Ross Wilson

  • Russia and the West: Moving the Reset Forward?

    Rose Gottemoeler at ACUS

    On September 9, the Atlantic Council, the Institute for Security and Development Policy and the US Army War College hosted a conference that focused on the trilateral US-Europe-Russia relationship and the current status and future of the reset. The sessions identified the obstacles and challenges facing the reset and steps for U.S. and European governments to drive relations with Russia forward.


    Read More
  • Turkish Military Leadership Resigns and What It Means

    Media reported in Turkey late on July 29 that the Chief of the Turkish General Staff (TGS), General Işık Koşaner, and the military service chiefs under him at Land Forces, the Air Force and the Navy have all submitted their resignations.
    Read More
  • Turkish Election: An AKP Victory with Limits

    The unprecedented third consecutive electoral victory won by Turkey’s Justice and Development Party (AKP) in Sunday’s parliamentary elections owes to a widespread feeling of satisfaction with eight years of the Erdogan government’s rule.

    According to preliminary results, the party won 50 percent of the vote. This was at the top end of expectations and exceeded the 34 and 47 percent of the vote it won in 2002 and 2007, respectively. The AKP secured 325 of the 550 seats at stake in the Turkish Grand National Assembly. Due to the vagaries of politics in individual constituencies, the AKP’s somewhat higher overall vote total translated to fifteen fewer seats in parliament than it took in 2007. Nevertheless, they will be able to form a new single-party government when the new parliament convenes.

    The Republican People’s Party (CHP), which took 135 seats based on 26 percent of the vote, recovered from dismal showings in the last two general elections. The National Action Party (MHP) held onto its core constituency, garnering 13 percent of the vote (versus 14 percent in 2007) and safely got across the country’s ten percent threshold requirement. Independent candidates associated with the largely-Kurdish Peace and Democracy Party (BDP) won 36 seats, up from 19 it garnered in 2007 when the party’s now-banned predecessor, the Democratic Society Party (DTP), first tried the independent candidacy strategy as a way around the threshold requirement.

    The vote and the campaigning before it were consistent with what goes on in democracies: lively debates, raucous rhetoric, wild and sometimes goofy campaign promises, and free and fair voting. It is remarkable that virtually all of the ballots were counted before the voting night was over and that at least so far the tabulation process – in the Turkish tradition – seems generally free of accusations of irregularities. While speculation about a “Turkish model” is overblown, Turkey’s experience in conducting well-run elections in which the results are universally accepted is something to which the Arab spring countries will do well to aspire to.

    The AKP fell just short of Prime Minister Erdogan’s goal of gaining a supermajority that would have allowed his government more or less to dictate the terms of a new constitution to replace the text drafted at the military’s behest after the 1980 coup. Had the AKP won 367 seats, the AKP could have changed the constitution as it wished by a vote in the parliament. Had it won 330, the party could have approved a new constitution and sent it to a public referendum, where only 50 percent plus one would be required to ratify the text. If the preliminary election results hold and the AKP remains stuck below 330, then any constitutional revision will require bargaining and coalition building with opposition parties or their members.

    In effect, Turkish voters used the ultimate “check and balance” of the ballot box to put a limit on the AKP’s power to rewrite the political rules of the road. This may or may not augur well for swift approval of any new constitutional text, but it will be good for Turkish politics that the AKP must now work with others on a constitution that commands support outside of its numbers in parliament. Given concerns about Erdogan’s megalomania and authoritarian tendencies that have gained traction in Turkey in recent months, the outcome is good for Turkish democracy – and probably good for the AKP and Erdogan, too.

    The AKP’s success was tempered by the revival of credible opposition. The CHP has started to claw its way back from what had been growing unpopularity, if not irrelevance. Its new leader, Kemal Kilicdaroglu, has articulated progressive, new ideas that attracted voters. His parliamentary block will be younger and probably more progressive than its predecessors. The Kurds’ success is also important. They are well-positioned now to influence debates on the constitution and other policy issues. Whether they can do so depends on the wisdom of party leaders, the extent of terrorist violence this summer and fall by the Kurdistan Workers Party (PKK), and whether larger parties abandon their ostracism of the BDP and try to find ways to work with it.

    Issues of Islam, ethnicity, modernity, civil-military relations and the role of the state in economic life are all now on the table in reasonably constructive ways. The opportunities for Turkey are great.

    Turkey’s European Union accession effort may get some encouragement from the vote and from the campaign itself, at least on the domestic side. The CHP abandoned what had become a strident, anti-EU stance. Its new leader publicly reaffirmed support for Turkey in the EU and for particular domestic policy changes, including constitutional reform, that will be required if the EU bid is to remain viable on the Turkish side. It is less obvious that the June 12 election results will change European calculations. One can hope that the spectacle of Turkish democracy in action, and the fact that the ballot box still works as a check on untrammeled executive power, would make Turkey more attractive again to Europeans. Domestic politics within Europe – more than anything else, including anything Turkey can now do – will determine the nature and pace of Turkey’s relationship with the EU.

    Turkey emerges from its election as a stronger partner for the United States – both because Erdogan won a strong mandate for continued rule and because voters denied him and his government untrammeled powers. Those arguing that the United States should weigh in on Turkey’s internal politics – never a good idea – ought now to be less concerned. Washington’s focus should be the large and ever more important outward-looking regional agenda on which engagement with Turkey is essential.

    • Syria is the most immediate issue for Turkey. Turks are terrified about the prospect of another Iraq on their southern border – of weak governance, sectarian bloodletting, and a potentially strengthened PKK, some one-third of whose fighters may be Syrian. Less encumbered by nationalist campaign rhetoric, Ankara should now be more willing to work with the United States and others on managing a Syrian transition, and Washington should pursue this.
    • With the campaign over, the AKP government may now be ready to ease tensions with Israel, which it recognizes is a necessary prerequisite for any larger Turkish role on Israel-Arab/Palestinian issues. Foreign Minister Davutoglu seemed, in remarks on the eve of the voting, to distance the government from plans to reprise the flotilla to Gaza that led to a crisis in Turkish-Israeli relations in 2010. Washington should revive efforts to bring Jerusalem and Ankara together.
    • If Russian President Medvedev achieves any kind of breakthrough on Nagorno-Karabakh when he meets with the presidents of Armenia and Azerbaijan on June 25, Washington should work with others to reengage Turkish-Armenian reconciliation, which will be freed for a time from campaign posturing – and which is essential if an Azeri-Armenian peace deal is to succeed.

