for
contractual pacts; ‘final agreements’ were often hastily rehashed or suddenly slapped
with new duties, regulations, or liabilities (Artisien-Maksimenko
Adzhube , 199 ,
p. 16). Again, why invest in Russia? For the energy sector, and particularly the
fragmented oil industry, the question becomes increasingly difficult to answer.
OIL AND FDI
Closed to foreign partnership for much of the last century, one of the world’s
largest oil reserves was suddenly available for expansion with the collapse of the
Soviet Union. Russia was extremely attractive to American investors who foresaw
high returns in damaged fields that were close to booming Asian markets and
required relatively little inputs to repair (Bayulgen, 2010, p. 123). Two sides of the oil
industry approached Russian with equal enthusiasm, but different strategies. The oil
7
"Asked whether they agreed that the legal system would uphold their contract and property rights in
business disputes, nearly 75 percent of businesses polled say they strongly disagreed.” (Akin, 1999)
36
Majors were supremely confident in their ability to quickly turn around Russian
production and aimed for large projects to put their superior capital, technology, and
management techniques to use. While perceived opportunity was frenetic at times,
selecting the oil industry as a target for investment in the early 1990s was dangerous
business nonetheless.
From the early 1990s, the Soviet oil inheritance was carefully separated and
managed by the new reformist government. Russians were wary of losing control
over their precious oil resources and did not want to grant foreigners an ‘equity stake’
in their fields (Bayulgen, 2010, p. 66; Grace, 2005, p. 166). Therefore, up until 1994,
many western businesses were still operating or negotiating petroleum production
contracts under the 1987 JV law since there was no fully established legal framework
(Communication, 2012c). Given that Russian businesses were cash poor and inflation
was rampant, ‘service joint ventures’ were in style whereby petroleum service
companies received physical oil for their work in undeveloped or damaged fields
(Grace, 2005, p. 144; Gustafson, 2012, pp. 156-159). But even with the use of
alternative contracts, the amount of Western investment in the 1990s was far lower
than expected (Artisien-Maksimenko
Adzhube , 199 , p. 58); for each barrel of oil
in its reserves, Russian attracted one-tenth the FDI compared to Azerbaijan
(Bayulgen, 2010, p. 9). The Russian system was simply too hostile for foreign
companies to navigate successfully.
There are many reasons why Russia failed to sponsor successful foreign
projects and high levels of FDI in the years post-collapse. For one, regulations were
ever changing: tax holidays for Joint Ventures were demolished and then later
37
restored and obligations for domestic sale changed wildly (Artisien-Maksimenko
Adzhube , 199 , p. 117). But there are certain difficulties that were endemic to the
petroleum industry and exemplify the difficulties of foreign oil companies. There
were ‘incessant problems’ with getting any produced oil out of the country (Grace,
2005, p. 146). The state-owned petroleum and gas transit company, Transneft,
controls and operates the entire Russian pipeline system and therefore any oil
project’s revenue stream (Lane, 1999, p. 22). Ventures in 1993, for example, were
abruptly stalled when Transneft decided to block the export of oil from any company
with partial foreign ownership for so-called ‘accounting violations’ and ‘scarce
capacity’ (Artisien-Maksimenko
Adzhube , 199 , p. 7). Difficulties also stemmed
from the unique regulatory environment surrounding oil projects.
A plethora of Russian agencies manage petroleum production at a series of
points along the product pipeline—during the early 1990s, oil companies had to
operate in compliance with a frustrating array of Russian bureaucracy. Oil export
duties were set by the Ministry of Foreign Economic Relations and separately
enforced by a purpose-built interdepartmental committee. Oil export quotas, on the
other hand, were set by the Ministry of Fuel and Energy yet handled by Transneft, a
company owned and controlled by the executive branch (Artisien-Maksimenko
Adzhube , 199 , p. 4). American oil companies soon realized that the barriers of
entry into the Russian market weren’t only in the form of capital-intensive
investments—they would require teams of lawyers, lobbyists, and patience.
Given the limitations of Russia’s investment legislation in the decade after the
Soviet collapse, oil companies turned to tools they deemed appropriate for the
38
uncertain and challenging economic environment. In this vein, executives saw an
opportunity to apply Production Sharing Agreements (PSAs), used by extractive
industries since the 1960s in more than 30 countries across the world (Bayulgen,
2010, pp. 30-31,34). A PSA contract between the private corporation and host state
would protect the investor from ‘arbitrary state action and rent seeking’ and allow the
company to recuperate its investment through untaxed sales of extracted resources
(Bayulgen, 2010, pp. 31-32; Chaisty, 2006, p. 174). This fit well with Russia’s
unclear legal environment as it would provide protection for the Western companies
as an enforceable contract in international courts (Bayulgen, 2010, p. 131). For these
risk reducing characteristics, oil company officials saw PSAs as the perfect solution
for limiting their uncertainty in the Russian market.
The Russian reaction to PSA suggestions from western oil corporations was
mixed, at best. Though President Yeltsin issued Presidential Decree 2285 in 1993
delineating the key characteristics of ‘PSA enabling legislation,’ PSAs weren’t
legally possible given Russia’s investment laws. To that end, Yeltsin requested that
the Duma agree to his 1993 decree in order to encourage major investment in
Russia’s resources (Bayulgen, 2010, p. 132). Two years later, the State Duma passed
the law ‘On Production Sharing Agreements’ granting PSAs recognition by the
federal government, albeit with stringent restrictions.
The 1995 bill was one of the first efforts to enumerate the investment structure
of the oil industry specifically, but left much to be desired. Before the final vote, the
Duma hard-liners had added a number of amendments limiting the independence of
the PSA contract from Russian regulators and legislators (Gustafson, 2012, p. 179).
39
The new law did recognize PSAs as legal vehicles of investment, but enumerated a
loose framework for companies to work within. Federal and local bureaucrats could
still arbitrate the details of taxation or regulations and significant oilfield projects
required State Duma approval (Chaisty, 2006, p. 176). Not all Russians were friendly
to the idea of foreigners securing contracts for their oilfields.
Outside the executive branch, PSAs were seen in a different light; Russian
officials and managers were brusque with their view of the contracts. They saw PSAs
as a ‘giveaway’ of Russia’s natural endowment to Western investors and lamented
that such methods were intended for unstable and impoverished nations. One
disgruntled official proclaimed in response, “we are not Papua New Guinea”
(Gustafson, 2012, p. 179). As a result, besides three initial PSA projects
grandfathered into the 1995 Russian legislation, new contracts were difficult to secure
and very few succeeded without deep local support and ‘lucky timing’ (Gustafson,
2012, pp. 179-180). Regardless of U.S. government efforts to lobby the Russian
government on behalf of western oil companies’ (described in Chapter ), foreign oil
projects’ difficulties would persist until dramatic economic upheaval in 1998 and a
later revival of world oil prices.
THE 1998 CRISIS
Though the Russian economic crisis came to a head in August of 1998, its
roots were spread across both time and space. The initial financial disruption that set
the downturn in motion was the Asian currency crisis a year earlier. Beginning in
1997 with the devaluation of the Thai Baht, economic troubles quickly spread across
Southeast Asia and even to South Korean and Chinese markets. The collapse of a
40
number of large emerging economies caused significant capital flight, colloquially
called the ‘Asian flu,’ and Russia was hard hit by investors’ pulling out capital to
cover their losses across the globe (Gilman, 2010, p. 107; Gustafson, 1999, p. 15;
Rutland, 2001). Worse for the Russian budget, the Asian downturn also caused
reduced demand for oil; amid the Organization for Petroleum Exporting Countries’
(OPEC) November announcement of increased production levels, oil prices dropped
precipitously from 1997 through 1998, leaving Russian producers almost in the red
(EIA, 2013; Gilman, 2010, p. 146). With reduced investment inflows and tax arrears
from oil exports, the country faced significant financial hardship as a result of exterior
economic developments. Domestic policies added a further source of instability.
The 1998 financial collapse was also caused by the Russian government’s
policy missteps. Throughout the past decade of Western-style reforms, progress had
been sluggish. The government was still struggling to collect more than 10% of GDP
in taxes but was spending about 15%, and thereby financing the country’s budget
through immense International Monetary Fund (IMF) credit packages (Gustafson,
1999, p. 15; Rutland, 2001). Beyond that, the Ruble was pegged to the dollar at an
artificially high rate (Gilman, 2010). The country’s finances were clearly
unsustainable and the Russian economic slide soon reached a critical stage, unable to
secure yet another round of lending from European leaders. On August 17th, the
country was forced to default on many of its loans and devalue the Ruble by about
two-thirds (Gilman, 2010, p. 186).
While the Russian slump almost caused an international recession and
exemplified the weakness of the Russian state, economy, and banking system, the
41
government survived and the moment drastically changed the landscape of the
Russian economy. Suddenly export-based companies, such as oil producers, could
cover their taxes and operating costs with fewer dollars, yen, or pounds (Grace, 2005,
p. 82).8 The stifling oil production taxes were no longer as difficult to pay and the oil
price rise after 1998 brought a renewed interest in Russian oil (See Appendix 1,
Figure 1). Energy drove the economic resurgence, and is said to be responsible for
almost half of the growth in GDP in the years following the crisis (Rutland, 2006).
With a renewed sense of urgency, the Russian leadership opened to new reform and
the economy began to rebound, more quickly than many expected.
Optimists in Western financial institutions claimed that the crash should be
seen as ‘a watershed for the Russian economy’ in that it inspired a resurgence of faith
in the market economy and Western forces (Gilman, 2010, p. 278). A more realist
perspective notes that, coupled with the collapse in international oil prices recovery
(see Appendix 1, Figure 1), the crisis “motivated all groups involved to improve the
legal environment for Western oil company participation” given the severe capital
outflows of 1997-8 (Bayulgen, 2010, p. 417; Gustafson, 2012).9 While the latter
analysis seems more likely, it is evident that the economic turmoil of 1998 was an
exemplary test for the nascent Russian economic system.
The 1998 crash eloquently bookends the Russian economic experience and its
relationship with Western investors, oil, and reform. It also depicts the deep change
8
The devaluation was especially helpful for the export-based oil industry—the five years after the
1998 ruble collapse became known as the ‘oil miracle’ (Gustafson, 2012, p. 183).
9
Many analysts see Russia’s investment environment within the context of pre- and post-1998. One
U.S. Trade and Development official claimed that while many projects weren’t successful pre-1998,
they might have been afterwards (Communication, 2013).
42
that Russia had undergone in the past decade; the nation was now integrated with
international markets and relied on banks and credit to trade and thrive (for better or
worse) (Gustafson, 1999, p. 16). While some may conclude that the crisis changed the
nature of the Russian landscape, scholars note that the mainstays of ‘Russian political
economy’ were shaped in the decade or more prior—“the crisis merely served to
highlight the system’s existing features” (Rutland, 2001). In any case, due to
consolidated banking systems, taxation regimes, and especially higher oil prices,
post-1998 Russia was a nation poised to attain economic stability on the brink of the
millennium.
CONCLUSION
The Soviet underpinnings of the Russian economy provided a weak
foundation for foreign investment in the emerging nation. Though Mikhail Gorbachev
had attempted to reform Russia’s command system, there were few avenues to
express foreign interest in the slowly opening market. Any company investing in the
new Russia faced a complex legislative environment of overlapping regulatory
structures, changing tax regimes, and insubstantial legal protection. Yet despite these
barriers to entry, western oil companies still attempted to work in the emerging
industry. They would pine for production sharing agreements to limit Russia’s
pervasive risk and ensure profitability but few projects ever succeeded. The market
only improved as a result of the rising price of oil post-1998. The incredibly unstable
environment helps contextualize and illuminate the domestic issues that characterized
the United States’ relationship to Russia throughout the tumultuous decade (Perovic
et al., 2009, p. 72).
43
Chapter 3
U.S. Companies Invest in Russia
“You would lose out if you didn’t take risk”
(Communication, 2012c)
Given the challenges associated with investing in Russian oil throughout the
early 1990s, it is a wonder any projects began at all. Changing tax burdens, permitting
hurdles and bureaucratic quagmire created a high-risk investment environment in the
midst of an unstable democratic regime. Despite this uncertainty, U.S. petroleum
corporations were still interested in Russia; as one scholar of Exxon notes, “the prize
was so alluring that all of the major Western oil corporations persisted in Moscow,
nonetheless” (Coll, 2012, p. 253). Smaller independent corporations also saw
opportunity but sought different types of contracts than oil majors—deals with
Russian partners and regional leaders throughout smaller oilfields of Russia’s Soviet
inheritance. Though some of these early ventures still exist and produce or process oil
today, the 1990s was a story of muted success across U.S. projects in Russia. The
inconsistent U.S. oil investment experience was a result of the structure of each type
of petroleum-centric firm, the individual corporate culture, and the particulars of each
investment project. Ultimately, executives would turn to the U.S. government for
assistance with the difficult Russian market.
Americans observing the Russian oil industry saw a languishing infrastructure
in sore need of capital and technologically advanced solutions. A 1992 study
commissioned by the U.S. government revealed an ‘industry in disarray’ with
production bottoming out and thousands of wells in a spectrum of disrepair (Grace,
44
2005; Gustafson, 2012, p. 150). American companies were therefore excited by the
prospect of a country prime for a quick infusion of capital, advanced technology, and
Western ‘know-how’ (Watson, 1996). A nation so desperate to resurrect its oil fields
would presumably accommodate them with open arms and lax regulations.
The difficulty of the business environment became apparent from the very
outset of Western involvement in the new market and the level of foreign oil
investment lagged throughout the decade (Artisien-Maksimenko
Adzhube , 199 ).
But wherever there was opportunity as looming as Russia’s, oil corporations would
tirelessly work to overcome the barriers to entry with teams of imported contractors,
lawyers, consultants, and auditors (Gorst, 1996; Gustafson, 2012, p. 146). By 1994,
there were about 50 operating oil-focused joint ventures, mainly working on raising
production levels at existing fields and bringing Western-style management to
development efforts at nascent Russian oil corporations (M. J. Sagers, 1994).
According to an IEA report in 1995, about 19 involved of these JVs were involved in
‘field development’ whereas 32 were strictly ‘service JVs’ (IEA, 1995, p. 95). The
relative successes that did materialize from these projects favored a particular mix of
factors that few oil companies got right. The intensity of oil work that Western firms
dreamed of never became a reality during the 1990s.
THE MAJORS AND EVERYONE ELSE
One of the main delineations between companies operating or interested in
Russia at the outset of the ‘opening’ of the Soviet oil opportunity was the sheer size
and type of petroleum service that each provided, sought, and succeeded in. As one
industry ‘white paper’ suggests, “Russia proffers opportunity but the pieces of the
45
puzzle vary depending on the company’s size and strategy” (Lawrence, 2003). Oil
majors, the massive multinational vertically-integrated corporations, were industry
behemoths that offered to bring immense capital, advanced equipment, engineering
prowess, and experience with technically challenging projects to the struggling
Russian oil business. Independents and service companies, on the other hand, thought
their maneuverability, scientific skill with modern production techniques, and
“entrepreneurial spirit was just what Russia needed” to increase production and repair
damaged fields (Grace, 2005, p. 145). The structural differences and goals of large oil
Majors and other petroleum-centric companies would result in significantly different
experiences for their respective investment projects in Russia.
The changing landscape of the international oil industry sparked Western
corporation’s interest in Russia and underscored their investment procedures within
the emerging market. By the late 1990s, resource nationalization and the rise of the
Organization of the Petroleum Exporting Countries (OPEC) had forced oil companies
out of both Latin America and the Middle East until a fraction of the world’s
petroleum reserves were privately held (Yergin, 2011, p. 270). Losing these
opportunities was disastrous for oil companies traded on the New York or London
stock exchanges. Each year, they were required to report to shareholders and the
Securities and Exchange Commission (SEC) reserves that they “controlled legally
and could exploit for sale in future years” (Coll, 2012, p. 51). Information about a
companies’ so-called ‘equity oil’ was a major driver of share price as it indicated
future profitability, inspiring an endless search for new reserves that pushed projects
“toward higher-risk frontiers” in many of the world’s unstable countries (Coll, 2012,
46
p. 57).10 Finding a replacement for the waning opportunities of the 1990s became
many firms’ priority.
With a gloomy industry outlook, the Russian ‘opening’ came at a seemingly
perfect time. Soviet-era infrastructure and previous exploration projects meant that
Russia was an incredible and rare opportunity, “coupled with extreme risk,” for
companies to add reserves (Gustafson, 2012, pp. 167-170). From the outset, most of
the big oil companies aimed for very sizeable projects to add to their portfolio,
inherent to their business model and method of valuation (Coll, 2012, p. 51; Grace,
2005, p. 145). To protect their new investments, majors sought production sharing
agreements (PSAs) directly approved by the Russian government—common practice
in many developing countries where majors needed to satisfy their board of directors
by minimizing legislative risk and ensuring that they could “survive further change in
government” (Bayulgen, 2010, p. 34; Communication, 2012a; Gustafson, 2012;
"Russia Country Reader," 2011, pp. 1616-1617).11 Reducing uncertainty through
PSAs also provided a key dual purpose, the contract would enable majors to articulate
their ownership rights and therefore reassure their investors of their future viability
and profitability. By the nature of their size and stock valuation, majors were locked
into fighting for PSAs on large blocks of Russian resources.
