1. PRISM
Volume 3 Issue 18 (November 7,
1997)
THE FORTNIGHT IN REVIEW
The Fortnight in Review
Yeltsin Punishes Architect of Privatization
A week is a long time in politics, former British prime minister Harold Wilson
once famously remarked. Two weeks ago, First Deputy Premier and Finance
Minister Anatoly Chubais was riding high, displaying his political muscle by
persuading President Boris Yeltsin to sack Chubais's political rival, Boris
Berezovsky. A week later, a journalist on the newspaper Novaya gazeta (said to
be, together with Moskovsky komsomolets, the only Moscow newspapers not to
enjoy the protection -- and suffer the influence -- of one or other of Russia's big
media barons) published an article accusing Chubais and a number of his highflying government colleagues of having taken money from a company owned by
Oneksimbank. In recent months, Oneksimbank had profited from privatization
deals whose outcomes the officials were in a position to determine.
At first, Yeltsin was unwilling to discipline Chubais, saying he was too valuable an
official to lose. After a week, however, Yeltsin was forced to give in partially to
the Duma, which was demanding the dismissal of Chubais from both his posts.
Otherwise, the Duma threatened, it would withhold approval of the 1998 federal
budget. Finally, on November 20, Yeltsin sacked Chubais as Finance Minister,

2. while keeping him on as First Deputy Premier.
Russia Marks 80th Anniversary of Bolshevik Revolution
On November 7, demonstrators marked the 80th anniversary of the Bolshevik
Revolution in many Russian cities and in most CIS and Baltic countries. Turnout
in general was apparently lower than last year, with the vast majority of the
population using the occasion as an opportunity for a day off work. November
7 is still a public holiday in Russia, as in the Soviet period, but it is now known
as "Reconciliation Day," and there are no official celebrations. In his weekly radio
address, President Boris Yeltsin tried to strike a balance: the revolution was an
event that helped to turn Russia into a superpower, he said, but it was also "a
fatal historical mistake" that unleashed political fanaticism and social conflict.
Although the Communist movement in Russia has been split for several years
into a number of rival trends and parties, the splits were more evident at this
year's demonstrations than in any previous year. In Saratov Oblast on the Volga,
for example, demonstrators were addressed by the representatives of no fewer
than three Communist parties. This sort of discord has been in the making
for some time, but has recently been accentuated by the decision of Russian
Communist Party leader Gennady Zyuganov to call off a threatened vote of no
confidence in the Yeltsin government.
Russia Hikes Interest Rates to Defend Ruble
The Russian government and Central Bank on November 10 announced

3. measures aimed at protecting the ruble against the speculation that had
disrupted other emerging markets in recent months. The moves, which included
raising interest rates and changing the way the exchange rate will be set, were
made public after the IMF had announced that it was withholding the latest
quarterly tranche of its $10 billion loan because of Russia's poor tax collection
performance. The Central Bank raised its refinancing rate from 21 to 28 percent;
it also raised its minimum requirements for hard currency reserves held by
commercial banks.
In addition, the Finance Ministry and the Central Bank issued a joint statement
announcing that, as of the beginning of next year, Russia will abandon the
gradually-depreciating "ruble corridor" it has used to date and move to a more
flexible "ruble band." This will allow the ruble to fluctuate within 15 percent
either side of a set rate -- 6.1 redenominated rubles to $1 in 1998 and 6.2
in 1999. (One new ruble will equal 1,000 old rubles as of January 1, 1998.)
The new policy means the ruble will be free to range between 5.25 and 7.15
rubles to the dollar. The aim is to signal support for the currency and protect it
against what First Deputy Prime Minister and Finance Minister Anatoly Chubais
described as "unfavorable phenomena in world financial markets." IMF officials,
nonetheless, continued to express unease at the large size of Russia's budget
deficit and the government's failure to collect taxes. Observers agreed that the
ruble seemed safe for the time being from speculative attack, but the long-term
health of the economy remains tied to the government's ability to improve tax
collection.
Chechen Oil Pipeline Open for Business
On November 9, early oil from the Caspian began to flow through the Chechen
section of the Baku-Novorossiisk pipeline on its way to western markets. The