    In Iraq, Pakistan and Afghanistan, on the Arab Spring, energy, terrorism, and missile defense, and even on Iran (the now patched-over rupture in 2010 notwithstanding), U.S. and Turkish interests coincide. A confident, democratic Turkey led by a strong government that just secured a convincing – but not too large – electoral mandate will remain a vital partner in a deeply troubled region.

    Ross Wilson is Director of theDinu Patriciu Eurasia Center at the Atlantic Council and former Ambassador to Turkey and Azerbaijan. This writing is a follow-on to the author's piece: "Turkish Elections Primer." Photo credit: Getty Images.


    Read More
  • Turkish Elections Primer

    Ross Wilson, director of the Dinu Patriciu Eurasia Center at the Atlantic Council and a former U.S. Ambassador to Turkey, provides this backgrounder on this weekend’s elections in a pivotal state.

    What is Turkey Voting On? 

    Elections for the unicameral Turkish Grand National Assembly take place on Sunday, June 12. All 550 seats in parliament are at stake. They will be allocated proportionally in multiple-member constituencies among parties receiving the most votes in those districts. However, parties must get ten percent nationally to qualify for representation anywhere.  

    Some fifteen parties are fielding candidates, but opinion polls suggest that only three are likely to meet the ten percent threshold requirement. These are the ruling Justice and Development Party (AKP), the Republican People’s Party (CHP), and the National Action Party (MHP). Independents can win election if they are top vote getters in their districts. About forty individuals who have been associated with the Kurdish-dominated Peace and Democracy Party (BDP), which does not expect it can cross the ten percent threshold, are standing for office on this basis. 

    The July 2007 election saw the AKP win 341 seats based on 46.7 percent of the vote. The CHP, which was then allied with the Democratic Socialist Party, took 112 seats with 20.9 percent. The MHP won 71 seats based on 14.3 percent of the vote. Twenty-six independents won election. Some twenty of these formed a Kurdish block under the banner of the BDP’s predecessor, the now-banned Democratic Society Party. 

    Who Will Win? 

    Recent opinion polls suggest the governing AKP will take about 45-50 percent of the vote or perhaps somewhat more. The same polls have put the CHP at around 25-30 percent and MHP at 10-12 percent. Recent elections have shown significant deviations from what many opinion polls have predicted, so these percentages should be viewed with some skepticism. If the MHP and the other parties fail to get ten percent, AKP and CHP will gain even more seats than their overall share of the vote might suggest. Most observers expect that the AKP will win many more than the simple majority (276) that is required to form a government. It therefore seems poised to become the first party in Turkish history to win parliamentary majorities in three consecutive general elections. Assuming it does so, the current prime minister, Recep Tayyip Erdogan, will remain head of government. 

    Why is the AKP Poised To Do So Well? 

    The AKP is the most successful party in modern Turkey. It has presided over unprecedented economic growth and development, opened accession talks with the European Union in 2005, and navigated through a range of foreign and domestic crises. These included apparent plotting by some in the military to overthrow it and a prosecutor’s effort in 2008 to shut it down and ban the party’s leaders from politics.  

    Far more than any other party in Turkey, the AKP has succeeded in tapping into underlying trends in society, including urbanization and a newly emergent middle class. Coalition politics are another key to the party’s success. It has attracted nationalists from the MHP, pious voters from avowedly Islamist parties (including its own, now-banned predecessors), liberals from traditional secular parties, and significant numbers of ethnic Kurds. Erdogan is the country’s most charismatic leader, and his party’s campaigns are well-run, modern, and effective.  

    The AKP’s vulnerabilities include unemployment that has remained above ten percent for the life of the Erdogan government, rising inflation, charges of cronyism that go with ten years in office, continued discontent among many ethnic Kurds, and concerns about the prospects of an unchecked AKP, including with respect to secularism. The June 12 results will indicate how many voters are concerned about these and other problems and how many still see the AKP and Erdogan as representative of the changes they would like to see in the future. 

    Weaknesses in the main opposition parties help the AKP.  

    The CHP performed dismally for years. In 2007, the party won just under 21 percent of the vote and that was made possible in part by a temporary alliance with the Democratic Socialist Party. The CHP’s political message, in many Turks’ eyes, looked backward and seemed too oriented toward the state and the military. Its longtime leader, Deniz Baykal, was deeply unpopular, even within the party, and many CHP heavyweights resigned from the party rather than chafe under his domination of it. Baykal was forced to resign in 2010 after a video of uncertain origins was publicized showing him having sex with a female colleague. New party leader Kemal Kilicdaroglu has tried to reinvigorate the party. He dropped from candidate lists two-thirds of those elected to CHP seats in 2007, tried to make the party internally more democratic, and promoted more positive and more popular political themes. Polls suggest that the CHP may draw as much as thirty percent, nearly half again as much as it won in 2007, but virtually no one outside the party expects it to win sufficient parliamentary seats to deny the AKP a majority.  

    MHP leader Devlet Bahceli was humiliated when large numbers of MHP backers defied the party leadership to vote for AKP-proposed constitutional changes in September 2010. A range of senior party figures, including candidates for the 2011 election, have in recent weeks been forced to step down in another scandal of murky origins involving video tapes and sex. 

    What Are the Issues? 

    The June 12 vote will boil down to whether voters are happy with AKP rule or not. Economic issues sit front and center for most voters, and the country’s new-found economic success obviously plays very well for the governing party. 

    Two issues operate below this surface. There is widespread discussion of the need to write a new constitution to replace, rather than just continue to amend, the 1982 text that was drafted at the military’s behest after its overthrow of civilian government in 1980. Many believe that Erdogan wants to revise the system of governance to strengthen what is now a limited presidency, perhaps along French lines, and then to become president himself. Many also believe that procedurally he intends to ram a new constitution through the party and then through parliament, so the extent of AKP victory is important. With 367 seats, the party could approve a new text without reference to other parties.  