While majors dealt with an endless cycle of lobbying for PSA approvals and
government guarantees, small independent oil companies and service firms interacted
very differently with the Russian market. It simply came down to economies of scale;
10
Lee Raymond, leader of Exxon and the later ExxonMobil admitted that he was incessantly and
obsessively worried about ‘reserve replacement’ throughout his tenure (Coll, 2012, pp. 57, 192).
11
PSAs were no longer being used in the Middle East, since they were seen as neocolonial exploitation
47
as privately-held or simply contract-based businesses there was no need to find
massive ‘equity oil’ projects over which they could assure control. This reality
allowed for a better relationship with the Russian government and Russian oil
companies. An trade-group ‘white paper’ proclaimed that Russian companies “have
higher comfort levels with non-majors that are looking for smaller niche projects”
whereby Western independents and service companies can “apply their capital,
expertise, and technology” (Lawrence, 2003). This focus on smaller projects and
fields proved crucial for the occasional success of such types of companies under the
shadow of Major Russian and Western oil corporations.
With Russia’s thousands of fields and mess of domestic oil corporations
during the early 1990s, there was a multiplicity of entry points to the petroleum
market for those willing to avoid large reserves, government approval, and Western
financing. Under the radar of the Russian government and majors there “was a vibrant
independent market” with a “more democratic investment playing field” of small oil
deposits that were insignificant to larger entities and technologically challenging for
domestic Russian companies (Communication, 2012c). Independent producers would
usually employ a Joint Venture-type contract in which a Russian partner would
contribute mineral rights and the Western firm would bring capital, equipment, and
management technology to improve wellhead production (Grace, 2005). The
independent would then accrue revenues from oil produced in excess of a ‘decline
curve,’ or the calculated production of the field without the inclusion of the Western
partner (Watson, 1996). Small companies did remarkably well, given the
circumstances, putting together ventures of multiple minor oil fields and avoided
48
much of the delays and haranguing necessary to obtain larger, politically and
economically sensitive projects.
Beyond independent producers, direct contractual agreements by Western
service companies enjoyed seemingly straightforward access to the new Russian
market. From the outset, a number of successful projects focused on repairing
damaged wells or bringing new technology, such as fraccing, to fields through
consignment joint ventures (Grace, 2005, p. 144; Gustafson, 2012, pp. 156-159).
These contracts, commonly referred to as ‘well work-over’ agreements, left all rights
of oil ownership to the Russian field owner and the Western company was paid either
with physical oil or from the proceeds of the increased production (Grace, 2005, p.
144; Watson, 1996).12 Though some of these service companies saw “immediate
success” and avoided insecurity by direct contracts and payment in dollars to foreign
accounts (they didn’t even maintain bank accounts in Russia), they still faced visa
difficulties, regulatory attacks, and contractual disagreements (Communication,
2012d). Disengagement from the Russian regulatory structure and central government
was simply impossible regardless of the type of project Western employed by
Western firms.
In short, oil majors are structurally different from other types of petroleum
extraction and service companies in ways that limit their ability to operate effectively
in an uncertain and complex investment environment without subsoil rights.
Generally, contractors are welcomed by “even the most nationalistic governments”
12
Major oil companies were also occasionally contracted with well work-over agreements. A New
York Times article detailed a small Texaco well repair project in Siberia in 1993 that would yield 250
barrels per day once it was fixed—a “drop in the bucket” according to the Texaco engineer onsite
(Stevenson, 1993).
49
since they do not grant any subsurface rights beyond the contractual payment for
services rendered (Coll, 2012, p. 52). In contrast, the production sharing agreements
that Western oil majors courted were threatening to domestic companies and
bureaucrats, wary of losing control of Russia’s oilfields (Gustafson, 2012, p. 179).
The difference between the objectives and capabilities of various types of Western
petroleum corporations resulted in differentiated success but similar regulatory
stressors. Amongst corporations of equal structure, size, and objectives, the varying
corporate culture provided a second realm inhibiting triumph in the Russian market.
THE EFFECT OF CORPORATE CULTURE
There were serious distinctions between styles of management and investment
amongst the Western oil majors. The variance of strategies employed were a result of
a difference in technical ability and capital power but also due to each company’s
leadership and culture that infused every decision, from the boardroom to the
negotiating table. The juxtaposition of two large American companies, Conoco and
Exxon (later ExxonMobil in 1999), provide an exemplary demonstration of the
spectrum of attitudes Western oil corporations espoused when examining Russian as
an investment opportunity.
From the early 1990s, Conoco took a very different approach to Russian
investment than many of the other Western majors. The company “understood that it
made more sense to go to the lower, local level” for projects and network with
regional actors to “work from the ground, up” (Communication, 2012c). They
therefore would avoid major PSA-type contracts and aim for locally negotiated jointventures where Oblast-level support would give them easier access; those familiar
50
with Conoco’s business concur that they were “not arrogant” or “after presidentiallyapproved projects” and unafraid to take on smaller projects and simply “get in on the
ground” (Communication, 2012c). The company’s management still wanted to ‘push
frontiers’ and commit to Russian investment to unlock the nation’s vast oil and gas
potential, but did so in a way that avoided frequent direct contact with central Russian
government (Nicandros, 1993). Such tactics paid off; by many accounts, Conoco was
initially one of the most successful U.S. Company to invest in Russia during the
1990s.13
In contrast, Exxon’s attitude towards Russian investment was far less trusting
and optimistic. This may partly be a result of the company’s history—with the Exxon
Valdez spill in the late 1980s and escalating media and public hostility, it was forced
to quickly adapt into a very different corporation. The transformation resulted in a
management system obsessed with safety, security, and secrecy—characteristics that
permeate every facet of their business (Coll, 2012). Exxon is considered by many
energy professionals familiar with their work, a “very conservative company”
(Communication, 2012e). This conservatism carried over to Exxon’s investment
practices in Russia and, coupled with the corporation’s size and style, suppressed the
possibility of success throughout the 1990s.
Exxon approached Russia from an inherently difficult perspective. The
company’s executives attempted to operate ‘at the highest levels’ due to the uncertain
business environment and fostered close personal relationships with those in Russian
13
Success in the 1990s did not necessarily translate to success in the 21 st century. Increasing control of
the Russian State has been a trend culminating with the relatively recent transformation of Rosneft into
a large state-controlled oil conglomerate that owns much of Russia’s oil reserves.
51
leadership positions relating to energy issues, such as Natural Resources Minister
Victor Orlov (Department of Energy Document # 380). But bogged down by
lobbying federal actors, they “did not get access to the huge reserves they thought
they were going to get access to” (Communication, 2012c). An individual with
knowledge of Exxon’s operations in early Russia, requesting anonymity based on the
sensitivity of the comment, bluntly called their strategy “stupid.” Though the
corporation followed the maxims of most of the Western majors when it came to
unstable regimes, Exxon seemed to attract more flak. Poor corporate image,
conservatism, and misdirected interaction may explain the corporation’s frustrating
Russian performance in the early days of the oil ‘opening.’
To examine the nuances of their failure, some attribute Exxon’s difficulties to
the fact that the company’s business model was simply ill-suited to a hostile
investment climate. Exxon always focused on owning the oil they were extracting,
resulting in higher profits but more risk—especially in the unstable countries that they
were increasingly driven to work in (Coll, 2012, p. 52). However, many other
companies opted for such a PSA-ownership route, faced significant investment
difficulties throughout the 1990s, but are not referenced so prolifically as ‘failures.’
This may be a reflection of the widespread animosity for Exxon’s style: those that
interact with oil conglomerate find “an arrogant, opaque company…[that] preferred
to go its own way” and oftentimes pushed away help, even from the U.S. government
(Coll, 2012, pp. 222, 255). Len Coburn, a former DOE official working on Russian
energy echoed this Exxon-centric sentiment in the company’s operations in Moscow;
he explained that “they think they can do better than the government and often they
52
do” (Coll, 2012, p. 255). Whatever the true cause for Exxon’s poor image, their
projects did face difficult challenges—perhaps due to their ‘arrogant’ and secretive
nature.
The approaches of Exxon and Conoco in Russia provide contrasting American
examples that demonstrate strategic and personal differences between similarly large
companies. Though Conoco is lauded for their thoughtful tactics, they still faced legal
and tax issues comparable to many other projects in Russia at the time (M. J. Sagers,
1994). Most of the hurdles associated with various early Russian oil investments were
the result of local complexities unique to each region, oil field, and Russian partner
that required constant troubleshooting to maintain profitability and viable progress.
Understanding some of the most significant Western projects’ facets and issues
illuminates which factors led to success and failure and how companies attempted to
manage their risky investments in the former Soviet Union.
MAJOR U.S. PETROLEUM INVESTMENT PROJECTS AND CHALLENGES
Large projects in Russia faced unique challenges from environmental,
regulatory, and legislative perspectives. By the mid-1990s, there were about four
major oilfield investments with a Western partner: Conoco’s Northern group of fields,
Amoco’s Priobskoye field, the Timan-Pechaora Company’s Varandey Development,
and the notable Sakhalin projects comprised of multiple foreign companies (Gorst,
1996). Detailing the travails and specifics of each explicates the factors that lead to
failure or enabled success for their owners. Every project ran into major hurdles and
companies were forced to improvise, lobby, and plow ahead to balance incredible
opportunity with incessant risk.
53
Some of the most successful ventures operating within the new Russia were
projects started during the Soviet era. Work on establishing Conoco’s Polar Lights
project began in October of 1990 with a feasibility study examining oilfields above
the Arctic Circle (M. J. Sagers, 1994). The American multinational soon signed a 5050 partnership with Arkhangelskgeologia, to develop the Russian company’s
promising local claims and share profits equally (Tanner, 1992). It was an unusual
project in that Polar Lights worked on developing a group of completely new fields,
compared to many JVs attempting to revitalize damaged fields, and was supported
with federally-approved tax waivers and royalty reductions (M. J. Sagers, 1994). The
unprecedented opportunity to develop an onshore Russian oilfield led to early success
for the venture.
By 199 , Conoco’s Polar Lights was one of the largest projects in Russia with
an investment of $356 million and relatively high oil output (M. J. Sagers, 1994).
With experience gained from projects in Alaska, Conoco had brought impact
minimization techniques to the north Arctic project in Timan-Pechora and capitalized
on their Russian partner’s mineral rights (Yergin, 2011, p. 34). But even with these
early successes, the project ran into difficulties in the mid-1990s. The company’s
pipeline, over thirty miles long through the arctic tundra, connected to Transneft’s
transportation network—linking its future to the state-controlled monopoly’s whim
(Tanner, 1992).14 Its tax exemptions, signed by the Minister of Finance Yegor Gaidar
14
Polar lights later lost its “unlimited access to Russia’s export pipeline” in May of 1999 and was
reduced to exporting 33 percent of their total production to world markets (Gismatullin, 1999). Limited
pipeline capacity meant that ventures were at the whim of Transneft who could shut export rights off to
foreign investors at any moment, as they did in 1993, for example (Artisien-Maksimenko Adzhube ,
1996, p. 67).
54
himself, were challenged and threatened to run the venture out of business (M. J.
Sagers, 1994). In 1999, the Polar Lights General Director predicted that the venture
would recoup its investments “by 201 , at the earliest” (Zhdannikov, 1999). While
conditions have somewhat improved with the codification of clearer energy
regulations, the project only ever proved to be marginally profitable given the ‘everchanging’ tax regime, according to Conoco’s then-chairman Archie Duncan (Perovic
et al., 2009, p. 183). As of 2013, Conoco (now ConocoPhillips) still has a 50% stake
in Polar Lights with Rosneft, although it is the company’s last major holding in
Russia (Klump, 2012). Polar Lights exemplifies a joint venture with many favorable
conditions that still faced considerable challenges when operating within the confines
of Russian bureaucracy.
Other U.S. investments were similarly thwarted by taxation changes. A joint
venture between Connecticut’s Phibro Energy, Anglo-Suisse, and a Russian firm
began a West Siberian project that included well rehabilitation and production
improvements (Kaufman & Hardt, 1993). Though owned 45% by Phibro, 50% by its
Russian partner, and 5% by Anglo-Suisse, by 1993 the Americans had fronted the
entirety of more than $100 million necessary to start the project. They were therefore
understandably rattled when an export tax, intended to be waived by a government
decree, did not materialize until late 1994 and threatened the business soon after the
project began (Sullivan, 1993). White Nights, since it incorporated a Russian partner,
was initially able to navigate the early business environment and only subject to 4
different taxes at the outset of the Russian Federation in 1991—but quickly increased
55
to 11 levies by 1993 (Watson, 1996). “White Nights will ultimately fail if the export
tax isn’t removed” claimed Phibro’s chairman of Russian operations and warned of a
large write-down for the company (Sullivan, 1993). With export difficulties,
increased tax burdens, and minimal progress, White Nights became extremely
difficult to operate (Watson, 1996).15 The firm eventually sold their portion of the
project to a Croatian company in November 1998 for a mere $20 million (Reuters,
1998).
One of the largest and most renowned Russian exploration and production
projects undertaken by Western investors in the 1990s were the oil and gas fields off
of the Sakhalin Island, north of Japan.16 The Sakhalin projects had a number of
advantages that initially attracted Western investors—namely that the offshore
location enabled international companies to circumvent Transneft’s domestic pipeline
routes and capacity limitations by pumping the oil directly onto ships to access
growing nearby Asian markets (Communication, 2012a; "Russia Country Reader,"
2011, p. 1657).17 Furthermore, since Sakhalin fields were too technically difficult for
Russian producers to explore or extract due to limited offshore technological
experience and the harsh environment, there was little domestic competition for the
rights to develop the significant reserves (Hill & Gaddy, 2003, p. 208). As an added
bonus, the immense distance from Moscow was ideal for avoiding bureaucratic
conflagration (Coll, 2012, p. 256; Grace, 2005, p. 164). With such favorable
15
As one former White Nights employee reported, “There weren't enough dollars left in the barrel, we
were completely underwater with no real hope of emerging from the other side” (Prince, 2000).
16
While exploration in the region dates back to the Soviet era of the 1970s and 80s, there was renewed
interest in the field after the break-up of the Soviet Union and a tender competition was announced in
mid-1991 to develop part of the region’s oil potential (Bradshaw, 1998).
17
Sakhalin-2 for example, utilized a short pipeline from which oil could be loaded onto tankers and be
exported directly (Gorst, 1996).
56
geopolitical circumstances, many Western corporations clamored for contracts to
develop the Sakhalin region’s offshore potential.
With Sakhalin-1, Exxon (USA), Sodeco (Japan), Rosneft (Russia) and SMNG
(Russia), embarked on a serious technological and political enterprise unlike any
other. Even within Exxon, a company known for its precision and technological
ability, the project was regarded as the ‘most complex the company had ever
undertaken’ (Yergin, 2011, p. 35); the team would drill a horizontal well from the
main island and contend with ice flows, seismic activity, high winds, and extreme
temperatures (Coll, 2012, p. 256; Hill & Gaddy, 2003, p. 208). Importantly, Exxon
would utilize the partnership of Rosneft, in order to attempt to insulate the project
from domestic difficulties. Rex Tillerson, an executive at Exxon also worked to
cultivate a relationship with the Sakhalin governor to ensure that, as he put it, the two
sides would be “on the same side of the table if disputes over the project arose” (Coll,
2012; Gustafson, 2012, p. 177). In spite of these efforts, the project faced
monumental hurdles; before it produced any oil, the partners had invested almost $7
billion over the course of a decade (Yergin, 2011, p. 35). Even though a PSA with the
Russian government was signed in 1996 the deal remained politically vulnerable and
was subject to environmental disputes and taxation issues as with many other U.S.
projects in Russia (Bradshaw, 1998; Coll, 2012, p. 257).
Since the Sakhalin fields were large and challenging, multiple projects were
granted production rights during the 1990s ‘opening.’ Sakhalin-2, another of these
simultaneous efforts led by the Sakhalin Energy Investment company, was as costly
as other Sakhalin prospects coming in at more than $20 billion—an amount necessary
57
to ensure that the oil and gas produced reached export markets around the region
through a reliable infrastructure network (Yergin, 2011, p. 35). The project eventually
comprised 5 companies of various non-Russian nationalities (including Marathon Oil
of the United States) through a Production Sharing Agreement which the Russian
government approved in 1993 (Bradshaw, 1998). By 1997, negotiations on financing
with Overseas Private Investment Corporation (OPIC), European Bank for
Reconstruction and Development (EBRD) and the Export-Import Bank of the U.S.
were “nearing completion,” according to a manager of government affairs at the USX
Corporation (of which Marathon Oil was a subsidiary), but murky taxation, customs,
and currency provisions were becoming ‘unmanageable’ and threated to force the
company to “stop work…if [the] exposure becomes too great” (Department of Energy
Document #330-3). Before the company’s first oil was pumped in 1999, about 1700
approvals from different Russian bureaucracies were required (Chaisty, 2006).