4. Chechen section of the pipeline had been restored after being seriously damaged
during the 21-month war with Russia. Officials in Moscow continue to insist that
Russia will build a new oil pipeline bypassing Chechnya, but both Russia and
Chechnya stand to gain by reopening the existing pipeline through Chechen
territory.
Did Moscow Resolve the Crisis in Iraq?
A fortnight that began with Russia reaffirming its "strategic partnership" with
China concluded this week with the apparently successful brokering by Moscow
of a settlement of the crisis between Iraq and the UN. The resolution of the
three-week Persian Gulf standoff, which had begun with the expulsion of
American members of a UN weapons inspection team from Iraq in late October,
was a major and unexpected triumph for Russian diplomacy. It came after the
Clinton Administration had launched a military buildup in the region and had
urged Russia to use its influence over Baghdad in an effort to prevent what
seemed increasingly likely to turn into a military confrontation.
That appeal resulted in an unscheduled visit by Iraqi deputy prime minister
Tareq Aziz to Moscow. Following several negotiating sessions involving Aziz
and Russian foreign minister Yevgeny Primakov, as well as a meeting between
Russian president Boris Yeltsin and the Iraqi official, Primakov announced on
November 18 that Moscow had drafted a plan to bring the latest Persian Gulf
crisis to an end. He provided no details of the plan, but said that he would travel
to Geneva the following day to present the Russian proposal to the foreign
ministers of France, Britain, and the U.S. The initial reaction outside of Moscow,
and particularly in Washington, was one of skepticism, and there were hints that
the Geneva meeting would not come off at all.

5. Events moved quickly from that point, however. Primakov did manage in the
early morning hours of November 20 to meet in Geneva with British foreign
secretary Robin Cook, French foreign minister Hubert Vedrine, U.S. secretary of
state Madeleine Albright, and Chinese envoy Sha Zukang. Afterwards, Primakov
announced that Iraq would declare later that day its willingness to allow the
immediate return of all the UN weapons inspectors -- including the Americans -and the resumption of their work. "That is what Russia has achieved," Primakov
said of the triumph, "without any use of violence, any use of weapons, without a
show of force."
The details of the Russian-brokered deal were not made immediately available,
and Albright, for her part, said that the U.S. had made no concessions to Iraq
to gain its agreement. She also said that the U.S. and UN would monitor Iraq
closely to ensure that Baghdad follows through on its latest commitments. That
same wariness was evident in the remarks of other U.S. officials, including
President Bill Clinton, later in the day on November 20. Pentagon officials,
for example, announced that the U.S. would send additional warplanes to the
Persian Gulf region, and Clinton's national security advisor, Samuel Berger,
warned that "This [crisis] is not over." He said that Washington would continue
its two-pronged policy of pursuing a diplomatic solution to the Iraq-UN
confrontation while simultaneously threatening military action.
Renewing Ties with China
Following talks in Beijing on November 9-10, Russian president Boris Yeltsin
and Chinese head of state Jiang Zemin reaffirmed the "strategic partnership"
between the two countries and declared an historic end to disputes over the