    Another key issue is whether and how ethnic Kurdish aspirations ought to be accommodated. The issue motivates backers of those associated with the BDP who will run as independents, and it motivates Turkish nationalists who reject the idea of special rights for Kurds and fear ethnic-based divisions that are, for them, tantamount to separatism and even a breakup of the country. To some extent, Erdogan and the AKP have tried to appeal to both to Kurds and to nationalists. How successful they have been will become clear after the ballots are counted. 

    Foreign policy plays relatively little role in the election campaign. Turks generally are proud of the country’s increased activism regionally, want to see Turkey both in Europe and involved in the Middle East, and like the government’s mix of pragmatism and truculence when it comes to Israel/Palestinian issues, the European Union, and the United States. 

    What Will the Election Mean? 

    If the AKP gets more than 50 percent of the vote, it and especially Erdogan will become even more dominant of Turkey and the country’s politics. The effect will be accentuated if threshold politics keep the MHP out of parliament, as the AKP would then likely have a supermajority sufficient to change the constitution and rule virtually as it wishes. If the CHP can get more than 30 percent, the reformist wing backing Kilicdaroglu will be strengthened. If the BDP-backed independents can seat significantly more than the 20 they numbered after the 2007 election and if the AKP lacks a supermajority, the BDP’s bargaining power on constitutional reform may become significant. However, nothing suggests ethnic tensions will abate soon. If the AKP falls below its 2007 vote total of 46 percent, many Turks will speculate that its time has started to end and that Erdogan’s popularity has peaked. 

    The most likely scenario – an AKP in the high forties and winning circa 340-360 seats in parliament – will be continuity in terms of domestic, economic and foreign policy. Constitutional reform will go forward, be dominated by the AKP, and be largely determined by what Erdogan wants. While an AKP-led government will likely remain problematic for the United States on some issues, such as Israel/Palestine and perhaps Iran, pragmatic cooperation with Washington will remain a feature of the government’s policies in most areas.

    Ross Wilson is Director of theDinu Patriciu Eurasia Center at the Atlantic Council and former Ambassador to Turkey and Azerbaijan. Photo credit: Reuters Pictures.


    Read More
  • Roadmaps on International Energy Cooperation in Southeast Europe: 5/24/11 - Transcript


    Read More
  • Turkey's Three Transformations

    Turkish bazaar

    In the latest Dinu Patriciu Eurasia Center Issue Brief, “Turkey’s Three Transformations,” Ambassador Ross Wilson, the Center’s Director, analyzes the mutually-reinforcing trends in migration, economics and politics that have reshaped Turkey and will continue to do so.  

    Download the PDF

    Read More
  • Kyrgyzstan's Historic Elections: A Guide

    Kyrgyzstan’s political drama that began with the overthrow of President Bakiyev in April, violent ethnic clashes in the country’s south in June, and a constitutional referendum two weeks later reaches it next pivot point in parliamentary elections that take place on Sunday.  

    Interim President Roza Otunbayeva hopes for a strong turnout and orderly proceedings that will give a new government the credibility and legitimacy needed to address the country’s growing problems.  Key issues include the economy and corruption, but simmering nationalism and ethnic issues remain. Opinion polling suggests the parliament will be highly fractured. The winning parties’ leaders will likely have an exceedingly difficult task agreeing on a new prime minister and government under the country’s new parliamentary system of governance.  

    A police advisory mission agreed upon by members of the Organization for Security and Cooperation in Europe (OSCE) has yet to deploy to Kyrgyzstan, and much of the $1 billion in foreign assistance promised for the country is on hold pending the elections and other developments. In sum, Kyrgyzstan’s problems remain immense. The coming 6-9 months will show whether Kyrgyzstani democrats can come together successfully to take on the country’s problems – or whether division and dysfunction will continue to dominate. 

    Political Scene 

    Kyrgyzstan’s June 27 constitutional referendum was by all accounts a success. Despite the turmoil associated with ethnic Kyrgyz-Uzbek violence in the country’s south just two weeks earlier, turnout nationwide was 70 percent. Nine out of ten voters approved a new constitution that establishes Central Asia’s first-ever parliamentary government deliberately designed to curb presidential powers and to ensure against majority-led despotism and corruption. President Otunbayeva gained an important measure of legitimacy. The OSCE’s Office of Democratic Initiatives and Human Rights (ODIHR) gave the referendum two thumbs up. OSCE/ODIHR mission head Ambassador Boris Frlec concluded that, “It is now up to all political forces to work together to improve the electoral framework ahead of the upcoming parliamentary elections and build a democratic society based on respect for human rights and the rule of law.” 

    Before and after the referendum, Kyrgyzstan’s interim authorities took steps to unwind various aspects of the Bakiyev regime. It dissolved a government agency on development, investments and innovation that was used as a political and business vehicle by the former president’s son, Maksim Bakiyev, who was its chairman.  Investigations began into alleged economic and political crimes committed by the Bakiyev family and its entourage, including diversions of foreign aid. Judges accused of abetting Bakiyev regime misdeeds have been sacked, and various ambassadors, including those to the United States, the United Kingdom, Uzbekistan, Belarus, Ireland and Malaysia were dismissed.  Perhaps more controversially, the chairman and a number of staff members of the Central Election Commission were replaced.  Charges of corruption continue to swirl around Bakiyev regime figures – and, unhelpfully, around interim administration players. In part to address public aggravation about corruption, President Otunbayeva signed a decree requiring polygraph testing for a number of positions to ensure recruitment ‘clean’ state employees. 

    Economy 

    Kyrgyzstan is struggling to address staggering economic difficulties. Its budget deficit is forecast to reach 10.5% of gross domestic product (GDP) for 2010. The country faces acute external debt issues that led President Otunbayeva, speaking in New York during the opening of the UNGeneral Assembly, to request relief.  In hopes of recovering funds stolen during the previous regime, the government decreed an amnesty for those who admit to economic crimes and agree to bring ill-gotten money back. By the October 1 deadline given to alleged miscreants, this measure had brought scant results.  