The Sakhalin-2 consortium of investors attempted to pursue a project in the
region without a regional Russian partner and paid the price. Throughout the decade
there was ‘mounting pressure’ to accept a Russian company as a partial investor and
significant hostility to the absence of Russian interests represented in such a large
project; the head of one Russian oil firm attacked the projects’ ability to “conduct
their policy unhindered, not always considering the interests of Sakhalin Oblast and
the entire country” (Bradshaw, 1998). But with a PSA to protect the investment from
spurious tax claims or regulatory attempts, there was little incentive for the project to
include domestic firms, aside from the regional government of Sakhalin (Gustafson,
2012). However, the venture was continuously subject to harassment from various
58
Russian regulatory structures: well after the project was underway, in 2006 Sakhalin2 was charged with a mass of environmental penalties and significant fines (Yergin,
2011, p. 40). Given the intensity of Sakhalin-2’s problems, the Western
multinationals relinquished control and Gazprom has now taken over as the leader of
the project (Gustafson, 2012). Even with the seemingly PSA-secured Sakhalin
investments, the trials and tribulations were too much for most multinationals to
profitably extract oil, despite decades of commitment.
MINOR U.S. PETROLEUM INVESTMENT PROJECTS
Though many of the large American ventures could almost be considered
household names, Conoco, Phibro, and the Sakhalin projects were by no means an
exhaustive list of oilfield investments in the emerging market of the 1990s. Small
scale operations were commonplace and companies such as Halliburton, Baker
Hughes, and Schlumberger were often brought in to repair wells damaged by neglect
and design over the past decades—Western major relied heavily on such contractors
and oil service companies to complete portions of their Russian mega-projects. Even
the domestic majors including Yukos, Sibneft, and TNK contracted the skills of
Western service companies to improve the oilfield management and technology of
their existing reserves (Perovic et al., 2009). While less thoroughly documented in
literature detailing Western oilfield investment in Russia, the independent, service,
and contracting sectors were perhaps the most successful and straightforward of all
the Western involvement throughout the decade.18
18
Some U.S. officials contend that the ‘oil renaissance’ in Russia was really brought in by service
companies such as Schlumberger and Halliburton (Communication, 2012d).
59
In spite of their importance, it is difficult to get a sense of the frequency and
size of the interaction between Western service companies and both American and
Russian firms operating in Russia. A selected table of ‘Contracts Awarded by
Sakhalin-1 and Sakhalin-2’ during the period of 1997 to 1998 provides a glimpse of
the dramatic quantity and type of service agreements contracted by Western firms
operating in Russia (Bradshaw, 1998, pp. 162-163). In only two years, these two
mega-projects awarded no fewer than 30 separate contracts for the multitude of
materiel and technology needed to operate large offshore drilling venture. The list of
service firms spans companies from Europe, the United States, and elsewhere—each
to facilitate a particular aspect of the oil production process. Since U.S. service
companies cultivated close relationships with majors and specialized in technology
and management skills, two facets Russian oilfields desperately needed, they were in
high demand by everyone operating in Russia (Communication, 2012c).
Independents also proved to be largely successful in Russia by operating
under the radar of both Western and Russian majors. In the mid-1990s there were
about 50 operating oilfield join ventures, only fraction of which were owned and
operated by large multinational companies (M. J. Sagers, 1994). Harvest Resources
and Teton Petroleum, two small American independent producers “operated and
survived in Russia” and found fields of 20-100 million barrels that were “outside the
radar of the majors” (Lawrence, 2003). Involved since 1996, Teton executive
chairman lauded Russia’s limited drilling risk, high well volumes, and low
acquisition costs (Lawrence, 2003). By grouping together small fields, independents
formed JVs that were rather profitable and successful (Communication, 2012c).
60
Irrespective of their size, all companies operating in Russia would face taxation
increases, permitting difficulties, and regulatory harassment that made business in
Russia complex and consistently problematic.
FAILURES AND OVERCOMING DIFFICULTIES
U.S. companies investing in Russia clearly faced a plethora of problems while
attempting to support oil production at their projects throughout the 1990s. As the
American Consul General in Vladivostok explained, many of these major
investments—the Sakhalin Island projects especially—were “illustrative of the
challenges of the various levels of the government in Russia” ("Russia Country
Reader," 2011, p. 1657). Though independent and service companies were largely
more successful in entering the market and avoiding bureaucratic dealings, all firms
faced significant hurdles in Russia either through taxation increases, regulatory
changes, or basic bureaucratic needling. How they learnt from and overcame these
uniquely Russian challenges exemplified the deep commitment it took to operate in
Russian during a challenging decade.
Presented with a hostile rent-seeking Russian taxation system, early 1990s oil
industry players turned to a number of avenues for relief. Of the multiple pathways
available for foreign oil development in Russia, the production sharing agreement
was a cornerstone of major American corporations’ strategic goals. Executive
Director of the Moscow-based trade group Petroleum Advisory Forum (PAF)
conceded that the reliance on PSAs was unique to American companies who almost
uniformly insisted on them to work in Russia (Department of State cable #419). The
inability of Western oil companies to find ‘acceptable basis’ for their massive
61
production goals is commonly referenced as the main reason that many multinationals
such as Shell, Texaco, etc. did not succeed in Russia during the 1990s (Gustafson,
2012, p. 180). Privately, American petroleum executives conceded that PSA
legislation might not solve the myriad of difficulties of the Russian investment
environment (Department of State cable #492). They would therefore turn to
alternative avenues to navigate the inherent Russian quagmire.
In order to avoid diplomatic disputes and individual disrepute, a range of
American businesses bundled together an interest group to lobby on their behalf. The
U.S. Russia Business Council (USRBC) was thereby founded in 1993 to focus on
instability, intervention with high level government officials (in both Russia and the
United States), and to host meetings between U.S. companies and Russian officials in
a neutral forum (Communication, 2012e). Specifically to advocate and work on oil
issues, the Petroleum Advisory Forum (PAF) centered in Moscow, was similarly
created in 1993 by international oil and gas companies interested in the Russian
market. These interest groups enabled company-specific teams to avoid
communicating unpopular messages within the messy and factionary Federal
Assembly of Russia and instead court relationships for preferential treatment from
Russian government officials to reduce their individual projects’ tax burdens
(Chaisty, 2006, pp. 125-126). USRBC and PAF represent only one portion of the
techniques employed to navigate the tumultuous Russian market in the 1990s.
Conoco was one of the few American companies that entered Russia with
contentious planning and the involvement of local partners. Constantine Nicandros,
Chairman of Conoco writing in 1993, was careful to outline the company’s
62
‘Roadblocks to Success’ in Russia and clearly detailed the strategic response to the
difficult, yet ‘exciting,’ investment environment: in order to combat the Western
difficulty of Russian business relations, he espoused the strategy of bringing in
Russian partners (1993). He outlined utilizing existing infrastructure, mobilizing the
highly-skilled domestic workforce, and lobbying for public financing. It was all part
of his company’s approach to avoid a ‘multi-billion dollar exposure’ within an
unstable economic environment (Nicandros, 1993).
Nicandros’ maxims are evident in the company’s Polar Lights project. Conoco
was careful to include Russian partners from the beginning, work from the ground up,
and avoid seeking PSA contracts. While a significant undertaking, the Polar Lights
was “intended to be merely an entrée for Conoco into Russia” (M. J. Sagers, 1994).
With their Northern Areas Project, Conoco invested 4 years and $80 million (as of
July 1996) but realizing that the project would not get very far without the
participation of a Russian entity, offered Rosneft a 50 percent stake in the deal
(Department of Energy Document #212). This savvy dealing avoided some politically
divisive situations and provided Conoco with reasonable protection from
encroachment by Russian regulators—at least for a few initial years.
Most Western companies eventually learned that involving a Russian partner
in every project was crucial to success. Sakhalin-3, however, attempted by Mobil,
Texaco, and Exxon originally did not include a Russian participant until the PSA
process was stalled without the local support of the Sakhalin administration and
63
Russian Duma (Watson, 1996).19 Similarly, Timan Pechora Company, a consortium
of Texaco, Exxon, Amoco, and Norsk Hydro was angling to develop over ten fields
in northern Russia—without a Russian partner in sight (Watson, 1996). By July 1996,
PSA negotiations were completed but the Russian government began insisting that
the investment group include the Russian company Rosneft in the deal (Department
of Energy Document #212). These two experiences would teach both Exxon and
Texaco that they needed to maneuver to “make sure that the partner mix minimized
political risk” (Communication, 2012c).20
Though the Russian majors were less technically advanced and financially
secure than their American counterparts, they undoubtedly knew their way around
Russia’s regulatory framework. A Russian business could deal with the local
governments, guide the project through Russia’s curious commercial culture, and
avoid Federal political meddling (Gustafson, 2012, p. 176). By the time Sakhalin-4
and -5 emerged in early 1998, U.S. companies had learned from previous experience.
The two projects demonstrated a marked difference in strategy from early Western
ventures; Russian partnership was ‘embraced … at the onset’ in order to cultivate a
local political advantage to hasten project approval and permitting (Bradshaw, 1998).
Exxon and Texaco were not the only American company that stumbled and learned
from their mistakes—but were slower to trust Russian partners with their ventures
than other foreign corporations.
19
An embassy cable from December 1997 detailed Russian Energy Minister Kiriyenko’s opinion that a
Russian partner was essential to a PSA for Exxon’s Sakhalin project (Department of State cable # 12).
20
By late 1997, U.S. government documents internally concluded that “a Russian oil company partner,
preferably a strong one, is essential in developing oil and gas projects … since Russian companies
have more influence over the decisions of Russian government ministries” (Department of Energy
Document #409).
64
While American companies struggled to navigate the complex investment
environment, they incessantly lobbied, through the PAF, USRBC, and their own
government affairs departments for tax exemptions and PSAs to protect their projects
and ensure profitability. Despite U.S. majors’ intensive commitment to oilfield
development and adaptation within Russia’s parameters, few PSAs that Western
companies sought would ever come to fruition (Gustafson, 2012, p. 179). As
identified in Chapter 2, The Russian laws simply did not promise Western operators
enough insurance from regulatory or duty changes and Russian legislators were
unwilling to codify concise energy investment rules.
Given that they faced serious top-level approval difficulties of PSA contracts
or more favorable tax codes, major corporations unabashedly exuded their influence
throughout the echelons of both the Russian and American government through their
aforementioned trade groups and the Gore-Chernomyrdin Commission (Bayulgen,
2010, p. 133). The differences between Majors and independents also carried over to
their interactions with the United States Government and its relevant departments.
Larger corporations “rarely came to the government unless some sort of piece of
paper was needed” whereas many smaller companies had weekly and monthly
contact with Department of Energy staff, for example, to discern what Russian
contacts they should foster and how to negotiate the myriad of tax and regulation
issues that many were facing throughout the 1990s (Communication, 2012d).
American oil majors were direct with the U.S. government regarding what
they needed and wanted in Russia throughout the 1990s. For politically challenging
situations, most large companies maintained personal connections with those in the
65
executive branch and oil or energy related positions—and judiciously prodded them
for aid on particular projects (Communication, 2012d). During a December 1997
meeting with the Department of Commerce to review priority projects, for example,
company executives were adamant that the US government help them lobby the
Russian government to uphold their previous contracts (Department of State cable
#417). Companies would even advocate directly to the American president himself;
with tax issues in 1993, Phibro and other U.S. companies operating JVs “appealed to
President Bill Clinton to intercede for them with Russian officials” (Sullivan, 1993).
Conoco and Phibro both had deep and useful communications with many
officials in the U.S. government and frequently communicated taxation issues of their
projects in Russia. The Vice President of Phibro would converse with the Department
of Energy regarding taxation changes (Department of Energy Document # 144-5) and
Conoco would similarly relate difficulties with energy customs claims against their
White Nights project to officials in the Department of Commerce (DOC) (Department
of Energy Document #335). When Conoco’s Northern Territories project was finally
ready for approval, they profusely thanked those at the DOC instrumental to the
agreement and requested that U.S. government representatives also sign the
document, given their immense efforts (Department of Energy Document #455). Not
all companies would court such a direct and open relationship with the U.S.
government, however.
At Exxon, government relations were approached in a slightly different
manner. The company was unafraid to utilize its “easy access to high-ranking
officials,” rather than department-level technocrats, to ensure the success of their
66
projects in Russia (Coll, 2012, pp. 68-72; Communication, 2012d). Exxon’s
Washington government affairs department was well versed in the channels of
command and organization within the Clinton administration and worked to ensure
that Exxon understood the policy goals of both the State Department and National
Security Council (Coll, 2012, p. 72). In September of 1997, Exxon’s General
Manager communicated to U.S. embassy staff that in relation to a recent annulment
of a portion of the company’s Timan Pechora project and a letter to PM
Chernomyrdin, the company requested background assistance but insisted that they
were not asking for direct U.S. government support (Department of State cable #
379).21 While Companies evidently approached U.S. government assistance with
timidity, they were supremely confident in their utility to the general progress of the
Russian state and economy.
U.S. oil companies were shrewd in their perceptions of the Clinton
Administration’s priorities. They saw the White House’s penchant for Russian reform
and aid and melded their message to it: Conoco justified their lobby for support with
such rhetoric: “unique circumstances - and the unique risks associated with a failure
of reform in Russia - justify some extraordinary effort” (Nicandros, 1993). Occidental
Petroleum’s Ray Irani, Chairman of the board and CEO, wrote to President Clinton in
September of 1997 informing him of “the obstacles that U.S. businesses continue to
face when exporting to and investing in Russia” and expressing his view that “U.S.
technical assistance and financial support can have a major impact on facilitating
21
When a U.S. government representative later proposed the topic to Energy Minister Kiriyenko,
described in a December 1997 cable, he was dismissive, explained that the company should go to
court, and that the decisions should be viewed as a sign of Russian rule of law (Department of State
cable #413-4).
67
Russia’s smooth and rapid transition to a rational tax system” (Department of Energy
Document #37 ). American’s lobby of the Russian government was far less
successful.
Companies’ relationship with the Russian bureaucracy was by no means rosy.
American investors were careful to defend their position and bluntly dealt with
Moscow to inform them of a project’s susceptibility to failure if the ‘extracontractual’ demands did not end, as in Conoco’s Polar Lights case (Yergin, 2011, p.
34). Exxon’s K.T. Koonce sent a direct letter to PM Chernomyrdin “requesting his
involvement in resolving a troubling situation associated with the competitive bidding
tender for … Timan-Pechora Oil” after a state committee found Exxon’s bid ‘null and
void’ in 1997 (Department of Energy Document # 381). However, there were Russian
bureaucrats slightly sympathetic to American oil companies’ development plans that
sparked optimism in many American bureaucrat and oilmen’s eyes.
Within the Russian government, there was a small liberal core that worked
with American companies and bureaucrats to navigate the politically complex
regulatory structure of the Former Soviet Union. Energy Minister Kirienko, in a
detailed memo to the Department of Commerce, itemized proposals of how to settle
each ‘priority project’s’ disputes (Department of Energy Document #426-32). This
evidence of a hands-on approach by the Russian government, trying to help U.S.
companies despite resistance from both Russian regulators and domestic oil
producers, was an unusual break from traditional Russian workings. U.S. companies
would often have to turn to public finance to improve their position within Russia’s
uncertain business environment.
68
Bringing in project backing from public financing institutions in the U.S. and
Europe aimed to solve a number of issues related to investment in Russia. By
utilizing loan guarantees from organizations such as OPIC, EXIM, EBRD, and the
International Finance Corporation (IFC), U.S. companies would be able to share both
‘political and commercial risk’ by including another public and politically powerful
actor (Nicandros, 1993). Beginning in 1991, OPIC, EBRD, and Exim bank opened
direct credit lines with the Russian government to support oil development through
Western firms (Artisien-Maksimenko
Adzhube , 199 , p. 139). With Conoco’s
arctic Polar Lights project, the team only began drilling once OPIC guaranteed a $50
million loan to the JV, and later received a $200 million guarantee from EBRD and a
further $60 million from a World Bank affiliate (M. J. Sagers, 1994). Though such
cash guarantees were incredibly useful, public financing also enabled environmental
NGOs to attack projects, such as the Sakhalin Island offshore platforms for their
impact on local communities and biosphere (Bradshaw, 1998). In short, there was no
silver bullet to avoid the difficulties that any project was bound to face when
operating in Russia.
CONCLUSION
In the end, each type of American company was limited by their structure,
corporate culture, and specific project. But regardless of these factors, every firm
faced significant limitations in Russia and successes were few and far between. The
slow return on Western efforts to revive the Russian oil industry is evidenced by the
JVs impact on Russian oil output; in 1995 the foreign ventures accounted for less than
6% of all Russian oil exports (Watson, 1996). According to one source working with
69
major multinationals in Russia at the time, the corporations “went in there arrogantly
and conservatively” and “squandered millions of dollars of resources” largely because
there were unwilling to accept any risk when pursuing their projects. Western
companies simply would not dive into a market and forge partnerships that could not
guarantee stable returns in the long run. As a result, many of the large ventures failed;
Russians were reluctant to lose control of their natural resources and Americans were
unwilling to give the Russians the reins.
While it is easy to point out the failures of many international oil companies’
actions and investment approaches in Russia, the risks of the early 1990s were simply
too daunting for projects wagering billions of dollars on the whim of a bureaucrat’s
taxation desires. Much of this aversion was augmented by the low price of oil, which
languished below $20 per barrel throughout much of the decade, greatly limiting
production profitability and companies’ ability to quickly recoup their investments
(EIA, 2013). The oil industry also dealt with major changes within Russia from 1990
to 1998; there were only 3 major levies in November of 1990, eventually rising to 14
by January 1998 (Department of Energy Document #485). These uncertainties led to
a variety of strategies for Western firms to protect their oilfield projects in Russia
throughout the 1990s, including their eventual reliance on U.S. government
assistance.