6. Russo-Chinese border. Yeltsin's trip to China marked the fifth summit between
the two countries, the third meeting between Yeltsin and Jiang over the past
20 months, and Yeltsin's third visit to China. Yeltsin received the red carpet
treatment while in Beijing, and the two leaders used the meeting to underscore
the intimacy of their personal ties. The visit continued several weeks of frenetic
diplomatic maneuvering among Asian-Pacific powers. It followed Yeltsin's
unprecedented November 1-2 meeting in Krasnoyarsk with Japanese prime
minister Ryutaro Hashimoto, and Jiang Zemin's first state visit to the U.S., which
concluded on November 2.
The declaration on the final demarcation of the Chinese-Russian border was the
highlight of the summit meeting, proclaiming as it did a close to centuries of
disputes along the 2,800 mile eastern border. The demarcation, which took six
years to carry out, is the result of a 1991 Sino-Soviet treaty which had earlier
drawn considerable fire from regional leaders in Russia's Far East. At issue, in
particular, had been several small islands located in the rivers that form the
border between the two countries. The summit agreement apparently stipulates
joint use of some of the disputed islands without fully resolving the status of all
the islands in question. The western border between Russia and China, a small
30-mile section that falls between Kazakhstan and Mongolia, is not covered by
the border agreement, but its eventual demarcation is not expected to pose
problems.
The two sides also signed a package of documents aimed at reversing a
recent decline in bilateral trade. One of the accords was a memorandum of
understanding on the construction of a $12 billion natural gas pipeline from
Siberia to China's eastern seaboard. There were apparently no major military
agreements signed during the summit, but a Chinese airline announced the
purchase of five Russian M-171 helicopters. Cross-border trade was the main
item on Boris Yeltsin's agenda during a November 11 visit to the Chinese city
of Harbin, capital of Heilongjiang Province, a region sharing a long frontier with

7. Russia. Yeltsin announced that Russia would launch several projects in nearby
Amur and Chita oblasts aimed at boosting cross-border trade in the region.
'New Historic Era' Opens for Caspian Region
On November 7, the first commercial oil was successfully extracted from the
Chirag-I offshore oil field, as part of Baku's "deal of the century" with the
Azerbaijan International Operating Company (AIOC). Oil industry leaders and
senior government officials from nearly 20 countries attended on November 12
the official inauguration of commercial production. AIOC's contract is the first
and thus far the largest among the nine contracts, each worth between one and
several billion dollars, signed by Azerbaijan with international oil companies in
the last three years. Further projects already underway or planned onshore and
offshore in Kazakhstan and Turkmenistan promise to open a new historic era for
the Caucasus-Caspian region, for countries further afield in the former Soviet
space, and for world energy economics. The political and oil industry leaders who
assembled in Baku on November 12 suggested that the date may go down as the
symbolic beginning of that new era. In historical perspective, this development
resumes and amplifies the pioneering efforts of the Nobels, the Rothschilds, and
the Rockefellers, who, at the turn of the century, had launched in Azerbaijan -then a part of the Russian empire -- one of the world's first major oil booms.
The fulfillment of that potential largely depends on the choice of the principal
export routes. It is generally understood that any routes via Russia would
be economically non-viable as well as exposed to political manipulation. The
discussions held in Baku on November 12 seemed to evidence a tentative
Western consensus in favor of building the main export pipeline from Azerbaijan
via Georgia to Turkey's Mediterranean coast at Ceyhan. An export pipeline of
lesser capacity to Georgia's Black Sea coast remains a secondary option; while

8. the "northern route" into Russia, leading to Novorossiisk, seems at this stage
to be deemed useful mainly as a stopgap solution for the early oil, pending
construction of export pipelines through Georgia and Turkey.
Chirag-Azeri-Geneshli
The "deal of the century," signed in 1994 by AIOC and SOCAR (State Oil
Company of Azerbaijan), envisages investments worth $8 billion to develop
the Chirag, Azeri, and Guneshli offshore oil fields. AIOC is a consortium of 12
corporations led by Amoco, Unocal, and Exxon of the U.S., British Petroleum, and
Norway's Statoil. British Petroleum and Amoco are the project operators. The
contract area, situated some 120 kilometers offshore and covering approximately
450 square kilometers, at an average drilling depth of some 3,000 meters, is
estimated to contain at least 500 million tons of oil and 90 billion cubic meters
of associated gas. Annual output is planned to reach 5 million tons by the year
2002. This "early oil" will be followed from 2003 onward by the "future oil," with
output levels expected to reach at least 40 million tons annually beginning by
2007.
It was also during this fortnight that Azerbaijan ratified four additional major
oil contracts, adding to the sense of an historic breakthrough. Three of
these contracts are with U.S. companies and were signed last August during
Azerbaijani president Haidar Aliev's visit to Washington. The participating
companies are not newcomers to the Caspian; all are already involved in various
oil and gas prospecting, extraction, and transportation projects offshore and
onshore in Azerbaijan and Kazakhstan.
Oguz