    The costs of reconstructing the southern cities of Osh and Jalal-Abad are another large burden on the state – one which the coming winter makes urgent. International donor promises to Kyrgyzstan amount to some $1 billion, but little of this has been allocated pending the elections and action by Kyrgyzstani authorities to address the underlying causes of the ethnic violence that took place in June. 

    Security 

    The most tangible security support that Kyrgyzstan has received – the OSCE’s undertaking in June to deploy a small police advisory team – has stalled. President Otunbayeva gave some blessing to this police mission, but has essentially backtracked in the face of vociferous objections by the mayor of Osh, Melis Myrzakmatov, and others, including members of her own government. The issue has become a hot topic in parliamentary election campaigning – reportedly supplanting the U.S. airbase at Manas as a target of political ire. Some hope the police assistance deployment will go forward after Sunday’s election. Collective Security Treaty Organization (CSTO) Secretary General Nikolay Bordyuzha reportedly told ITAR-TASS that his organization will help Kyrgyzstan’s security forces, and CSTO technical assistance continues. Direct intervention, however, seems highly unlikely under almost any circumstances. 

    Elections 

    A robust OSCE/ODIHR monitoring mission will observe Sunday’s balloting. Voters will be considering candidates for all of 120 seats in parliament that will be allocated on a proportional basis, subject to a 5% nationwide minimum threshold, a requirement to obtain significant numbers of votes in the country’s various oblasts and a limit on any one party’s total representation. Unofficial results should be known within a couple days of voting, and the final vote tabulation and allocation of parliamentary seats should be published within two weeks. The leading party has 15 days after publication of the official election results to form a new government. If it fails to do so, then other parties can attempt to form one. If after three tries there is still no agreement on a government, the president can dissolve the parliament, and electioneering starts over. Kyrgyzstan’s new constitution is, of course, untested, and it remains to be seen how the government formation process will in fact work. 

    Some 29 political parties are registered to contest for seats in parliament.  Observers regard this election as the most competitive in Kyrgyzstan’s history.  Published platforms of the various parties have many similarities, including calls to return power to the people, restructure the government, reform state institutions, revive the economy, restore peace and security, and eradicate corruption.   The following are the leading parties. 

    Ata-Meken (Fatherland) is one the oldest parties in Kyrgyzstan.  It has been headed since 1992 by Omurbek Tekebayev, a former speaker of parliament and deputy chairman of the interim government. Ata-Meken is strongly nationalist on economic issues, opposing outside meddling or dictates on economic management or reform. 

    The Social Democratic Party of Kyrgyzstan (SDPK) was established in 1993. Almazbek Atambayev, a former prime minister and later deputy head of the interim government until he resigned in July, leads the party. The SDPK is a strongly socialist party that emphasizes economic revival and development of agriculture, tourism, mining, and other key sectors of the economy. Russian Prime Minister Putin held a very visible meeting with Atambayev in early September, presumably signaling a level of Russian backing for his party and candidacy. 

    Ata-Jurt (which can also be translated as Fatherland) was established years ago by current interim President Otunbayeva.  It now emphasizes its collective leadership – and therefore its lack of fealty to any single leader. It advocates a detailed investigation of the causes and consequences of the ethnic violence in June, as well as economic and other support for the southern part of the country. 

    Respublika, headed by business leader Omurbek Babanov, is another personality-based party created in 2007. Babanov was once a deputy prime minister. Respublika seems both pro-Russian and pro-European, and it supports greater engagement in the Eurasian Economic Community, the Shanghai Cooperation Organization and the CSTO. 

    Ak Shumkar (White Falcon) was founded in 2005 as the “Union of Democratic Forces.” It is headed by former interim government finance minister Temir Sariyev, an ambitious politician who has particularly tried to appeal to younger voters. Like other political figures, he has been accused of corruption. The party program includes details on social security, education, health, agricultural and business development, and an activist foreign policy. 

    Ar-Namys (Dignity) was established in 1999 and is now headed by Felix Kulov, an ethnic Kalmyk who, among other things, speaks little Kyrgyz.  Kulov has been a senior Kyrgyz official for much of the country’s independent history. He served as prime minister under Bakiyev, but later broke with him. Today Kulov emphasizes his military rank and experience to promise stability and security.  He visited Moscow in September, presumably in a bid to win Russian support. 

    Butun Kyrgyzstan (United Kyrgyzstan) is a new party chaired by long-time parliamentarian Adakhan Madumarov, whose last position in government was as secretary to the Security Council. It appears to be a nationalist party and has decried the threat of religious fundamentalism in the country. 

    Aikol El (Generous Nation) is another new party. Edil Baisalov, a long-time civil society and political activist who briefly served as chief of staff to interim President Otunbayeva, heads it. The party emphasizes its progressive character and the absence among its candidates of people who served as ministers to former presidents Akayev or Bakiyev. 

    A recent opinion poll conducted under the auspices of Kyrgyzstan’s Institute for Public Policy showed public support for these parties as follows: 

    Ata-Meken

    14.6%

    SDPK

    10.5%

    Ata-Jurt

    9.5%

    Respublika

    8.7%

    Ak Shumkar

    6.9%

    Ar-Namys

    6.9%

    Butun Kyrgyzstan

    5.7%

    Remaining parties garnered less than 2%, while 23% declined to give a preference and 5% opposed all parties. 

    The coming several weeks will be dramatic in Kyrgyzstan and pivotal for the country’s future. Elmira Nogoibaeva, chief of “Polis Azia,” a political think tank, suggests that the most difficult struggles will take place after the election and in negotiations to form a new government. If it succeeds, Kyrgyzstan will become the first parliamentary republic in Central Asia – and then the new government will face the gargantuan tasks associated with rebuilding the country and restoring internal harmony in an exceedingly difficult part of the world. Failure would be a setback for the prospects for democracy, stability and prosperity in Kyrgyzstan and in Central Asia – and would make none of the country’s or the region’s many problems easier.