70
Chapter 4
The U.S. Government Wants to Save Russia
“The radiance of Western justice and success is the power that caused the east
European nations and the Soviet Union to abandon what they were and attempt to
become what we, the democracies, have made of ourselves…it is a moment to seize”
(Pfaff, 1991)
From the first instances of the Soviet Union’s teetering under Mikhail
Gorbachev, Americans saw opportunity. For those in the federal government, the
reality that a near century-long international foe was slowly slipping into the recesses
of history was an incredible moment. Suddenly, the world’s other major nuclear
superpower, one that had driven massive defense spending and endless economic
rivalry for almost the past century, no longer challenged the United States for global
hegemony. This power vacuum also meant that there was an immense nuclear
arsenal—both weapons and scientists—at the whim of an unstable government. Such
risk prompted officials of the U.S. government to rush to stabilize Russia, through a
multitude of federal agencies and the facilitation of American investment. The Bush
and Clinton Administrations’ response to the Soviet collapse displays the processes
behind American coordination, direction, and formation of Russian policy and energy
policy throughout the 1990s.
American policy towards Russia was by no means stagnant during the decade
of ‘transition.’ The aid regime for the Former Soviet Union (FSU) began under
President George H. W. Bush with the 1992 Freedom Support Act and transferred to
Bill Clinton Administration’s responsibility in 1993, as a result of a difficult election.
While Bush was lukewarm on Russia’s new government and leadership, Clinton
71
attempted serious bilateral coordination and communication with the Russians
through the Gore-Chernomyrdin commission and numerous aid programs.
Administration officials also emphasized direct American support for the rebirth of
the Russian oil sector, as part of their larger goal of Russian stabilization. These
efforts, though successfully in many ways, were limited by the idealism and
organization of Russian assistance.
The reaction of Americans to the Russian collapse evinced the perceptions
and paradigms that pervaded U.S. policymaking under both the Clinton and Bush
administrations. Many saw the collapse of the Soviet Empire as a sure sign that
America had ‘won’ the Cold War (Talbott, 2002, p. 33), and therefore brought a sense
of triumphalism to the relationship with their Russian counterparts. Talk of a ‘new
Marshall Plan’ embodied the ideals of America ‘saving’ Russia and guiding its course
to a new and better history (Wedel, 1998, p. 16). Bureaucrats, policy wonks, and
journalists would all frame Russia as a ‘heady time,’ an incredible opportunity with
terrible consequences if the U.S. did not ensure stability and reform with a guiding
hand (Clinton, 1993; Ermarth, 1999; "Russia Country Reader," 2011, pp. 1567,
1664). President George H.W. Bush’s outgoing State Department Secretary Larry
Eagleburger had warned his successors in the Clinton Administration that “if reform
fails in Russia, it most assuredly will mean the failure of reform throughout the
former Soviet empire” (Talbott, 2002, p. 5). The sense that Russia was an unequal
partner, on the brink of a security disaster, would complicate the nations’ relationship
as Americans’ initial optimism waned and Russian reform dragged on through the
decade.
72
The truly interesting questions regarding U.S. foreign aid and strategy towards
the Former Soviet Union (FSU) address this extraordinary focus, coordination, and
attitude. Could twenty some odd agencies organize into an effective policy unit? How
were priorities driven? Was the government reflective and knowledgeable of its
failings in Russia? Twenty years on there are a wealth of criticisms, some by the
government itself, of America’s reactive Russian policy process during the 1990s.
The U.S. government’s Russian aid efforts point to flaws in the executive policy
process, the use of oil investment as a multi-pronged tool towards economic stability,
and the underlying paradigms that drive America’s interaction with Russia. The
confluence of priorities under the banner of ‘security’ would serve as the definitive
focus of the U.S. government’s response to the collapse of the Soviet Union.
U.S. AID TO RUSSIA
With the fall of the Soviet Union, America’s deep-seated fear of another Great
War was replaced by two new sentiments. The first, that of ‘giddy cooperation’ or
‘heady optimism’ brought the U.S. to see Russia in a new light—a potential partner
with whom they could cooperate (Dubinsky, 2013). The second was a fear of Russian
instability and therefore nuclear danger. A senior Central Intelligence Agency (CIA)
analyst told a Senate Panel in early 1993 that there was a “possibility and a danger”
that Russia would disintegrate, with disastrous consequences for nuclear security
(Sciolino, 1993); a wayward state with such capabilities might try to sell equipment
and material to ‘Third World countries’ (Gates, 1992). There were constant warnings
of the risk of a country such as Russia, with “thousands of nuclear weapons and other
deadly materials,” failing to “find and follow the path of political and economic
73
democracy” (Ermarth, 1999). This fear transformed Russia into a partner with whom
America must cooperate and dominated U.S. bureaucrats’ overarching strategy and
relationship with the ‘reform’ process.
American officials were quick to elucidate the importance of the Russian
‘opportunity.’ Former President Richard Nixon penned an article in the Wall Street
Journal claiming that “Who Lost Russia?” would be the question of the decade and
called the ‘fate of the political and economic reforms’ in the country “the most
important question since the end of WWII” (1992). This focus was reiterated by
members of President Bush’s cabinet; then-Secretary of State James Baker called the
fall of the Soviet Union ‘the greatest challenge confronting’ the U.S. (Cox, 1994).
The Russian situation facing the U.S. provoked concurrent excitement and fear that
brought the Bush and Clinton administrations to the next logical step: a strategic
alliance with the new state based upon generous American aid.
Until 1992, American aid was slow to come to Russia. President Bush wanted
the Newly Independent States (NIS) to undertake reforms themselves before any
large U.S. assistance packages would be promised (Cox, 1994, p. 639). From the
initial crumbling of the Soviet Union, the administration utilized the Support for East
European Democracy (SEED) Act of 1989 to begin small-scale aid packages to the
fledgling democracies of Eastern Europe and Russia (Rojansky, 2010, p. 12). But the
incessant political change was seen as destabilizing and the U.S. government clung to
Gorbachev during the Soviet leader’s last days of power. President Bush was notably
timid on the new Russian President, Boris Yeltsin, never meeting him during the
period of 1989-91 when Yeltsin was the leader of the opposition—even when he
74
travelled to Washington (Dubinsky, 2013). The Bush Administration’s uncertainty
regarding the new Russian leadership’s committal to reform parlayed into restrained
American efforts throughout the first months of the Soviet transition.
Such weak commitment to the new Russia proved politically difficult for
Bush with the ensuing 1992 presidential election. He was frequently criticized by
Clinton and pundits for waiting to provide economic help to the new ‘democratic
government’ (Nixon, 1992; Simes, 2007). In the previous two years, the Bush
Administration had only extended humanitarian aid, food and medical supplies, in the
form of mainly credit purchases and few grants (Tarnoff, 2002, p. 3). Even senior
Bush officials recognized that the aid program was “not going to be of any
consequence” and that the administration had not done enough, even in terms of food
assistance ("Russia Country Reader," 2011, pp. 1543-1544). American aid policy was
largely dependent upon the private capital leading the charge after the rise of a free
market. As one former CIA official noted, “Washington’s part in purveying in Russia
the dogma that markets will triumph over all … began … under President Bush”
(Ermarth, 1999). When Clinton began attacking weak Russian aid in his campaign
stump speeches, the Bush team rushed to draft a new package supporting reform and
democracy in the FSU.
With a catchy acronym and usual fanfare, the Bush Administration announced
the signing of the FREEDOM Act (Freedom for Russia and Emerging Eurasian
Democracies and Open Markets Support Act of 1992) (S. 2532) on October 24th
1992. Passed by a fairly wide margin with bipartisan support, the law created a
coordinating position within the State Department for federal assistance to the NIS,
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authorized appropriations of $410 million for ‘bilateral assistance,’ provided $12
billion to the International Monetary Fund (IMF), and further resources to deconstruct
Soviet nuclear weapons, among other provisions ("FREEDOM Act," 1992). It
corralled 23 federal agencies into the Russia aid process and directed the Department
of Commerce (DOC) to “provide commercial and technical assistance to U.S.
businesses seeking markets in the independent states” (Bush, 1992; GAO, 1995b).
Though Bush’s presidency is often attacked for weakly responding to the Soviet
Union’s collapse, the Freedom Support Act (FSA - the common name for S.2532)
“set forth the broad policy outline” and initiated U.S. assistance for Russia and the
Soviet Union’s former territories (GAO, 1995a).
In his press release, President Bush called the measure “historic.” The act
authorized U.S. support of “free market and democratic reforms being undertaken in
Russia” and drew on “our private sector, as never before” to deliver assistance to
Russia (Bush, 1992). Bush was clear in his underlining reason for the bill—“we
undertake these programs of assistance out of a commitment to increased security for
ourselves, our allies, and the peoples of the NIS.” In January of 1993, basic market
reforms were enacted and the two countries signed the first denuclearization
agreement (Cox, 1994). By the time President Clinton came into office, the Russian
reformation was well on its way.
During his campaign for the presidency, Clinton clearly expressed his
priorities regarding reform of the new Russia. He emphatically declared that “no
national security issue is more urgent” and pledged to promote the fledgling
democracy (Sciolino, 1993). Once Clinton came into office, his focus became
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tangible. He appointed an ambassador-at-large at the State Department to coordinate
the administration’s NIS policies, his Oxford friend Strobe Talbott, and during his
first three months in office, Clinton spent almost half of his foreign policy time
‘analyzing and assessing’ the new Russian situation (Cox, 1994). The president’s
emphasis on Russia is further evidenced by his first trip out of the country as
President of the United States, to Vancouver to meet President Yeltsin (Clinton,
1993). From their initial meeting, there was a striking personalization of diplomacy
with Russia; Clinton believed he could work with and ‘manage’ Yeltsin, despite his
foibles (Dubinsky, 2013). Clinton’s personal focus carried over to larger U.S. efforts
to promote Russian reform with deep resources.
Under Clinton’s direction, assistance to Russia quickly ramped up. By 199 ,
aid disbursements reached $1.3 billion to Russia alone, compared to a quarter of that
during the previous fiscal year (Tarnoff, 2003). As touted by both Clinton and his
officials, the main objectives of U.S. assistance to the FSU were based on three
central themes: promoting democracy, establishing a market economy, and enhancing
security (Goldgeier & McFaul, 2003, p. 107; Tarnoff, 2003). To that end USAID
served as primary coordinator of much of the reform process, given the need for a
federal agency experienced in managing contractors and large budgets, and was the
organization charged with distributing funding for a wide range of projects including
privatization programs, trade missions, and independent media support (GAO,
1995c). Though Clinton’s trifecta of goals was aimed to promote a balanced strategy
to Russian assistance, priorities were largely skewed towards security considerations
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(Goldgeier & McFaul, 2003, pp. 108-110). The nuclear threat of Russia was the
dominating worry of policymakers both inside and outside of the White House.
While on the surface the Clinton Administration’s aid effort was somewhat
balanced between the foci of security, stability, and humanitarian, the appropriations
told a different story. A large part of the bilateral aid effort was being funneled
through the Nunn-Lugar Cooperative Threat Reduction (CTR) program created by
two Senators in 1991, aimed at minimizing the security risk by paying for the
Russians to destroy their nuclear stockpiles. In fact, many within the Clinton
Administration and Department of Defense considered it the most useful and
effective Russian aid program (Goldgeier & McFaul, 2003, p. 108). By the end of the
1990s, $1.9 billion had gone solely towards CTR coupled with billions more for
separate projects by the Department of Energy and State Department towards similar
goals, compared to about $9 billion in total grant assistance through 2001 (Dubinsky,
2013; Tarnoff, 2003). The security-focused bilateral aid to Russia was perhaps the
most successful and consistent portion of funds spent in Russia under the Clinton
administration’s authority.
The saga of U.S. funding in Russia is a difficult narrative to explain. While
appropriation levels were initially quite high in 1994, they languished below $200
million for the rest of the decade, despite Clinton’s panache for Russian reform and
personal connection with its leader, Boris Yeltsin (Tarnoff, 2003, p. 7). This was in
part due to the organization of the American government—foreign policy funding
comes not from the executive branch but the appropriation committees of Congress.
The House of Representatives and Senate, Republican-dominated beginning in 1995
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through the end of Clinton’s presidency, were hostile to new monies for foreign
programs and refused to meet many of the administration’s funding requests (Tarnoff,
2003, p. 7). As one government report concluded, the bulk of the assistance to Russia
was granted in the form of IMF loans since world leaders, the U.S. included, “chose
early on not to commit substantial bilateral resources to Russia” (GAO, 2000).
That is not to say that more cash grants would have been effective in
promoting Russian reform. From early on, the Clinton Administration didn’t have a
clear overarching strategy towards Russia; as a senior CIA official told a Senate
panel, the intelligence community and other government agencies had not agreed
upon a detailed plan with which to tackle ‘the Russia problem’ (Sciolino, 1993). Even
as of 1995, there were no government documents that “clearly articulated strategy for
achieving the overarching goals of the Freedom Support Act for helping the countries
of the FSU achieve their reform objectives” (GAO, 1995c). The best way to examine
the Clinton Administration’s aid strategy is thereby to examine the institutions that
left indelible legacies on U.S.-Russian relations.
THE GORE-CHERNOMYRDIN COMMISSION
The Gore-Chernomyrdin Commission (GCC) was the institutionalization of
President Clinton’s pledged support of Russia, overlapping with the goals of the 1992
Freedom Support Act. Proposed by the Russian foreign minister privately to U.S.
officials, it was designed to be a useful instrument such that U.S. assistance would
appear more “politically palatable” and less like “patronizing charity” to the Russian
public (Talbott, 2002, p. 59). A dual benefit of a coordinative body would presumably
enable more effective spending of U.S. aid dollars on projects the Russians actually
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needed (Rojansky, 2010, p. 15). At the 1993 Vancouver Summit with Yeltsin, Clinton
announced the formation of the GCC, the Business Development Committee (BDC),
and an ombudsman position to facilitate American investment (Tarnoff, 2002, p. 11).
These three new vehicles for the U.S.-Russian relationship would serve as an
intensified grouping of federal agencies to address key issues in the Russian
reformation process.
The GCC was a complex bureaucratic organ designed to facilitate partnership
on a number of fronts. As the name suggests, Vice President Al Gore and Prime
Minister Victor Chernomyrdin would serve as the principal representatives of each
nation, tasked with a three-pronged focus on economics, trade, and technology.
Below the figureheads, the commission eventually contained numerous committees,
all chaired at the cabinet and staffed by the respective Russian and American
agencies, including those related to Space, Energy Policy, Defense Conversion,
Environment, Health, and the aforementioned BDC (Department of Energy
Document #301; Rojansky, 2010). With these panels, an official channel developed
through which U.S. agencies could communicate with their counterparts in the
Russian government and “[get] to know much of the Russian elite” and up-andcoming ‘younger technocrats’ (Goldgeier & McFaul, 2003, p. 106; Talbott, 2002, p.
264). While the Commission only officially met about twice every year, the
individual committees maintained quite ‘regular contact’ throughout the decade
(Department of Energy Document #302). At the staff level, individuals responsible
for the coordination of their committee would travel frequently to Russia to meet with
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their counterparts on the Commission (Communication, 2012b, 2012d). As simply a
forum of forced and regular cooperation, the Commission was quite successful.
Giving U.S-Russian relations an institutionalized opportunity for interaction
prompted surprising successes. By virtue of the two nations’ bureaucratic interaction,
the Commission enabled the Russians to ‘see how government runs’ by observing
their American counterparts (Goldgeier & McFaul, 2003, p. 106). In turn, the U.S.
was able to witness the unique Russian ‘super-presidential’ system at work—Yeltsin
changed his top level cabinet members frequently while Russian technocrats below
dealt with the real policymaking. The frequency of meetings also fostered trust,
enabled a working relationship between staff-level bureaucrats over the years, and led
to cooperation on many topics (Communication, 2012d). The multiple committees
produced a range of bilateral projects, from food labeling to tax code drafting, and
over 200 agreements were signed in only 5 years of the Commission’s activity
(Fenner, 1998; Talbott, 2002, p. 264). For the first time in many decades, American
and Russian technocrats were working together, no insignificant achievement.
By the 10th session of the GCC in 1998, the participants were quite proud of
their achievement in furthering U.S.-Russia relations. The Committee was an
unprecedented institutional structure for Russian relations; never before had such a
relationship been attempted in U.S. foreign policy history, with any country for that
matter. Coordinator Talbott lauded the “utility of the personal channel between the
vice president and the prime minister” (Talbott, 2002, p. 263) and according to Vice
President Al Gore, speaking at the end of the 10th GCC meeting, the Commission
“made a real difference in the relations between our two nations and in the lives of the
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American people and the Russian people” (Fenner, 1998). Chernomyrdin agreed that
the GCC “turned into an important stabilizer of U.S.-Russian relations” (Fenner,
1998). Despite the inherent bias of the commentators, they are arguably correct in
claiming that the Commission was quite successful in fostering ties between the two
nations. As a result of such frequent interaction and intensive American support for
Russian activities, the commission created a reasonably well-functioning framework
of policy for American officials to focus their efforts on particular projects with
definitive utility to their Russian counterparts.