9. The U.S. company Mobil Oil will develop this field in partnership with SOCAR,
each holding a 50 percent interest. The contract envisages $2 billion worth of
investment and a 25-year period, with Mobil fully financing SOCAR's share during
the exploration period. Situated some 80 kilometers southeast of the Apsheron
peninsula and covering an area of 430 square kilometers, at sea depths ranging
from 50 to 300 meters, the Oguz field is estimated to contain 100 million tons of
oil.
Apsheron
Previously known as Zeinalabdin Tagiev, the Apsheron field will absorb $4
billion worth of investment over a 25-year period. The field is estimated to
contain 120 million tons of oil and 400 billion cubic meters of associated gas.
It is situated some 85 kilometers southeast of the Apsheron peninsula and
covers an area of approximately 400 square kilometers, at a sea depth of 450
to 500 meters and at drilling depths ranging from 4,800 to 7,100 meters. The
partnership includes SOCAR, the U.S. company Chevron, and Total of France,
with shares of 50 percent, 30 percent, and 20 percent, respectively. Chevron is
the project operator. The two Western companies will cover SOCAR's share of
the investment during the exploration period.
"Nakhichevan"
This Caspian offshore oil field -- not to be confused with landlocked Nakhichevan
region after which it is named -- will be developed by the Exxon company of
the U.S. and SOCAR in 50-50 partnership. The investment is projected at $2

10. billion over a 25-year period of exploration and exploitation. Exxon will fully
finance SOCAR's share during the exploration period and is the project operator.
Situated some 55 kilometers south of Baku and some 90 kilometers offshore, the
Nakhichevan field covers an area of approximately 280 square kilometers, at a
sea depth varying from 400 to 600 meters and at drilling depths averaging 5,000
meters. The field's reserves have not been conclusively estimated.
Yalama
Situated in the northern portion of Azerbaijan's Caspian shelf, the Yalama oil field
occupies some 270 square kilometers at a depth of some 600 meters under the
sea bottom. Its reserves are estimated at up to 100 million tons of oil. It is to be
explored and developed by Russia's LUKoil company and SOCAR under a 25-year
contract signed last July. The investment is valued at $2.5 billion, with LUKoil
holding 60 percent and SOCAR 40 percent interests. LUKoil will fully finance
SOCAR's participation in the project for an initial six-year period.
The ratification of these contracts brings to nine the number of offshore oil
projects launched by Azerbaijan and international oil companies. Aggregate
investments under these contracts amount to approximately $30 billion. Across
the Caspian Sea, Kazakhstan has the potential to experience an even more
spectacular development of its oil and gas resources. Its strategy, similar to
Azerbaijan's, relies largely on Western partners while giving Russian companies a
limited role, intended in part as an incentive for Russian political cooperation.
Azerbaijan, Kazakhstan, and also Turkmenistan (the latter after a period of
hesitation and ambiguity) espouse the principle of sectoral division of the
Caspian Sea among the five sovereign coastal states. Russia and Iran advocate

11. the opposite principle, that of "condominium" or joint control over mineral
resources. However, Moscow has recently tended to mute its objections to the
sectoral division that has developed de facto in the Caspian Sea. It was left for
Iran to lodge protests with Azerbaijan and at the UN over Baku's ratification of
these projects. Turkmenistan for its part claims, wholly or in part, the Azeri,
Chirag, and Kapaz/Serdar oil fields from Azerbaijan. Two Russian companies
this year shelved a project to develop Kapaz/Serdar after Turkmenistan stated
its claim to it. Ashgabat declares itself prepared to refrain from seeking actual
control over these fields and to accept compensation instead. Significantly,
Ashgabat bases its case on the sectoral division principle. U.S. officials encourage
Turkmenistan and Azerbaijan to settle the matter through direct negotiation and
through U.S. good offices.