    Ross Wilson is the Director of the Dinu Patriciu Eurasia Center at the Atlantic Council. He served as the US ambassador to Turkey from 2005 to 2008.Meerim Abdieva is an independent political analyst in Bishkek who does occasional work for the Atlantic Council. This piece builds upon the work of the Atlantic Council's Eurasia Task Force. Photo credit: Getty Images.


    Read More
  • BSEEF 2010 - Finance and Trade: 09/30/10 - Transcript

    Back to Black Sea Energy and Economic Forum 2010 event page

    THE ATLANTIC COUNCIL OF THE UNITED STATES

    BLACK SEA ENERGY & ECONOMIC FORUM 2010

    FINANCE AND TRADE

    WELCOME AND MODERATOR:
    GUVEN SAK,
    RECTOR,
    TOBB UNIVERSITY OF ECONOMICS AND TECHNOLOGY

    PANELISTS:
    ULRICH ZACHAU,
    COUNTRY DIRECTOR FOR TURKEY,
    WORLD BANK

    STEPHEN BIEGUN,
    VICE PRESIDENT OF INTERNATIONAL GOVERNMENTAL AFFAIRS,
    FORD MOTOR COMPANY

    JOHN MORAN,
    MANAGING DIRECTOR, INVESTMENT DEVELOPMENT & COORDINATION, OPIC

    THURSDAY, SEPTEMBER 30, 2010

    Transcript by
    Federal News Service
    Washington, D.C.

    GUVEN SAK:  Good afternoon.  We have come to the finance and trade panel, and we are also expecting His Excellency Mr. Mehmet Simsek right at the end of this panel.  The objective is to discuss the impact of this global economic crisis that started in the center of our system on the Eurasian dynamics, basically, on how it affected Eurasia. 

    And it can come – of course, we are right in the middle of a recovery process, many of the countries, including Turkey, is now already – it looks like we will get the numbers that we will be recovered from the impact of the crisis.  Regarding income, generation has increased rapidly to pre-crisis levels.  There are, of course, issues that we have been discussing – whether this process is actually sustainable or not in the case of Turkey.

    We have great panelists today in order to discuss the issues.  Maybe what I should do is – let me introduce them by asking questions to them.  We have here Dr. Ulrich Zachau.  He is the representative of the World Bank office.  So we are both from Ankara, living in Ankara, basically, and following the Turkish economy very closely, let’s say. 

    Let me start with Mr. Zachau by asking the – (inaudible, audio interference) – this crisis in different countries.  There are countries that are coming out of the crisis more rapidly than the others.  And the impact of the crisis, also, has been felt in an asymmetrical way.  So it might be useful to start by painting a picture, let’s say, about how the crisis is and how we are coming out of the crisis and what are the lessons, when you look at what are the policy lessons that we have to take into account and when we look at the picture, let’s say.

    ULRICH ZACHAU:  Thanks, Guven.  Yes, as you said and we all know from reading the press, from living in our countries, that experiences have differed.  In fact, there are people in the U.S. who are wondering whether the crisis is really over already.  There are people who think we’re still in a crisis.  I think people would not say this here in Turkey.

    MR. SAK:  We’re told that it’s already over here.

    MR. ZACHAU:  Yeah, exactly.  I think people here in Turkey think it’s largely over.  Certainly, for the economy, if you measure it by traditional standards – economic growth rates, et cetera – it’s over.  In fact, Turkey has been growing at 10 percent this year so far, which is really high. 

    And I think in general, the more general message is that I think developing countries and emerging-market economies have done relatively well, in terms of emerging from the crisis.  And this country has done particularly well.  So I think in terms of policy lessons, in terms of looking back, I think one issue is that the policies of those countries that have grown a lot, which have been those countries that are open to trade, despite the crisis. 

    They initially suffered quite a lot, but now, they have also recovered quite quickly, and better than other countries.  Those policies have been vindicated.  Also, in terms of the policies to have some macroeconomic loosening and some macroeconomic support, fiscal support, but not too much, and begin exiting – I think that policy by some countries, including Turkey, has essentially been vindicated.  Of course, it’s a little too early to celebrate, but I think it is clear that the policies have worked in these countries here, and that more of the same will be needed, but a gradual withdrawal of the fiscal stimulus. 

    Now, looking ahead, one key challenge will be what happens in the Europe and the U.S. for countries in this region, including Turkey, but pretty much all open economies and emerging-market economies.  And the key question is what monetary policy does in advanced economies.  And if it stays very loose and the yield differential remains very high, investments here, capital flows to Turkey, to emerging-market economies, will remain high. 

    But if the yields start rising in the U.S. and in Europe, for example, because there continues to be fiscal stimulus and, in fact, there’s a supply constraint, then of course, the yields start rising and the relative differential declines and so there is a risk for countries like Turkey, and other similar countries, that these capital inflows won’t remain at the current levels. 

    And of course, we can later on talk about more of the policy implications of that.  So I think that’s the broad picture.  These countries have done relatively well.  Their future depends a little bit on how the global picture evolves.

    MR. SAK:  But I think there is also a difference when you look at the economies – (inaudible, audio interference) – including Turkey.  Turkey looks even more diversified and, as far as I see, we are growing the domestic economy, also, at this stage.  And when I look at the Central Asian republics, basically, the petroleum price thing looks to be much more important.  Shall I go with you, Mr. Stephen Biegun from Ford Motor Company?  He’s the guy from the area – from the real markets, real sector.

    STEPHEN BIEGUN:  Thank you.  Against the economic backdrop that you just heard are the practical implications for a company like ours – but we aren’t unique in this – companies that are well-invested throughout this part of the world.  For Ford Motor Company’s part, we’re a longstanding and major investor in Turkey, but also in Russia, also in Central and Eastern Europe, and of course, heavy investment in the European Union. 

    So when we see the decline of the global economy in such dramatic terms, certainly the first impact can be seen and most heavy impact can be seen on the producers of high-value consumer goods, which are one of the first retreats of the consumer.  And so not surprisingly, the automobile industry was severely impacted by the financial crisis.  And just as was the case with macroeconomics, in terms of facilitating the recovery and, in some cases, the survival of the industry, government actions are a mixed bag.  There’s been a variety of actions across the region.