Though the Commission played a central role in the U.S.-Russian relationship
throughout the 1990s, it did not elegantly fit into the framework of U.S. Russian
policy within the Clinton Administration’s organization. The Commission, with its
array of committees and projects, had “no direct coordination responsibility for the
U.S. program to Russia,” according to the GAO (GAO, 1995c). Though DOE
officials mentioned that the Office of the Vice President (OVP) played a coordinating
role, the staff did not involve themselves with the Commission’s daily activities as of
1995 (Communication, 2012d; GAO, 1995c). The policy process was clearly
somewhat muddled. According to an investigative GAO report, “no one person in
either the Coordinator’s Office of the OVP had complete knowledge of the
Commission’s ongoing activities” (GAO, 1995c). The top-level of the Clinton
Administration was notably absent in directing the early progress of the Commission
that they later extoled.
Major coordination of the Commission was therefore left to administration
staff already focused on Eurasian affairs. Throughout the GCC’s existence, the
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President’s National Security Council (NSC) Directorate for Russian affairs served as
the main coordinating body and the direct contact point within the administration’s
policy apparatus (See Appendix 1, Figure 2). But even then the NSC’s role was
mainly advisory; one former DOE employee suggested that the NSC simply “kept
things going” and was worried about a range of issues—mainly security related
(Communication, 2012d). In any case, as time went on OVP oversight did improve;
by 1998 OVP sent memos in advance of full Commission meetings soliciting topic
briefs from various departments and clearing submissions for VP Gore’s use
(Department of Energy Document #401, 454, 509). Of the little oversight that existed,
the GCC was largely dominated by high-level Clinton Administration officials
involved with American foreign policy and security issues. The clear disorganization
that government reports uncovered in the mid-1990s left the Commission ripe for
criticism.
Denunciation of the GCC came from both within and outside the government.
Early GAO reports, one entitled “U.S. bilateral program lacks effective coordination”
served would-be attackers with fodder for their reproaches (GAO, 1995c). A former
State and Pentagon official lamented that the U.S. delegation travelling to Moscow
for official GCC trips was between 700 and 800 officials and that “with time, the
commission has taken on a bureaucratic life of its own and now impedes rather than
encourages innovation” (Merry, 1999). Speaking on the House floor Representative
Weldon, a Republican from Pennsylvania, stated his initial support for the forum but
new understanding that the GCC was only designed to focus on VP Gore’s
relationship with Prime Minister Chernomyrdin (Weldon, 1999). Still others claimed
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that the summit-style organization of the commission inhibited progress between
official sessions—“the commission needs fodder for its summits: ‘new’ programs to
unveil, documents to sign” (Merry, 1999).
While some of these attacks were politically-minded, they do point to
legitimate issues during the Commissions tenure. The former ambassador to Russia
from 1997-2001 under Clinton James Collins admitted that progress was slow, since
the participants were “insufficiently motivated,” and the senior leaders did little to
help their respective bureaucracies overcome ‘blockages’ (Rojansky, 2010, p. 20).
That being said, many of the criticisms pointed toward the GCC mention a caveat—
that it was “an important channel for relations with Russia” (Risen, 1998). While
there was bureaucratic bloating and ineffective coordination, the GCC was an
unprecedented effort of strategic cooperation between two nations who just decades
before were close to nuclear war. In particular, the energy working group of the
commission would serve as a new opportunity for partnership and action on behalf of
the U.S. government.
CLINTON’S ENERGY STRATEGY FOR RUSSIA
The Clinton administration’ goal of stabilizing Russia utilized a number of
policy vehicles to realize their objective. The challenge, as Vice President Gore
explained, was to “insure that the reform and progress … can become self-sustaining
and systemic” (Fenner, 1998). But with the Russian government deep in debt to
Western financial institutions, it was difficult to envision a stable future for the
struggling former superpower. With economic viability and nuclear security in mind,
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policymakers turned to an avenue they were sure could provide stable revenues to the
Russian coffers and thereby support the ‘reformers’ in their battle.
The opportunity set for investing in Russia’s oil production capabilities was
clearly understood by those in the upper echelons responsible for policy direction and
goal driving. According to one senior Clinton Administration official, oil fit well with
three realities of the early 1990s. First, the facilitation of Russian production would
stabilize the Russian government with revitalized revenues from oil exports and taxes.
Furthermore, Clinton was keenly aware of “the Nation’s growing reliance on imports
of crude oil and refined petroleum products [that] threaten the Nation’s security
because they increase U.S. vulnerability to oil supply interruptions” (Clinton, 1995).
Increased Russian oil production would add to ‘a well-balanced global supply mix’
that the U.S. desired (U.S. Energy Security: Russia and the Caspian, 2003). And
finally, there were many U.S. companies—petroleum exploration firms in
particular—that were clamoring to enter the new Russian market (Communication,
2012c). Oil investment was therefore a perfect accompaniment to the Russian aid
strategy in that it would accomplish multiple goals for the Clinton Administration
and, most importantly, stabilize the fledgling Russian state’s financial situation.
Even before the Soviet collapse officially occurred, Russian oil was on many
of the minds of top U.S. officials. As early as May 1991, the Chairman of the Senate
Committee on Foreign Relations had asked the Government’s auditing arm, the
Government Accountability Office (GAO), to provide information on both “the
recent decline in Soviet oil production …and the principal obstacles to U.S. trade and
investment in Soviet oil exploration and production” (GAO, 1991, p. 2; 1995b). With
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the rise of Russian reform, oil became a central focus. Speaking in 1993 before his
first visit with Yeltsin, Clinton extoled Russia’s “wealth of oil and gas” and
America’s ability to help “repair Russia’s energy infrastructure, [so] we can help
Russia regain a large and lasting source of hard currency” (Clinton, 1993). Over the
course of the decade, several agencies of the U.S. government would attempt to
facilitate the rebuilding of Russia’s oilfields, energy investment laws, and oil taxation
regimes under the broader goal of stabilizing Russia and increasing the world’s
energy supply.
The primary goal of repairing Russia’s energy infrastructure would fall to
U.S. oil and service companies with the technical know-how and interest in Russian
contracts. In that regard, a large project of federal government agencies was “trying to
smooth the path for U.S. companies to invest successfully in Russian energy” and
“guide them” through the unfamiliar environment (Communication, 2012d; "Russia
Country Reader," 2011, p. 1614). Such an effort required bureaucrats from the
Department of Energy, Commerce, State, and Treasury, as well as public finance
institutions such as Overseas Private Investment Corporation (OPIC), the Trade and
Development Agency (TDA) to work hand in hand. These federal agencies
functioned closely together, both inside and outside of the framework of the GoreChernomyrdin Commission, to attempt to ensure that U.S. businesses could navigate
the unique Russian environment throughout the entirety of the 1990s.
Of all the aforementioned federal agencies, the Department of Energy (DOE)
and U.S. Embassy probably had the most frequent interaction with U.S. companies
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relating specifically to energy investment issues.22 DOE staff conducted weekly and
monthly meetings with American oil companies simply wondering ‘who they should
speak to’ in Russia and organized in-country events, in conjunction with embassy
officials, for American businessmen to enable connections and contacts
(Communication, 2012b, 2012d). DOE even funded an oil and gas technology center
in Russia to “address technical, economic, and institutional issues associated with the
decline in Russian oil and gas production” (GAO, 1995b). Throughout the decade, the
Moscow Embassy and DOE kept up to date with the travails and progress of oil
corporations operating in Russia and worked “hand in glove” with some to help them
overcome permitting difficulties, tax issues, and public financing approvals
(Communication, 2012d). Given the range of difficulties with U.S. investment in
Russia, their interactions would be closely coordinated under the GCC and the
Business Development Committee (BDC).
Created at the 1993 Vancouver Summit with President Yeltsin, the BDC was
directed to advance U.S. investment in the new Russia. Specifically, it was chartered
to “help identify and remove impediments to trade and investment … and improve
the commercial infrastructure for bilateral commercial growth” (Fact Sheets from the
Russia-United States Summit, 1993). The group was made of up of more than 12
federal agencies, with the Department of Commerce (DOC) representing the largest
delegation, and led by DOC’s Ombudsman for Energy and Commercial Cooperation
with the Russian Federation, Jan Kalicki (Department of Energy Document #138,
22
Department of Commerce’s Ombudsman for Energy and Commercial Cooperation with the Russian
Federation, Jan Kalicki, probably was the most frequent individual facilitator of U.S. energy
investment in Russia given his role as coordinator of the BDC and thereby the efforts of numerous
federal resources (Department of Energy Document #271).
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143). The BDC was the center of U.S. government efforts to create a stable
investment environment for energy investment, as it housed the Inter-ministerial
Working Group on Oil Industry Taxation with representatives from Commerce, State,
Treasury, and Energy (Department of Energy Document #136, 314). With support
across multiple agencies, the subcommittee was able to focus its efforts on a wide
range of issues, including production sharing legislation, pipeline studies, energy
taxes, and priority projects (Department of Energy Document #138, 314, 350). The
push to alter energy ownership legislation and investors’ tax burdens would
encompass the largest undertaking of the working group and BDC throughout the
decade.
On the legislative and taxation front, there were extremely high levels of
coordination. There was close partnership between the agencies operating within the
GCC’s BDC under DOC Counselor Kalicki’s direction (Communication, 2012d).
Each agency pursued a specific path and there was some recognized division of labor
between the organizations working towards increased access for U.S. companies to
Russian energy (Communication, 2012d). As a result of high-level focus on subsoil
rights and numerous complaints by both U.S. companies and their trade groups
regarding taxation issues, BDC and the Inter-ministerial Working Group “focused
their attention on monitoring the progress of production sharing legislation” and the
reworking of many energy taxation regulations (Department of Energy Document
#212-6, 233, 315, 334).23 This attention continued throughout the GCC’s lifespan and
23
A National Security Council memo strategizing on “the next round of debate on the PSA in Russia”
detailed a ‘multiplier effect study’ that would exemplify to the Russians the benefits from specific PSA
investments (Department of Energy Document #290).
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constituted the federal government’s main hurdle in facilitating U.S. corporate access
to the Russian energy market.
While tax issues and energy legislation difficulties were never fully resolved
during the decade, there were notable successes of the U.S. government’s facilitation
of investment through the GCC and otherwise. As one participant noted, “the GCC
proved to be an important avenue for the U.S. government to advocate on behalf of
American companies (including oil companies) before the Russian government” (See
Appendix 2). There were instances of exemplary cooperation when, for example, “the
Russian delegation requested information concerning laws, regulations, and market
mechanisms in effect in the U.S. that are intended to ensure a competitive market
environment in energy production, trade, and transport” and received a detailed
response at one of the subsequent meetings (Department of Energy Document #19120 ). The Commission also undertook an ‘oil investment study’ in September of 1997
and jointly identified priority oil investment projects including Sakhalin I and II, the
Timan Pechora Project, the Priobskoye project, and the Caspian Pipeline Consortium
(CPC) and how to work past the difficulties of each one (Department of Energy
Document #408, 442). The Commission was a useful diplomatic tool that gave U.S.Russian trade relations a neutral forum for both discussion and cooperation on
energy-related issues.
Outside of the GCC framework, American bureaucrats were more forceful in
their personal appeals to Russian counterparts for legislative action or high-level
intervention. An embassy cable from August 1996 describes Thomas Pickering, then
Ambassador to Russia, in a meeting with President Yeltsin to clarify oil excise tax
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increases and request that the Russian government uphold its previous agreement to
grandfather in the early American Joint Ventures under forthcoming investment laws
(Department of State cable #147). The State Department conceded in its analysis of
the meeting that they might need to appeal directly to top levels of Yeltsin’s
administration to reverse the taxation increase (Department of State cable #147). U.S.
officials were also extremely active in relaying American companies’ concerns; in a
meeting with representatives from the Russian Ministry of Fuel and Energy and
others, a DOC envoy related American executives’ anxieties regarding Russia’s
opaque standards setting and certification laws for the oil and gas industry
(Department of State cable #238). Such interactions depict the serious involvement of
many American diplomats and technocrats working on energy investment difficulties
during the decade.
Even the upper echelons of the Clinton Administration were, at times, deeply
involved with encouraging their Russian counterparts to accept and promote major
American oil investment projects. Secretary of Commerce Mickey Kantor and Vice
President Gore’s talking points on the ‘Priority Oil Development Projects’ were
forceful and specific. At the 1996 GCC meeting in Moscow, they urged progress in
the Timan-Pechora region (“let’s not allow this important project to lose
momentum”), Conoco’s Northern Area project (“we are very concerned that the
Northern Area negotiations have been delayed and are lagging behind other major
projects”), and Priobskoye Oil Project (“I suggest that we make it our objective…to
get the PSA signed by our next meeting”) (Department of Energy Document #223-5).
As the 1990s dragged on and few oil investment projects progressed, there was
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notable frustration with many policymakers working tirelessly to improve the Russian
business environment. As a result, Clinton officials would attempt alternative efforts
to increase American companies’ access to oil reserves of the FSU.
Despite the GCC’s useful working environment and the coordinated efforts of
many federal agencies, towards the end of the decade it was clear that few investment
projects were going to come to fruition by the end of Clinton’s term in office. White
House officials had been privately skeptical of any energy partnership with Moscow
and with little “discernible forward progress” towards reform, thought PSA
legislation was unlikely to succeed in Russia at all (Coll, 2012, p. 253). Therefore,
energy and diplomatic officials were simultaneously working against Russian
interests in the Caspian Sea region to further oil projects outside of Russia’s difficult
oil transportation and investment structure. Testifying before congress in 1997, an
NSC staffer bluntly explained that the U.S. aimed “to promote the independence of
these oil-rich [FSU countries], to in essence break Russia’s monopoly control over
the transportation of oil from that region” (Ottaway, 1997).
In 1998 Clinton appointed a Special Advisor to the President and the
Secretary of State for Caspian Basin Energy Diplomacy, Richard Morningstar, who
was the previous advisor focusing on assistance to the NIS. His job was essentially a
‘pipeline promoter,’ evincing the clear focus on regional pipeline politics
(Communication, 2012d). Writing both before and after President George H.W. Bush
came to office, Ombudsman Kalicki emphasized that Washington should give the
“highest level of support to the cooperative development of regional energy reserves
and pipelines” (J. H. Kalicki, 1998, 2001). The Clinton administration was careful to
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avoid placing all its energy security hopes within the framework of a single country
or forum for cooperation.
Beyond the bureaucratic formations within the GCC, many other federal
agencies were corralled into the Clinton Administration’s focus on Russian oil
production and therefore committed both manpower and resources to aid American
oil corporations in numerous ways. TDA, a federal agency designed to help American
companies sell their goods and services, sponsored refinery upgrades, feasibility
studies, trade missions, and various other projects in Russia (Communication,
2013).24 USAID funded a U.S. Geological Survey resource assessment program
intended to “make petroleum geology data on FSU countries available to the U.S.
private sector and facilitate investment by the U.S. petroleum industry” and also
sponsored a linkage between the Government of the State of Alaska to the Sakhalin
Island Administration for governance assistance (Bradshaw, 1998, p. 162; GAO,
1995b). The CIA maintained a database of U.S.-Russian Joint Ventures through the
1990s to monitor progress, difficulties, and U.S. investment levels (Communication,
2012a). In short, the United States’ pursued a multitude of pathways in its attempt to
support Russian oil production and American investors’ projects in the unstable
environment.
Oil was a convenient facilitation of American foreign policy in Russia
throughout the decade. It fit into the administration’s broader energy policy of
increased resource access and was essentially a “win – win, both foreign policy and
24
The Trade and Development Agency’s activities went far beyond the oil sector and a large project
involved shutting down some of Russia’s plutonium breeders, a project that came directly from OVP.
The director of TDA’s Russia program candidly noted that he was unsure whether this project fit with
TDA’s goals since it did not really directly promote US business (Communication, 2013).
92
energy wise” (Communication, 2012b). In the incessant struggle for stability in
Russia, oil and American oil companies became a useful tool of the Clinton
Administration to bring revenue flows to the ailing Russian federal budget. One high
ranking Clinton official remarked that oil investment facilitation and the massive
nuclear disarmament programs were really “two sides to the same coin.” Both aid
efforts were part of the larger strategy to avoid dangerous ‘hard security’ situations.
NSC staffers saw Russia’s historical change within the context of “massive, massive
risk;” they worried that without a steady revenue stream the Russian government
would not survive and could lose control of its nuclear weapon stocks. In the end, oil
fit perfectly into the Clinton Administration’s strategies—it addressed both the
investment opportunities and security concerns presented by the Soviet Union’s
collapse.
THE REALITY OF AID
Though many Russians initially welcomed the United States’ aid efforts, the
reality of the relationship soon soured the billions of dollars the Clinton
Administration promised. As one critic of the administration’s Russia policy
surmised, “Washington’s self-congratulatory historical narrative lies at the core of its
subsequent failures in dealing with Moscow in the post-Cold War era” (Simes, 2007).
An article penned by President Carter’s National Security Adviser in 1992 brashly
presented this American triumphalism: “the political destiny of what was not long ago
a threatening superpower is now increasingly passing into de facto Western
receivership” (Brzezinski, 1992). The ideal of Western primacy and Russia as a
‘defeated enemy’ even arose during the 1992 presidential campaign; Bush and
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Clinton frequently traded barbs regarding America’s “victory in the cold war,” a line
that Ambassador Talbott “was sorry to hear” and he knew would upset the Russian
reformers who had worked to change their country (Simes, 2007; Talbott, 2002, p.
33). This unsettling sense of American conquest pervaded the United States’
relationship with Russia and undermined years of bilateral cooperation that many
American bureaucrats so proudly spoke of.
That is not to say that the American leadership of the 1990s was unaware of
the delicate aid relationship. Senior Clinton Administration officials were wary that
the Russians did not favor the words ‘assistance’ or ‘humanitarian aid’ (Williams,
1993b). But despite their efforts to treat their Russian counterparts with respect (they
even issued guidelines to the Clinton support staff to “make sure the Russians are
treated as equals” before the 1993 Vancouver Summit), critics note that the U.S.Russia aid relationship was not a partnership of equals (Wedel, 1998, p. 39; Williams,
1993b). Individual Clinton officials may have been cautious with their word choice
but the underlying tone of the entire bilateral aid effort stymied U.S. efforts to work
to effect change in Russia. Some scholars go so far to conclude that the Clinton
Administration “turned the missionary impulse into an official crusade” (S. F. Cohen,
2001, p. 8). Though personal interactions between U.S. and Russian officials were
delicate and partially responsible for a tense relationship, the historical context was
perhaps more affecting.
Policymakers saw a collapsing nation and thought they could save Russia
from its economic depths. One USAID procurement official noted, “I don’t think the
agency has done anything like this [before]. Communism doesn’t fall every ten years”
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(Wedel, 1998, p. 26). The notion of an once-in-a-lifetime opportunity, a Russia to be
guided by a Western hand, pervaded American bureaucratic thought and many
journalists writing in major newspapers (S. F. Cohen, 2001; Wedel, 1998, p. 21).
Their perceptions of a needy Russia would ultimately lead to a troubled bilateral aid
effort that failed to fulfill Americans’ hopes for a westernized Russian partner. Russia
was viewed through this “lens of ideology” which would guide U.S. policy and aid
disbursement in the FSU (Fairbanks, 1999). The whole aid process carried with it
connotations of the U.S. as a ‘white knight,’ a global savior ready to lead Europe to a
new democratic era akin to the Marshall plan of the mid-twentieth century (Wedel,
1998, pp. 17-21).
Throughout the collapse of the Soviet Union there were many allusions to this
idea of a ‘new Marshall Plan’—a Russian aid package similar to the massive
American effort to rebuild Europe after WWII. But compared to the true Marshall
Plan of the mid-20th century, U.S. aid to Russia was insignificant, poorly executed,
and came with a different connotation. Total American assistance from 1992-2002
amounted to only .5 percent of the Russian GDP during that time—infinitesimally
small when compared to U.S. aid during the years of 1949-54 in Europe (Gilman,
2010, p. 37). Coordination was also weak; Yegor Gaidar, the former acting Prime
Minister later charged that “the trouble, in my view, was that there was no leader
capable of filling the sort of organizing and coordinating role that Harry Truman and
George C. Marshall played in the postwar restoration of Europe” (Goldgeier &
McFaul, 2003, p. 112). Furthermore, during the original Plan the U.S. approached
Europe as an equal partner in the fight against communism—a far cry from
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Westerners’ perceptions of a Russia begging for foreign assistance. The
unwillingness of the United States government to commit the resources, coordinative
effort, or necessary respect inhibited successful support of the Russian reformation.
By many accounts, the Clinton Administration’s Russian policy was
unsuccessful. Though Americans predicted a quick turnaround for the new nation,
Russia spent the entirety of the 1990s undergoing ‘reform,’ interspersed with a major
financial collapse and very un-democratic shelling of the Russian parliament in the
mid-1990s, described in Chapter 2. The billions of dollars in IMF loans from Western
nations largely went to prop up Yeltsin’s unbalanced budgets and keep him in power
(S. F. Cohen, 2001). Furthermore, though many in the policymaking community
believed that a 1990s Marshall Plan was “impractical because private capital flows
have made government aid pale into insignificance,” high levels of foreign
investment never materialized (Lukacs, 1997). Few U.S. businesses ever successfully
invested in the challenging emerging market, including the much-promoted energy
sector, since few market reforms ever took hold throughout the decade (Bayulgen,
2010). One scholar dramatically called Clinton’s Russian efforts “the worst foreign
policy disaster since Vietnam” (S. F. Cohen, 2001, p. 11). Criticism for the United
States’ expensive and flawed Russian aid program would evince the shortfalls of the
U.S. foreign assistance process, as told by government employees and reports.
GOVERNMENT ANALYSES OF US-RUSSIAN BILATERAL ASSISTANCE
The U.S. government was acutely aware of criticism of its Russia policy
throughout the decade; reports and analyses conducted by government agencies
detailed the shortfalls of U.S. bilateral assistance to Russia both during and after the
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1990s. In 1995, for example, members of Congress asked the government’s auditing
arm, the Government Accountability Office (GAO), to determine the structure and
coordination of U.S. aid to Russia. The report, entitled “Former Soviet Union: U.S.
Bilateral Program Lacks Effective Coordination,” was scathing in its analysis of the
Clinton Administration’s leadership efforts, citing many bureaucrats frustration with
the policy process (GAO, 1995c, p. 26). Subsequent analyses by the Congressional
Research Service (CRS) and statements by government employees also pointed out
many of the flaws of programs during the 1990s. Documentation of the difficulties of
the Clinton Administration’s policies shed light on the multitude of reasons that
reform in Russia proved both difficult and ultimately unsuccessful.
Bilateral aid to Russia was funneled through multiple avenues during the
1990s. With the 1992 Freedom Support Act, many different agencies and funding
arms from across the government were theoretically organized under a State
Department ‘coordinator position’ to implement aid to the FSU ("FREEDOM Act,"
1992). In practice however, the GAO found that the coordinator’s role was “much
more limited” and the legislation did little to direct how all the agencies would
effectively come together (GAO, 1995c; Wedel, 1998, p. 31). And while the
coordinator was central to the Freedom Support Act (See Appendix 1, Figure 3), the
position was ancillary to other groups within the executive branch when it came to
overarching Russia-centric goals and programs (See Appendix 1, Figure 2). The
Clinton cabinet, other government agencies, the Gore-Chernomyrdin commission,
and even congress ‘resisted, hindered, or overruled’ the State Department
coordinator’s overseeing authority (GAO, 1995c). Russian aid was simply not housed
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under one roof. Such coordinative difficulties would result in an American aid
package that lacked oversight, direction, or effective auditing—a recipe for failure.
With no authoritative direction, individual agencies held differentiated
responsibilities that tinged the design of many aid programs. The U.S. Agency for
International Development (USAID) served a crucial role in distributing funds, and so
success and progress was often at the whim of USAID’s regional director in
approving projects, hiring contractors, or securing monies ("Russia Country Reader,"
2011, p. 1620).25 Disputes arose between various government agencies and USAID,
requiring the Coordinator’s office to spend an inordinate amount of time arbitrating
between the disparate policy goals of different bureaucrats (GAO, 1995c, p. 4). As
the Assistant to the Coordinator for Assistance Programs for the NIS during 1993-4
bluntly stated, “we had a lot of bureaucratic friction between our office in the State
Department and AID trying to give the assistance programs overall political
direction” ("Russia Country Reader," 2011, p. 1621).
In addition, USAID was not a risk taking organization and often attempted to
import successful programs from other parts of the world with familiar contractors.
This reliance led to poorly suited programs run primarily by American consulting
companies (Tarnoff, 2003; Wedel, 1998, p. 34).26 And though the United States’
financing institutions were included in agency-level meetings and the GoreChernomyrdin commission’s functions, when the GAO conducted its study, the
strategy papers it found did not delineate the role of financing institutions such as
25
On numerous occasions the agency purposefully delayed action because it did not agree with the
implementation of a certain project it was directed to fund (GAO, 1995c, p. 20).
26
For the notorious story of USAID’s reliance on the Harvard Institute for International Development
(HIID) see (McClintick, 2006; Wedel, 1998).
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EXIM, OPIC, or others in achieving objectives (GAO, 1995c). Evidently the process
was severely flawed in its ability to direct effective aid to Russia, and USAID is
partially responsible.
Of the entire U.S. aid program to Russia, there was only one point in which it
coordination overlapped. Chaired by the Deputy Secretary of State, the NSC’s Policy
Steering Group attempted to coordinate and manage all FSU policies and programs
under the Clinton Administration (See Appendix 1, Figure 2) (GAO, 1995c). This
consolidation of policy direction, in the hands of those most concerned with U.S. and
its allies’ security and safety, lead to a dramatically skewed aid package that inhibited
flexibility and serious introspection of 1990s aid efforts. In addition, much of the
money spent throughout the 1990s was under CTR—the congressionally directed
initiative dating back to 1991; former Ambassador to Russia James Collins lamented
that “one of the big missed opportunities of the 1990s … was that we never got that
pie chart [of aid spending] to be more balanced” (Goldgeier & McFaul, 2003, p. 110).
But more balanced monies distribution wouldn’t necessarily have increased
the success of reform in Russia. The inability of the Clinton administration to
delegate authority outside of the core policy steering group enabled a failed assistance
package to Russia, regardless of the amount of cash involved. As the Special Adviser
for East European Assistance noted, “there is too much duplication and competition
among donors, and too little coordination of activities so that we can make the best
and most effective use of our collective resources” (Hutchings, 1993). Throughout the
decade, academics and government officials alike would recognize this shortfall and
discredit much of the administration’s efforts to ‘reform’ Russia.
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CRITICISM OF AID
Amidst a sea of articles under the heading ‘What Went Wrong in Russia,’
many authors have attempted to determine the missteps that American officials made
throughout the 1990s. As early as 199 , Clinton’s ‘post-Soviet strategy’ was facing
commentary detailing the Administration’s poor handling of the Russian crisis (Cox,
1994). Critics cherished anecdotes of wasted aid dollars spent on Russia; in one
example, USAID bought millions of dollars’ worth of pipeline valves for Gazprom,
who promptly bought a few executive jets weeks later (Bivens, 1998). However, there
were far more serious criticisms of Clinton’s Russia policy that would surface during
the decade.
Clinton’s trust and optimism in Russian reform and those of Yeltsin’s inner
circle was a major source of flak for the administration. His faith likely spawned from
the personal connection between the presidents and the tumultuous early Russian
years; Nixon famously warned that “if Mr. Yeltsin fails, the prospects for the next 50
years will turn grim” (Nixon, 1992). Senior U.S. officials often praised Yeltsin as
America’s ‘best hope’—sounding alarm bells for Russian-watchers (Sciolino, 1993;
Williams, 1993a). One scholar of Russian affairs noted, “if the administration
identifies the evolution of Russia with the heartbeat of an individual, it will be a
fundamental error” (Williams, 1993a).
The Clinton team’s confidence in Yeltsin caused missteps in policy. A veteran
CIA official charged that “much of Washington’s action and rhetoric on Russia has
been aimed at preserving the image of a foreign policy success, even as the image
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became more tarnished” (Ermarth, 1999).27 A senior analyst at the U.S. Embassy in
Moscow during the early 1990s echoed these criticisms and described that “there was
an unmistakable shift in the administration’s priorities, from ‘tell us what is
happening’ to ‘tell us that our policy is a success’” and that he “saw dozens of draft
reports on economic problems that were never transmitted” (Merry, 1999). Yeltsin
may indeed have been Russia’s most ‘pro-Western’ leader but his relationship with
U.S. officials impeded objectivity in the U.S. assistance program to Russia.28
Additionally, a number of scholars and government officials have noted that
the position of Ambassador-at-Large and Special Adviser to the Secretary of State on
the New Independent States, held by President Clinton’s friend Strobe Talbott,
remained ineffective throughout the decade in focusing the political goals of U.S.
bilateral assistance to the new Russia. One State Department policy officer for
Eastern Europe and the NIS during the late 1990s explained that Talbott was “in a
more ethereal and philosophical mode,” rather than focusing on the programs and
actions of assistance ("Russia Country Reader," 2011, p. 1664). This charge is echoed
by multiple former Clinton Administration officials concurring that “Talbott was not
engaged in the technical issues of privatization, stabilization, or social policy reform”
(Goldgeier & McFaul, 2003, p. 112). The inability for Talbott to make use of his
27
With the financial crisis coming to a head, CIA officials were concerned that the Clinton
Administration was not interested in “unvarnished information about corruption in Moscow,” given
that discussions were underway to deliver more aid from the U.S. and Europe (Risen, 1998). A
notorious story, repeated in both the media and floor of congress, describes VP Gore returning a report
implicating PM Chernomyrdin after writing “BULL ****” across the first page (Merry, 1999; Risen,
1998).
28
In response to allegations of corruption of some of Russia’s leading reformers, one senior
Administration official commented, “What does the CIA want us to do, not deal with the PM of
Russia?” (Risen, 1998)
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naturally coordinative position in the State Department was a major policy flaw of
Clinton’s aid process.
Despite the administration’s many mistakes regarding the United States’
relationship with Russia and its leaders, the aid program was successful in a number
of ways. Large-scale denuclearization did occur, some food and humanitarian aid was
delivered, and Russians were “exposed to new ideas” regarding the free market,
democratic rule, and independent non-governmental organizations (Tarnoff, 2003).
But the methods employed by the Clinton team to achieve those results leave much to
be desired. Government reports detail an aid program without effective direction or
leadership and scholars note the idealistic sense of conquest with which the American
officials approached their efforts to support Russian reform. The American aid effort
was bound to fail with such a skewed structure and focus.
CRITICISM OF ENERGY POLICY
In the end, the U.S. government also failed to facilitate energy investment in
Russia despite the aforementioned semi-coordinated efforts of numerous agencies.
Officials saw Russia as an opportunity to strengthen the energy security of the United
States, 29 but were reluctant to accept Russian control of expanded capacity.
Therefore, “U.S. policy has been contradictory;” while trade envoys worked to open
doors in Moscow for U.S. companies they were simultaneously directing Caspian
policy against Kremlin influence with multiple pipeline projects (Perovic et al., 2009,
p. 192). The duality of American actions stymied Russian cooperation on domestic
production agreements, albeit with minor advances after the 1998 economic crisis
29
Kalicki and Goldwyn define energy security as the “assurance of the ability to access the energy
resources required for the continued development of national power” (2005, p. 9).
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when private Russian oil companies more actively sought Western assistance and oil
prices rose (Jan H. Kalicki & Goldwyn, 2005, p. 128). The inability for the Clinton
Administration to further America’s energy relationship with Russia points to larger
difficulties within Washington’s policymaking hierarchy.
Though the Clinton Administration committed serious resources to energy
development in Russia after the soviet collapse, a deep bilateral energy partnership
between the two nations never materialized. Bureaucrats who served under the
Clinton Administration charge that energy policy was simply never integrated with
foreign policy or ‘high diplomacy’ due to “a failure of political will and leadership”
(Jan H. Kalicki & Goldwyn, 2005, p. 6). As government reports and scholars
conclude, overarching direction was severely lacking across the U.S. aid programs
and any goal was thereby difficult to champion across the variety of different
departments and organizations involved with the Russian transitional support effort
(GAO, 1995c; "Russia Country Reader," 2011, pp. 1620-1621). Though U.S. efforts
in Russia do seem tipped towards crisis prevention and macro-level relations, that
was not the ultimate cause of failure for American energy policy in Russia. Promoting
Russian energy was a definitive mainstay of U.S. policy but failed for the same
reasons as the entire American aid effort: a difficult Russian environment and skewed
approach of Russian assistance efforts.
CONCLUSION
American aid efforts throughout the 1990s were inhibited by a number of
priorities and missteps of the Clinton Administration. Policymakers were constantly
aware of the fact that Russia first and foremost needed a stable income to avoid the
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‘hard security risks’ of thousands of unsecured nuclear weapons. U.S. strategy
thereby relied on both democracy and the natural free market to inspire Russian
stability (a very Wilsonian perspective), both of which never truly took hold in the
new country (Goldgeier & McFaul, 2003, p. 118). In a rare showing of clear
organization, the Clinton Administration focused the efforts of multiple federal
agencies to facilitate energy investment, as part of a plan to increase Russia’s
financial reserves and simultaneously contribute to well-supplied global energy
economy. But of the majority of aid dollars flowing to Russia, there was little
direction, accountability, or oversight from any coordinating body within the
administration. The attitude with which U.S. officials approached aid further limited
their ability to see Russians as equal partners in the transition to a stable future.
Countless articles, books, and conferences have been devoted to discerning
and debating the questions “Who Lost Russia” and what went wrong with President
Bush and Clinton’s strategies of aid. One individual knowledgeable of the U.S.
government’s Russian foibles challenged that “anything that the U.S. government
says they were doing in Russia is probably overstated by about 5 times.” However, it
is irrefutable that an inordinate amount of resources and coordination were dedicated
to dealing with American energy companies, Russian tax and legal reform, and aid
towards the new nation. Making sense of this convoluted process of policymaking
effort is strikingly important in understanding the confluence of stabilizing efforts,
energy policy, and corporate influence during the 1990s, all under the banner of
American security.