    Turkey, I would hold out as an exemplar, actually.  Through a well-regulated stimulus –reductions in the consumption tax in order to facilitate the purchase of automobiles, they’re able to sustain a domestic market that is now recovering and growing at a decent rate.  More problematic, actually, for a company like ours, especially one that produces in Turkey, is that Turkey doesn’t constitute even the majority of the market that we serve with our vehicles.

    We’ll send vehicles from Turkey to 70 destinations around the world this year.  By far, the largest customer is the European Union, but also Russia, for example, is a very robust customer.  Unfortunately, in our industry, the European Union is currently in decline.  After an enormous stimulus of scrappage programs that spurred the purchase of new cars last year, we see European sales volumes declining dramatically this year against a backdrop of the rest of the world, more or less, recovering at a slow pace.

    But other public policy actions that were taken that certainly have disrupted the recovery of the industry are in places like Russia, which imposed protective tariffs.  Russia had been a very important export market – and I think, not only for the automobile industry, but my guess is, for many other sectors of the Turkish economy, as well. 

    And Russia, which is not a WTO member, was free, among other things, to – fully legally, within its rights – to enact trade barriers, which did have the effect of not only cutting off Turkish exports, but also, I think, compounding some of the issues in Russia’s economic recovery.

    Nonetheless, looking forward, we do see a recovery globally in the automobile industry reflecting, I think, an overall recovery in the economies.  But as we’ve said and I think everyone here has seen that recovery is uneven.  And so the Turkish economy is recovering at an impressive, double-digit growth rate, but Western Europe is particularly slow recovering, and in some cases not recovering.

    MR. SAK:  Western Europe, and also the region that we are interested in – it looks that it is much more tied to the base of the petroleum prices, also, or the natural resource prices.

    MR. BIEGUN:  I think there were many people who thought that the crisis would wean economies in this region – and North Africa and the Middle East and, also, in Central Asia – would wean them away from an overdependence on oil prices.  And from what we’ve seen – and this includes Russia – it has done nothing of the sort.  In fact, those economies’ recovery, particularly a robust recovery, appears entirely tied to the recovery of oil prices.

    MR. SAK:  And let me turn to this side.  Mr. Zolnikov (ph) is a commercial banker from Bulgaria.  And when we are talking about an uneven recovery process, one of the questions that was asked for this session is whether it is possible to maintain the access to financial markets, basically.  Is that also uneven?  How would you assess it?

    MR.    :  I would slightly disagree with my colleague, but also agree; to some extent it’s too early to celebrate the end of crisis.

    MR. SAK:  It is for Turkey.  (Chuckles.)

    MR.    :  Yes, I’m just picking up – because you just have to have a look at what’s happening in Western Europe.  So Spain was downgraded today.  Just look at that one and the other countries in Europe.  So unfortunately, we are about to feel the consequences of the crisis for a longer period than expected.  The financial markets are giving mixed signals.  As you can see, industrial production is declining, so this is a very bad signal.  So in the near future, the access to the financial markets from the real sector is not going to be that easy. 

    So I feel worse about my country.  We were, to some extent, lucky because in Bulgaria, there is a currency board, so the financial discipline was at an acceptable level.  So we did not face, that much, this credit crunch.  And I believe that in the near future, in order to facilitate the access to the financial markets, new regulations have to be imposed.  A step in that direction –

    MR. SAK:  Regulations on what?

    MR.    :  On the banking sector – I mean, the financial sector, as a whole.  A step in this direction is the new set prepared by Basel III, which practically envisages strong regulations on the sector, which is a key issue in that direction.

    MR. SAK:  Would you like to add something about direct investments, also? 

    MR.    :  (Inaudible.)

    MR. SAK:  Okay, let me then turn to Mr. Moran.  Mr. Moran is from OPIC.  That’s the American agency for providing investment insurance for the American companies, basically, as far as I remember.  So he is very much related to the issue at hand, regarding maintaining access to finance or to financial markets by the investors in the – (inaudible, audio interference) – the investment flows, or everything just halted?

    JOHN MORAN:  We didn’t really – you’re correct in that we are the U.S. government development finance agency focusing on investment, distinct –

    MR. SAK:  Because the U.S. government did a lot to maintain the system, as a whole.

    MR. MORAN:  To maintain the system and they did certain – people came to us and talked about whether we might expand our mission, for example, to provide a source of trade financing, which we don’t do, actually, because that’s our export credit agency, or Ex-Im. 

    But what we did do – we became more active – or we’re not really reactive, in the sense that we try to get out and make good deals, deals that are commercially sound and good for the host country or region that is where the direct investment is going to go with a U.S. participant, which can also include other, non-U.S. investors.  But we do need some kind of U.S. commercial nexus or private investor to sponsor the deal and to have real capital at risk for us to then be able to provide either insurance, or to be a debt provider to a project.  And we also support privately managed equity funds. 

    So we have political risk insurance, debt finance – medium- to long-term debt finance – three to 20 years, similar in our insurance – and then we do privately managed equity funds, where we support them with – we can’t do equity, unlike, say, the IFC or EBRD or some of the other, European countries have development finance institutions like OPIC – DEG, KfW in Germany, FMO, and there are others – Proparco – but what we cannot do is, we are not able to do equity. 

    We cannot take direct equity stakes in companies, and nor do we finance our support our investment funds that we establish or that we motivate with equity; we do it with debt, basically, with a smaller upside than a traditional limited partner does.  What we’ve seen in the market is people coming back to us, particularly in this region – in Turkey and elsewhere in Central and Eastern Europe and Eurasia. 

    We’ve seen people that had access to private finance – because we are not supposed to compete with the private sector; we’re supposed to play a role.  We can do complementary finance and cofinance, but we’re not supposed to finance deals where there’s ready access to private lending, private equity.  What we’ve seen is the market shrank, as there was the global contraction, is that good, bankable deals that lacked access to debt capital at reasonable prices or at fixed-rate longer terms were coming back to us.  Good, solid deals were coming back to OPIC because their financing had dried up.