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Chapter 5
Policy Framework: The ‘Garbage Can’ Model
“[the 1990s is] a era that continues to be called by what it comes after—the PostCold War era—rather than what it is, may best be considered an era of confusion”
(Allison & Zelikow, 1999, p. 9)
Few scholars have attempted to fit the convoluted United States’ Russian
policy process of the 1990s within the context of classical theoretical models of
governance or diplomacy. There are, however, a range of analyses examining the
decades prior: work detailing the Cold War’s game theory dynamics, rational actor
politics, and nuclear security strategy, all of which focus on the arms race and
decades of dramatic brinkmanship that defined the U.S.-Soviet relationship. But with
the collapse of the Soviet Union came the disinterest of great-power policy theorists
in Russia. This may partly be due to the intricacies of the decade; there simply
doesn’t seem to be an off-the-shelf policy process model that elegantly explains
American strategy in the new Russia.
Regardless of the literature’s limitations, it is important to attempt to try to
apply a theoretical framework to comprehend 1990s U.S.-Russian interaction. The
policy process is made up of hundreds of individual actors, multiple levels of
organization, and the conflicting goals, methods, and paradigms of each—finding a
way to simplify the complexity is essential “to have any chance of understanding it”
(Sabatier, 2007, p. 4). However, the confusion and chaos of the decade after the
Soviet collapse seems to defy the application of most theoretical models; policy
process hypotheses simply do not fit the anarchic nature of the United States’
response to Russia during the 1990s. Handily, scholars have developed one
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framework to attempt to explain policymaking within such an environment of
‘organized anarchy.’ Nicknamed the Garbage Can Model, it combines elements of the
pluralist, elitist, and sub-governmental theories to define decision making within a
mixed environment of dominant problems, solutions, and organizations. Explaining
the American government’s policy framework through this model is a useful, albeit
limited, tool that illuminates organizational behavior during a unique decade.
A SELECTION OF AVAILABLE MODELS
One of the earliest scholarly models of the policymaking process invokes a
linear progression of rational actors through decision making pathways and clear-cut
choices. Labeled the Rational Decision Making Model and sometimes referred to as
the ‘textbook approach’ or ‘stages heuristic,’ the framework focuses on a series of
steps involving goal-setting, the weighing of available options and alternatives, and
evaluation of implemented programs (Sabatier, 2007, p. 6; Stone, 2012, p. 249). The
complex process of policy creation is thereby divided into categories useful for
examination and causation.
But this model wholly fails to explain the modern American government’s
system of governance. Policymaking is far from the result of a singular rational actor
weighing a series of options and then implementing them (Stone, 2012, p. 268). On
the contrary, scholars argue that national policy is determined by a “conglomerate of
large organizations and political actors” and the result of multiple streams rather than
a linear progression of goal-making, implementation, analysis, etc. (Allison &
Zelikow, 1999, p. 3; M. D. Cohen, March, & Olsen, 1972; Sabatier, 2007, p. 67).
American Russian policy during the 1990s was certainly a result of an incredible
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array of federal agencies, international financing institutions, and individual actors
coming together to create policy. Rational Decision Making therefore cannot provide
an encompassing framework for explaining the United States’ reaction to the
‘opening’ of Russia.
Although Rational Decision Making is too simplistic for our purposes, the
basic idea of a linear policy process is a useful foundation from which to expand.
Institutional Rational Choice, one of the most frequently applied models to describe
U.S. governance, is a more specific form of the Rational Decision Making Model
within the scope of organizations. As a policy plan winds its way through the various
systems of government, it is shaped by the institutional rules, powers, incentives, and
influence of agencies through which it operates (Stone, 2012, p. 268). This updated
rational choice model thereby aims to describe how behavior is altered by
institutional norms of the multiple federal agencies involved in directing and
implementing policy (Sabatier, 2007, p. 8). After all, policy flows through
organizational forums that affect the process simply through their involvement.
Analyzing U.S.-Russian policy through the institutions of the federal
government could indeed delineate the biases of various agencies and bureaucrats in
the process of policy development and implementation. The U.S. Agency for
International Development’s (USAID) role in disbursing aid is a clear example of
how an organization’s rules and standard practices affected the American-Russian
relationship. However, the framework fails to explain the entirety of the U.S.
response to the collapse of the Soviet Union throughout the decade. The American
policy process was a result not just of federal organizational structures and norms, but
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also external individuals and corporations that attempted to influence the U.S.
government’s priorities and projects. The demands of multiple non-governmental
groups, especially those of American oil companies (as evidenced in Chapter 4), were
a serious consideration of political leaders of the U.S. government throughout the
decade.
Accordingly, the pluralist model seems to better address this multifaceted
characterization of the United States’ Russian reaction. The framework argues that
policy is determined as a result of ‘widespread popular demand’ and aims to explain
how specific problems or concerns reach the agenda of government institutions
(Gupta, 2001, p. 49). Robert Dahl, one of the most notable advocates of political
pluralism, summates that political power and the policy process is truly dominated by
the interaction and competition of various interest groups, with the government as a
mediator between the factions (1961). This model holds well to the American process
of policy after the Soviet collapse. Decision-making power and interests were
distributed across a variety of levels of business, federal contractors, and international
financial institutions with the U.S. federal government at the center. But while
interest groups’ influence does fit with the classical pluralism framework of political
theory, there was undoubtedly top-down dissemination of policy from top political
positions of the executive branch of the U.S. government—a characteristic not
included in the original model. Determining who sets the overarching agenda is
paramount to examining the 1990s American experience in Russia.
In terms of political and economic pyramids of influence, the Elitist Model is
a popular theory that attempts to organize the policymaking process by the ‘flow of
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power.’ At the top of the hierarchy, the political and economic ‘elite’ disseminate
policy decisions to the bureaucracy which, in turn, directs the interactions of public
interest groups and advocates (Gupta, 2001, p. 51). Of certain aspects of American
policy this is certainly the case. Russian stability—economic and nuclear—was a
central concern of officials in the upper ranks of the National Security Council (NSC)
and Senate and this priority was disseminated throughout the ranks of American
bureaucracy via policy directives and legislation. Following Daniel Khaneman’s
prospect theory, losses loomed larger than gains for high-level American security and
intelligence experts formulating Russian policy and so they focused on the ‘hardsecurity’ risks that the new nation presented (Tversky & Kahneman, 1981).
The utility of the rigid top-down Elitist Model ends there; United States’
Russian policy was the product of flows of power in more than one direction. For
example, energy investment was advocated from American business interests eager to
enter the nascent Russian market and the bureaucracy of the federal government
played a major role in directly formulating energy investment priorities and projects
as part of the Gore-Chernomyrdin Commission and its Business Development
Committee. Much of the policy process was not dominated by the upper levels of the
Clinton or Bush Administrations; a confluence of actors from many segments of
American society participated in the reaction to 1991 collapse of the Soviet Union.
This relationship of agenda setting requires an alternative framework to explain the
intricacies of interaction amongst U.S. actors.
The best theory that explains the interaction between formal and informal
actors is the rigid organization of the Sub-governmental Model of Agenda Setting. It
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builds upon the Elitist Model to involve an ‘iron triangle of players’ from the
legislative side, administrative corner, and special interest groups that formulate
coalitions to effect the policymaking process (Gupta, 2001, p. 52). As with the
hierarchy of other models there is some top-down direction from political elites, but
the similarities end there. Trickle-down chains of command are replaced by an
agenda setting network of bureaucrats and corporate professionals that interact and
combine to motivate policy. Such a network seems to apply well to the U.S. policy
process towards Russia. Corporations and bureaucrats did indeed combine
effectively—especially in terms of energy investment—to work towards a definitive
goal. These linkages are further described by the popular Advocacy Coalition
Framework formulated by Paul Sabatier and Hank Jenkins-Smith (1988).
The purported coalition framework delves into the organizational behavior of
governance better than many of the aforementioned scholarly models. The authors
suggest that alliances of actors with a common set of beliefs interact within a ‘policy
subsystem’ and thereby change and effect policymaking in relation to internal
competition and external events (Sabatier, 2007, p. 9). Sabatier and Jenkins-Smith’s
argument fits well with the notable energy policy complex of actors that formed
during the decade of Russian reform. The interaction of American corporations,
consultants, bureaucrats, and investors within the scope of the United States’ energy
policy could certainly be described as an ‘advocacy coalition network.’ These actors
definitively shared a set of goals regarding the ‘opening’ of Russian oil and the utility
of the Soviet Union’s energy infrastructure to American energy security objectives;
110
they wanted to increase private access to the world supply of oil in a newly stable
state.
Both the sub-governmental framework and Advocacy Coalition model
characterize the overall U.S. energy efforts in Russia during the 1990s, but there are
nuances of the larger policy process that neither can describe. They both assume a
“stable coalition of players” that did not exist around many other issue areas of U.S.Russian relations (Gupta, 2001). In reality, U.S. policy was more of a result of
‘organized anarchy.’ The mess of multiple levels of federal agencies, public financing
institutions, and private entities did not mesh well outside of energy investment.
‘Top-down’ coordination was lacking in respect to many issue areas and networks
were constantly fluctuating as funds and interests ebbed and flowed. An alternative
model is necessary to explain the imperfection of the United States’ Russian policy
process.
A BETTER FRAMEWORK
The Garbage Can Model of choice is the most useful perspective through
which to analyze the United States’ policymaking process regarding Russia. The
‘organized anarchy’ of the Bush and Clinton Administrations’ aid stratagem requires
a model that delves into the realities of imperfect solutions and an ambiguous context.
As research suggests, there were few clearly delineated policy goals and American
strategists participation varied according to each particular project, committee, or
policy objective. Focusing on this disorganization and variability of the United States’
Russia approach enables one to have some hope of comprehending the mess of
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decision making. The foundational Garbage Can Model and ‘Multiple Streams’
perspective provide such a framework.
This particular view of organizational choice identifies a theoretical ‘garbage
can’ as a metaphor for confusion or ambiguity and aims to explain decision making
that seems contrary to common models (Krumme, 1999). Cohen et al., the original
proponents of the theory, begin with analysis of ‘organized anarchies,’ characterized
by a complexity of policymaking preferences, participation that varies amongst
actors, and unclear processes (1972). As such, the Garbage Can lens purports that
collective choice is highly context dependent, an end result of the confluence of an
organization’s structure and procedure—similar to the idea of Institutional Rational
Choice (Sabatier, 2007, p. 66). No one actor determines policy, but rather the
changing problems, solutions, and participants affect the resulting choice (M. D.
Cohen et al., 1972). This follows other theoretical arguments that policy decisions are
made within a mixed environment; the Garbage Can Model includes aspects of the
sub-governmental model and the ‘randomness’ of pluralism that invoke the multipleactor idea and policy reality (Gupta, 2001, p. 52).
The organization of the United States’ Russian policy during the 1990s
follows the concept of an ‘organized anarchy.’ First and foremost, overarching goals
were wholly unclear to the multiplicity of federal agencies, who instead proceeded to
join the priorities of various coalitions within the government—the GoreChernomyrdin’s (GCC) Business Development Committee for example. This
disorganization fostered a loose collection of policy solutions whereby agencies
discovered goals through action and solutions by rummaging through the theoretical
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‘garbage can’. The GCC’s energy group ended up facilitating projects that the
Russians themselves desired, such as environmental policy efforts to develop oil spill
protocols and legislation, although they did not necessarily follow initial American
strategic objectives. Federal agencies also varied in the amount of time and effort they
devoted to different U.S.-Russian bilateral projects as different departments were
brought in to troubleshoot specific problems—the State Department resolving visa
disputes, for example. Evidently, the boundaries of organization were unclear to
American agencies participating in the Russian policy process. The convoluted
context of the U.S. government’s (dis)organization affected the outcomes of
individual projects, goals, and relationship with Russia.
The crux of the Garbage Can Model is that it addresses the disconnected
processes through which an organization mixes participants, problems, and solutions.
The choice opportunity is seen as a garbage can into which problems and solutions
are ‘dumped’ as they are created (M. D. Cohen et al., 1972). The framework argues
that the subsequent policy outcomes largely depend upon the timing of a problem or
solutions’ ‘arrival’ and the decision makers’ attention to the issue (Coutu, 2006).
These independent events provide an alternative explanation of policy from the linear
progression suggested by the Rational Choice Model (Krumme, 1999). The Garbage
Can lens is meant to suggest an understandable, orderly, and recognizable process,
amidst a ‘mixed-up’ context. It provides a possibility of analyzing seemingly messy
policy progressions within a new, clarifying framework.
It would be difficult to categorize the American response to the collapse of the
Soviet Union as a linear problem-solution system. The U.S. government’s attention
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was focused on a variety of issues—or perceived ‘problems’—and direct solutions
were not always readily available. Two examples best evince this Garbage Can-esque
process ambiguity: the focus on facilitating Russian energy supply expansion and
nuclear stability.
The problem of nuclear stability dominated the American Russian framework
because it was a symbol that applied to the entire policy community and involved a
grab-bag of solutions to address that developed throughout the decade. Numerous
federal agencies attempted to shore up Russia’s economy (and therefore its ability to
safeguard nukes), address the ‘brain drain’ of Soviet scientists, or directly finance
nuclear disarmament—a variety of projects towards the same goal. Energy
investment priorities involved a similarly wide range of agencies and utilized the
arrival of American energy companies’ interest in Russian resources to the fulfill
policy objectives. The convoluted U.S. policy choice process can be further examined
through a more specific adaptation of the Garbage Can ideal.
Using the Garbage Can Model as a foundation, scholars have attempted to
further stratify the policy process “under conditions of ambiguity,” when there are
multiple options available (Sabatier, 2007, pp. 65-66). The ‘Multiple Streams’
perspective analyzes the problem-solution system and separates it into three
interconnected streams of actors and processes that underpin the policy process: a
problem stream—the goals of policymakers, a policy stream—the range of competing
solutions available to officials, and a political stream—consisting of public sentiment,
interest groups, and bureaucratic turnover (Sabatier, 2007, p. 70). The independent
lineages connect during a catalytic “window of opportunity” when ‘policy
114
entrepreneurs’ work to couple the three sectors and direct the attentions of top
officials to effect deep change (Sabatier, 2007, pp. 74-75). This overlaid structure of
hazy policy processes is a useful delineation and further clarification to the founding
Garbage Can theory.
The Multiple Stream overlay fits well with the policy process of the United
States during the decade of Russian ‘reform.’ Policymakers did indeed view the
collapse of the Soviet Union as an ‘incredible opportunity’ for which to exploit and
shape the new Russian state into a market economy and stable democracy. In that
regard, there were so-called ‘policy entrepreneurs’ such as the Department of
Commerce’s Ombudsman Jan Kalicki, who worked to couple the three ‘streams’ and
improve the United States’ energy policy efficacy and relationship with Russia as the
decade wore on. Despite such coordinative efforts amidst the complexity of American
governance, serious and overarching strategic transformation did not occur. Thus it is
important to note the limitations of the Garbage Can Model and its Multiple Stream
adaptation in examining a unique decade in U.S.-Russian relations.
LIMITATIONS
No scholarly theory will perfectly describe the reality of the United States’
Russian policy structure during the 1990s. Instead, there are bits and pieces of
multiple classical theories that explain a portion of the American framework of
governance in response to the Russian ‘opening’ after the Soviet Collapse. Each
application is a tool to understand the complex mess of the process in which decisions
were made. While it is important to avoid applying theories too broadly, the Garbage
Can Model does fit many aspects of the 1990s American Russian policy structure
115
quite well. The lens is useful in that it affords an observer the ability to ascribe a
simplified description to an ambiguous process of seemingly chaotic structure. For
our purposes, the Garbage Can and ‘Multiple Streams’ model help elucidate the
complex decision making progressions of American policymakers to arrive at the
unique failures and successes of U.S.-Russian policy throughout the 1990s.
116
Conclusion: The American Blunder?
“Some people have portrayed our energy policy and Russia’s as a zero sum game.
We reject this analysis” (Stein, 2011).
“...almost everything one can say about the country is true and false at the same
time”
John Maynard Keynes on Russia
The U.S. reaction to the Russian ‘opening’ of the 1990s is summarily
categorized by many academics and even some American government officials as a
failure. The Clinton and Bush Administrations saw an opportunity for a Russian
‘rebirth’ but their assistance effort was minimal, poorly organized, and partially
enabled the creation of new economic elite that plundered the nation’s Soviet
resources in the midst of the chaos. Though there was a bright spot of massive
coordination to facilitate U.S. investment in the new nation’s oilfields, few companies
were ever able to navigate the complexities of the Russian business environment. Is it
then fair to regard the entirety of 1990s U.S.-Russian policy as a failure?
Russia’s historic transformation, ever-changing investment environment, and
the actions of U.S. oil corporations and government reveal a more nuanced picture
than many critics suggest. As early American optimism waned through the struggles
of the decade, policymakers and businessmen were forced to revise their expectations
downwards. But despite the harsh realities of the U.S.-Russian relationship, American
efforts did result in nuclear de-proliferation and Russia today is a reasonably stable
country with a modern economy, non-communist government, and fully integrated
into the global community. Russia was neither a complete disaster nor a fanciful
success; the unique decade fits somewhere in between.