    And on the funds – very briefly, the way we support equity funds is, we do a call – what we call a call – and we’ll say we want to do a fund or funds in a region or in a sector.  And so for example, most recently, we did a global call for investment funds for technology, innovation and access.  And this was pursuant to President Obama’s Cairo speech. 

    And what we found in those cases, once we select fund managers, they go out and raise about two-thirds of the total capital of the fund, and we match it with one-third of it in the form of a debt.  And we also did, in 2008, a global renewable energy fund call.  And what happened there was that a lot of those funds in the 2008 – very solid fund managers, some of them – in fact, the most recent call, we had almost all non-U.S. fund managers, but very well-established, good track record, very capable. 

    And one of the principal reasons that we make in selecting a fund manager is their ability to do the private raise.  And what has happened is the private limited partners have gotten very wary of investing.  And conversely, what the fund managers say is, we can’t do the private raise as well, so that means if they’re talking about a $450 million fund, they’re having trouble raising that 300 (million dollars) private so can come in with our 150. 

    What the fund managers say is that the private LPs are very – as contracted – but we see a lot of opportunities on the ground that, if we had the money, we see very good values that we would be able to invest in.  So what we’ve had to do, as a result, is try to be more creative and innovative, in terms of doing deals that are good, commercially sound, but maybe don’t have access to private capital, whether it’s on the debt side or on the investment side.

    MR. SAK:  Regarding, for example, the geographic distribution of your interests, how much importance you are attributing to this region?

    MR. MORAN:  Well, it’s coming back.  And I say that –

    MR. SAK:  I’ll ask that question to you, too.

    MR. MORAN:  Yeah, we used to have an OPIC representative based in Turkey for about six, seven years, largely – and focused on, as part of the Caspian finance center based in Ankara covering Eurasia.  When I first came to OPIC, I was based in Zagreb and covered southeast Europe and spent a lot of time in Sofia and other places around, looking at deals. 

    At the time – and what happened, really, interestingly, was the market kind of matured and all of a sudden, private banks were very well-established and our role was fairly short-lived, in terms of being needed in terms of development finance institutions.  There were other – all of a sudden, banks and investors kind of catapulted ahead.  We did some funds that – we had two funds for southeast Europe, for example, and we’ve done a number of funds that were able to do investing in Eurasia and Turkey.

    But there was a period there where, all of a sudden, people were able to go to the private side without needing our function.  Of course, the EBRD and the IFC have also played very significant roles, as well, because they don’t need the U.S. commercial nexus and we always need some kind of U.S. private sponsor. 

    What’s, again, happened is, I think we are now seeing more interest in our being able to support projects – political risk side, debt finance, as well as investment funds – because the market has retracted a little bit and now the role for a development finance institution, based on market response, seems to be more preeminent.  So our pipeline and portfolio is going back up in this region.

    MR. SAK:  Thank you.  And Mr. Zolnikov, regarding – I’ll counter your pessimism.  I’ll ask you to discuss that in a few minutes, but regarding your company’s operation in the region, how you are seeing the situation now?  How you are seeing the region?  Because as Ulrich has already noted, it’s uneven – this recovery process is uneven.  I mean, I’m sorry it’s not that good in Europe, but it’s not that bad, also, in Turkey. 

    And we are also seeing some – that’s why Ulrich has mentioned the importance of some policies to be pursued, because there are risks that are accumulating, no question about it.  It’s not normal yet.  The new normal is not around yet.  But how you are seeing the business situation?  Are you looking for new deals, especially regarding the geographical distribution?  Are you looking at this region?  Are you seeing something different?

    MR.    :  No, we believe that this region has a very good potential for growing.  For instance, the infrastructure projects that are under development are giving good opportunity because this involves, more or less, the support of the state, as well, which is quite important these days.  Of course, after the crisis, the bank started reviewing the projects in a different way because a few years ago, it was –

    MR. SAK:  – different because the capital is going to be costly because of the new regulations?

    MR.    :  For various reasons.  It’s a complex – there is a complex set of reasons.

    MR. SAK:  Or are there any inherent risks in the region?

    MR.    :  First of all, the inherited risk in the region; second, the cost of obtaining the financing –

    MR. SAK:  Is it increasing now?

    MR.    :  Yes, it’s increasing.  The investors are pretty cautious and are reviewing the projects in a different way, so that it turns out that at the end of the day, there are not that many bankable projects.  So this is on the one hand.  On the other hand –

    MR. SAK:  So you still see this as a transitory stage – that, that may be the reason why –

    MR.    :  Yes, more or less.

    MR. SAK:  – we are all more cautious.

    MR.    :  On the other hand, there is pressure from the markets because there is a desperate need of yield.  So by this way, I think that within the next maybe 12 to 18 months, sort of break even should be found because the economy needs fresh money in order to grow. 

    MR. SAK:  I see.  So let me come to Stephen, also, regarding that similar issue.  And Ford Motor Company is looking at this region.  Are you basically looking only Russia – as you have mentioned Russia and Turkey a lot – you’re not looking at the other parts?

    MR. BIEGUN:  Well, we’re globally invested.  We have 35 countries around the world where we manufacture.  Turkey exports to 70 markets around the world – 70 different countries around the world.  So our business is completely integrated on a global basis.  In this region, we manufacture in Turkey, Poland, Romania, Russia – nowhere in the Middle East, so Turkey really is our access point to Central Asia, the Caucasus –

    MR. SAK:  Are you doing anything together with some joint ventures with the Turkish companies?

    MR. BIEGUN:  Here in Turkey, of course, it’s not a wholly owned Ford Motor Company.  We have a joint venture partner, Koc Industries, with whom we’ve been building cars for 50 years.  So we’re in a joint venture here in –

    MR. SAK:  That’s an old one; let’s look at the new situation, also.

    MR. BIEGUN:  Well, going forward, it makes most sense, when you can finance, to own your own business entirely.  But different countries have different requirements.  In the case of Russia, for example, in the earlier panel, there was some discussion about the nature of the Russian auto industry.  Actually, the Russian government is beginning to copy the features of the Chinese auto policy in pushing investors to partner with domestic companies in order to make a stronger indigenous industry.  There are trade rules and investment rules that we contend with on a global basis. 