117
Before any discussion of American actions, it is important to emphasize the
place of the 1990s Russian transformation within a historical context. U.S.-Russian
competition defined international relations for almost half a century and the collapse
of the Soviet Union meant the redrawing of much of Eastern Europe and Central
Asia. American statesmen, policy wonks, and businessmen thereby saw the decade as
a tremendous opportunity for a new relationship with Eurasia. Russia could become a
new nation, partnered with the U.S. and built upon the foundations of a market
economy guided America’s best economic consultants. This paradigm is an important
characteristic of early interaction between the two nations; U.S. expectations of
success and partnership would color their policy decisions and revisions throughout
the decade.
The American anticipation of success and opportunity was gradually replaced
as the reality of the Russian situation became clear. Chapter 1 follows the initial path
of this reality through the collapse of the Soviet Union, roots of privatization, and
perception of ‘incredible opportunity.’ In short, change was slow, uneven, and
unscrupulous. Over the course of the decade, President Yeltsin’s cadre enabled and
condoned the transfer of an incredible wealth of Soviet assets into the hands of the
well-maneuvered few. Amidst the quagmire of transformation, the country’s vast yet
damaged oil reserves were theoretically ‘opened’ to Western business. Surprisingly,
such a Soviet legacy did not dramatically damper the optimism with which
Westerners first approached the Russian economy.
With the expectation of a fruitful investment relationship with Russia’s
emerging market, Western executives rushed to enter the new economy. But despite
118
President Bush, Clinton, and Yeltsin’s excited calls for massive private sector
involvement, Russia lacked the investment security necessary to foster capital
inflows. Chapter 2 delves into the legacy of Western exclusion that pervaded Russian
law books and the multiplicity of barriers to foreign entry. Despite the official
collapse of the Soviet Union, weak regulations from the late 1980s served as the only
vehicle for private sector involvement and companies would attempt to apply
alternative contracts to ensure investment security. In addition, Americans faced a
veritable legislative quagmire of warring factions within the domestic Russian
political scene. Foreign companies were forced to navigate different Russian agencies
and regional governments vying for regulatory control, taxation authority, and
autonomy from Moscow. Investing in the new Russia exemplified difficulties that
characterized the decade and forced American bureaucrats and investors to reconsider
their initial perceptions of triumph and opportunity.
The insecurity facing Western investors was the focus of much of the
American relationship with Russia throughout the decade. But even investment in the
Russian petroleum industry—highly attractive to Western oil companies amidst the
decade’s trend of resource nationalization and rise of national oil companies—never
reached expected levels. Americans’ initial optimism, eventually turning to caution
and failure, is described in Chapter 3 as Western oil extraction companies, despite
their resources, technology, and management prowess faced serious difficulty with
any and all of their Russian projects. These problems were largely a result of the type
of contract they sought, each company’s corporate culture, and the individual
investment particularities.
119
Over the course of years of negotiations, stalled investments, and regulatory
hurdles, American companies were forced to revise their tactics to fit Russia’s unique
environment. Project managers soon realized the benefit of involving Russian
partners and public financing institutions to attempt to reduce pressure from the
Russian government and warring regulatory agencies. When even those efforts
failed, companies large and small were unafraid to appeal directly to either the
Russian and/or the U.S. government for assistance in navigating the challenging
investment environment. As a result, the U.S. government would include energy
business facilitation as part of its bilateral relationship with Russia and the overall
U.S. aid process in order to prevent the economic failure of the new nation.
The underlying key to the entire American fascination with Russia was the
Soviet Union’s massive stockpile of nuclear technology. Suddenly, with the power
vacuum created by the collapse of the Soviet Central Command system, there was
wayward nuclear technology in former republics of the USSR. Chapter 4 details how
policymakers approached Russia in terms of ‘hard security’ objectives and promoted
many projects, including oil investment facilitation and the Gore-Chernomyrdin
Commission, with the ulterior goal of stabilizing the new nation and government to
guarantee the security of thousands of nuclear weapons. But despite the intensity of
worry over Russia’s security, there was little coordination of the American aid
process outside of oil investment. Furthermore, the paradigms of U.S. policymaking
and officials’ perceptions and approach to Russia severely constrained America’s
ability to effectively develop a bilateral relationship with the new nation. The initial
excitement regarding new ties between the nations waned as nuclear stockpiles were
120
secured and Americans realized that Russian reform and partnership was an
extremely difficult endeavor.
Attempting to fit the entirety of 1990s American Russian policy within a
common off-the-shelf framework of theory is a challenge given the nuance of
success, failure, and rotating mix of actors for each issue. As Chapter 5 argues, the
“Multiple Stream’ (colloquially named ‘garbage can theory’) policy process model
best explains the formation of American policy in response to the collapse of the
Soviet Union. In the face of the unique Russian situation, policymakers matched
problems and solution based on their availability, rather than through a linear
development model. The Multiple Streams analysis is a useful tool for simplifying the
complexity and nuance of the American reaction to the Russian ‘opening,’ despite the
apparent chaos and failures of the decade.
DEFINING SUCCESS AND FAILURE
Describing United States’ Russian policy of the 1990s as a clear-cut success
or failure is an impossible task; the decade was not black and white. Regardless, two
distinct camps of literature decidedly identify the period of U.S-Russian relations as
either a total loss and ‘failed crusade’ (S. F. Cohen, 2001) or one of ‘considerable
accomplishment and promise’ (Talbott, 2002). Both of these conclusions are
incorrect—the reality was somewhere in between. In terms of the main goals of
American bilateral aid—developing a strong relationship with the new Russia,
establishing a stabilized and democratic nation, and bringing high levels of private
sector investment to the nascent economy—there was a mosaic of experience. In
examining these categories, we find definitive achievements, outright shortfalls, and a
121
middle ground of projects that depict a settling point of the U.S.-Russian relationship
in the post-Soviet era.
There is little doubt that the Clinton Administration furthered cooperation
between the two nations to a level unseen in previous seven decades. The public and
personal connection between Bill Clinton and Boris Yeltsin paved the way for
agreements regarding nuclear disarmament and a thorough cooling of the U.S.Russian adversarial relationship. The nations’ partnership was institutionalized
through the Gore-Chernomyrdin Commission and fostered deep connections not just
at the top levels of the administration, but between the bureaucratic staff of numerous
federal agencies of the two countries. In terms of increased communication,
networking, and interaction between Russia and the U.S., American policy was a
success.
But to say that the two nations came away from the decade with a strong
strategic partnership would be a step too far. The 1990s expansion of the North
Atlantic Treaty Organization (NATO), deemed a success by Western policymakers,
came at the expense of Russia’s domestic security and sovereignty—with a missile
defense system essentially on its border. There was little Russian diplomats could do
as Poland, Hungary, and the Czech Republic all joined the regional security
partnership in 1999. Furthermore, NATO’s bombing of Yugoslavia severely
perturbed the Russians and directly undermined a planned 1999 meeting of the GoreChernomyrdin Commission. In that regard, the U.S. failed in creating a strong ‘greatpower’ partnership for the future.
122
The goal of Russia’s nuclear stability was yet another objective of U.S. policy
that straddles both failure and success. As the former American Ambassador Robert
Strauss described, nuclear weapons were scattered around in four different republics
and the U.S. wanted them back in Russian hands ("Russia Country Reader," 2011, p.
1541). To that end, the Senate’s Nunn-Lugar legislation was extremely successful in
aiding Russia to track and eventually destroy many of its nuclear weapons systems.
The denuclearization of Russia was a definitive result of U.S. aid disbursements and
policymakers’ focus on controlling the new nation’s stockpile of weapons and
scientists in a responsible manner.
Second, the goal of nuclear stability included economic solvency—that Russia
would have a balanced budget, reasonable level of debt, and fruitful trade with
regional economic partners. A large partition of this goal included the facilitation of
Western investment in the Russian oil sector. But compared to other Newly
Independent States (NIS), Russian levels of Foreign Direct Investment (FDI) lagged
throughout the decade, even in the much heralded energy sector. U.S. oil companies
were never able to secure more than a few projects and in reality, American and
Western fiscal aid policy did more harm than good. Russia was saddled with more
debt than it could handle and shock therapy sent the country into an economic tailspin
that only truly ended with the resurgence of oil prices post-1998 (See Appendix 1,
Figure 1). The resulting oil-based currency influx enabled Russia to pay off its debts
ahead of schedule in one large lump sum of cash by the early 2000s, a success that the
U.S. could hardly claim credit for.
123
A favorite Washington buzz word that was also used as a measure of success
in Russia during the 1990s was ‘democracy.’ Pundits and Administration officials
were influenced by the then-popular ‘democratic peace’ theory purporting that
democratic nations do not fight other democracies (Doyle, 1983; Dubinsky, 2013;
Nixon, 1992). After all, the U.S. was inclined to avoid future conflict with the nation
that had prompted an arms race and rampant defense spending over the past decades.
But while Russia evinced early signs of democratic rule with a reasonably
independent press, free elections, and non-violent transfers of power following the
Soviet collapse, these nascent characteristics proved inconsequential to Yeltsin’s
power. With the 1993 constitutional crisis, Yeltsin ordered the shelling of the
democratically-elected parliament; Russia could not really be labeled a democracy.
The failures of the overall U.S. aid efforts in Russia in the decade after the
Soviet collapse are well documented. Numerous government reports detail an aid
process mired by scandal, inefficacy, and false hopes. There was simply pressure to
“get money out the door” (Wedel, 1998, p. 28); the notorious case of the Harvard
Institute for International Development (HIID) depicts the faith and leeway given to
USAID’s contractors throughout the aid disbursement process (McClintick, 2006).
An overarching misstep of the Clinton Administration’s policy in Russia was the lack
of a well-coordinated aid policy stemming from a single point in the federal
government, what arguably should have been Strobe Talbott’s State Department
position. Washington’s inability to actively synchronize different organizational
preferences of involved federal agencies led to the ultimate inefficacy of billions of
dollars of U.S. aid.
124
But beyond these mostly clear-cut failures and successes of U.S. policy, there
exists a realm of 1990s American Russian policy that straddled the boundaries of
either definition. The Gore-Chernomyrdin Commission (GCC) and its Business
Development Committee (BDC) are instances of this grey area in that they embodied
successes and failures within a singular institution. While the GCC was an
unparalleled effort to promote a bilateral relationship between the United States and
Russia, it produced little concrete progress or improvement of the American aid
process at large. The forum was a remarkable avenue for interaction between
American and Russian bureaucrats but it is difficult to point to more than a handful of
fruitful agreements or projects that came as a result of the Commission’s work,
despite almost a decade of meetings and communication. More specifically, the
Commission’s BDC can neither be deemed a veritable success or total failure. The
Committee served as a resource of coordination between multiple federal agencies
around a singular policy goal—facilitating investment in Russia especially in the oil
sector—but despite these benefits of an institutionalized policy setting, the BDC was
largely unsuccessful in its mission and few bilateral oil projects ever came to fruition.
Curiously, the involvement of American interests in the Russian oil industry is
a focus of U.S. policy that receives little academic attention, despite the importance of
the resource to both nations. Oil fit perfectly into the larger U.S. aid process but,
again, is a nuanced story that evinces the difficulty of the Russian situation, initial
American optimism, and the revision of policy goals as the decade dragged on.
Throughout the decade the BDC was extremely active in lobbying the Russian
government for legislative, regulatory, and taxation changes on behalf of U.S. energy
125
companies looking to enter the uncertain market. American executives initially
pursued a variety of investments but few major oil projects ever succeed, in spite of
the intervention of top level Clinton Administration officials. Furthermore, progress
made in Russia proper was undermined by the energy policy of the U.S. in the
Eurasian region; officials worked with Russia for U.S. companies in Moscow and
against Russia for U.S. companies in the Caspian basin. The concerted effort by
numerous federal agencies on behalf of Western oil companies was a successful
coordinative project but the end result of few large projects did not meet Americans’
initial optimistic expectations.
This middle ground, between the success and failure narrative of the
American experience in Russia, is the best way to define U.S. Russian policy of the
1990s. Russia never became the shining democracy on the hill like some Americans
envisioned, but it did not become a wayward nuclear state ready and willing to drop
bombs on its neighbors. Instead, the new nation transformed into a semi-authoritarian
and stable nation ready to control its nuclear stockpile, largely as a result of rising oil
revenues post-1998.
The United States’ expectations of success in Russia tinged the outcome of
policy throughout the decade. Even in 1998, Vice President Al Gore was still
convinced that reform would prevail in Russia. He famously stated on the eve of the
1998 financial collapse, “Optimism prevails universally among those who are
familiar with what is going on in Russia” (Fenner, 1998). American policymakers
undoubtedly envisioned a stabilized Russia, at the hand of Western advisors, with a
newfound bond in terms of both diplomatic relations and energy investment. But as
126
the decade wore on and little progress was made, the U.S. was forced to revise their
expectations downward. This adjustment is evinced most notably by the levels of aid
funneled to Russia during the 1990s. Though the Clinton Administration was initially
highly optimistic regarding its ability to affect change in the new nation and
appropriated more than $1 billion in 1994, they subsequently asked for much lower
levels of funding from congress as their eagerness waned and Russian progress
struggled on (Tarnoff, 2003). Though there were notable achievements and flaws in
American policy, the decade of Russian ‘reform’ defies characterization in either
realm. Instead, it existed as a grey area of policy accomplishment; there were
successes, failures, and in-betweens despite the United States’ best efforts.
The decade after the Soviet collapse was a unique era in U.S.-Russian
relations. Americans saw incredible opportunity and risk in the new nation and
therefore aimed to involve themselves in Russian affairs through multiple avenues.
However, the reality of the 1990s would force the United States to reconsider its
initial optimism; the rush to stabilize Russia’s fledgling democracy and economy,
satiate American oil companies’ appetite for the emerging market, and limit security
risks of unaccounted nuclear weapons was a mosaic of success, failure, and
indeterminate results. As Victor Chernomyrdin famously stated, “we meant to do
better, but it came out as always.” Russia’s middling decade of reformist struggle
would not result in a new strategic partnership with the United States, but the nation
nonetheless emerged as a stable power due to the rise of oil prices and an
authoritarian leader.
127
Appendix 1
Figure 1:
This graph depicts the spot price of European Brent Crude Oil from 1987-2013 in
dollars per barrel.
Source: (EIA, 2013)
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
128
Figure 2:
This diagram depicts the coordinative relationships and hierarchy of the U.S.
government’s Former Soviet Union (FSU)-Focused Program
Source: (GAO, 1995c, p. 11)
129
Figure 3:
This diagram charts the relationships and coordinative structure of the U.S.
government’s Freedom Support Act program
Source: (GAO, 1995c, p. 17)
130
Appendix 2
The following material is selected from a case in the United States District Court for
the Southern District of Texas Houston Division:
Case 4:07-cv-04413
Document 117-4
Filed 4/11/2008
MDL No. 1886
IN RE: Refined Petroleum Products Antitrust Litigation
Exhibit B: Declaration of Leonard L. Coburn
Excerpt from page 11:
131
Appendix 3
List of Department of Energy Documents and Department of State Cables:
#136 Inter-ministerial energy taxation working group report (1996)
#138 U.S.-Russia Business Development Committee GCC-7 Scope Paper (1996)
#143 Interagency Distribution of Individuals of the GCC (1996)
#144-5 Phibro Energy Letter to DOE, Re: Russian Excise Tax (1996)
#147 Department of State cable *Sensitive*
#191-206 “Privatization and Creation of a Competitive Environment in the Russian
Fuel and Energy Complex”
#212-6 Update on Timan Pechora and Northern Areas Oil Projects: Different
Experiences, Same Result (1996)
#223-5 Talking Points on Priority Oil Development Projects (1996)
#233 Prospects for Tax Reform: The Draft Tax Code (1996)
#238 Department of State cable *Sensitive*
#271 Report on Ombudsman Activities with the NIS (1995)
#290 NSC Memorandum on PSA amendments in Russia (1995)
#301-2 U.S. Department of State Fact Sheet on GCC (1996)
#314-5 Draft Joint Report for GCC regarding Energy Sector Development (1996)
#330-3 Letter from Marathon Oil to DOE (1997)
#334 Letter from Phibro Energy to DOC, Re: Russian excise tax, pipeline access and
energy customs (1997)
#335 Letter from Phibro Energy to DOC, Re: Energy Customs Claim Against White
Nights LLC (1997)
#350 Joint Report on BDC Activities for GCC-8 (1997)
#376 Letter from Occidental Petroleum to President Clinton (1997)
#379-80 Department of State cable *Sensitive*
#381 Letter from Exxon to PM Chernomyrdin (1997)
#401 Cable regarding GCC-9 Preparations
#408-9 Internal DOE memorandum regarding GCC Oil Investment Study (1997)
#412-4 Department of State cable *Sensitive*
#417 Department of State cable *Sensitive*
#419 Department of State cable *Sensitive*
132
#426-32 ‘Materials and recommendations of the Conciliatory Commission of the
Ministry of Fuel and Energy of the Russian Federation’ (1997)
#442 White House Press Release: Joint Statement on Priority Energy Projects (1996)
#454 OVP Memorandum for the GCC Points of Contact (1998)
#455 Confidential Transmittal to DOC
#485 ‘Summary of Major Russian Taxes Paid by Russian-American Ventures (1998)
#492 Department of State cable *Sensitive*
#509 Internal OVP/NSA memo *Sensitive*
133
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