    We haven’t put an investment in Turkey in a few years.  We have about $2 billion here now, although that is constantly being financed with materials in the assembly of the vehicles and procurement of the commodities that we use to build the cars.  But our investments are growing globally, for sure, although by far, the weight of growth, not only in investment, but also in the market itself, is in Asia today. 

    What makes Turkey, and countries like Turkey – shouldn’t be limited to Turkey – extremely interesting, though, is when they have access to those markets.  So in the case of Turkey, some important free trade agreements and, of course, the access to the European Union, which takes the competitive nature of an emerging market like Turkey and gives it tremendous opportunity globally.  Where we get hurt, of course, is where I mentioned earlier, is when the trade rules start breaking down.  And then we can increasingly get boxed in to only be operating in the economy where we build the vehicles, which, in today’s world, is an uncompetitive model.

    MR. SAK:  But then I am looking for example that the fund flows into Turkey, as the access issue is important, was one of the issues that was raised here.  In terms of Turkey’s basically portfolio flows that we are setting, are you investing directly now – that is, making investments somewhere around the globe in this, let’s say, transitory stage?

    MR. BIEGUN:  Yeah, absolutely.  We’re investing billions of dollars this year in India, China, Thailand –

    MR. SAK:  In foreign direct investment?

    MR BIEGUN:  Directly, yeah.  We’re a capital-intensive industry.  We finance the bricks and mortar; we finance the assembly of the vehicles; we finance the sale of the vehicles; we finance the export of the vehicles.  So we’re constantly borrowing and paying off loans.  We’re constantly moving capital in and out of the company.  First preference, oftentimes, is self-financing, but it’s impossible, in our industry, to self-finance, entirely, our growth.  So we borrow money.

    MR. SAK:  What should we do to attract Ford Motor more to Turkey, for example?

    MR. BIEGUN:  Well, Turkey’s doing some great things.  There’s the basic rules of thumb that I think an emerging market always want to pursue, which a country like Turkey has the ability to offer incentives to investors around tax policy.  This is extremely important, and Turkey does not have to conform to all the same rules of the European Union because it’s not a member, but it has that access. 

    So in terms of incentives around tax reductions and infrastructure development, Turkey’s been quite effective at that.  Second is a stable regulatory and tax environment, and here, Turkey has done a decent job, but no government is perfect.  Third is macroeconomic stability.  We’ve been in Turkey for 50 years, so you can imagine what we’ve seen.  But right now, it’s looking pretty good.  But that’s this year.

    MR. SAK:  So Turkey is looking pretty good, but as Mr. Zolnikov said, he’s relatively pessimistic, let’s say, as a conservative banker.  If you have anything to say, you’ll jump in, but let me ask Ulrich about it.  Are we underestimating this situation with the developments in Europe and Turkey, basically?  Or is it, you know –

    MR. ZACHAU:  I don’t know, Guven, whether you are underestimating them, but we, however – (laughter) – we hope that we are not.  I want to come back to this notion of an uneven recovery, and I think that’s the whole point.  The picture is different in different places.  So you’re right that the PIGS – Portugal, Italy, Greece and Spain – they don’t look all that good right now, and some other parts of Europe, too.  And overall, it’s really quite slow.

    It’s also true that in the U.S., the recovery is extraordinarily slow.  I’m German.  Personally, I’m not optimistic on Europe, okay?  I think it will take a while.  And additionally, in addition to take a while, I think there are risks of some pretty nasty secondary incidents.  So I don’t think that’s likely, but I think there are risks.  I’m skeptical about the U.S.  I’m not optimistic or pessimistic.

    But I do think that developing countries, especially the better-performing advanced and emerging economies are really doing quite well, relatively speaking.  And that’s true for Turkey.  We will see for how long.  But there is a bit of catch-up in the numbers, so it’s not all pure, new economic genuine growth.  There’s some catch-up – simply because last year was so bad, it looks this good this year.  But there is also some portion of genuine, good economic growth. 

    So because of this differentiation, I think there are three things that are really important.  The first one is – and I’m picking up on the points that were made by my colleagues on the panel – the first one is back to basics.  And back to basics means stable macroeconomic policy, which was just highlighted, and also is the very reason why, you know, Spain was downgraded. 

    And I think it’s a perfect illustration why it is important to be prudent in fiscal policy and actually not keep the over-stimulus, keep that going.  I think there is an end to that road, and that end is pretty close.  So I think it’s really prudent to watch macroeconomic policy pretty closely and not to overdo it on the easing.  So I think that’s point one on the macro policy.  That’s true for fiscal, as well as monetary.

    Secondly, trade – you mentioned trade restrictions in Russia.  I think this is exactly the point.  I think in this situation, if you want to have a recovery of trade, that’s kind of the worst thing you can do.  So you really want to have a trade regime that is attractive to trade and promotes trade, so few restrictions, if possible. 

    One point back on the macro:  There is this sort of beggar-thy-neighbor, competitive devaluations policy going on around the world, including between the U.S. and Japan.  And quite frankly, you know, some people – few people, if any, in this group – may remember what happened a few decades ago, but the world has been through this.  And it led to universal, global disaster.  And I think, really, the policymakers of this world –

    MR. SAK:  You expect that to be deepened, for example?

    MR. ZACHAU:  I would hope that policymakers in this age are wiser and have more responsibility, more sense than to go that route all the way.  Unfortunately, what’s happening in the U.S. and Japan right now is not a good model, and I hope it will come to an end.  But that was back on the macro. 

    So trade is the second thing, and I think the third one is access to finance.  And you mentioned, and we agree with you, that in significant parts of the countries where the crisis is still going on, it remains constrained.  And in fact, we know from many of our clients around the world that banks are still asking, routinely, for confirmed letters of credit where they used to be asking – or were quite happy to get unconfirmed letters of credit.  This isn’t like it was, anymore.

    Now, in some very few parts, it’s beginning to ease.  But I think it is important for public institutions – Ex-Im, yourselves, ourselves – to actually help this and support this.  So one thing we do as the World Bank in Turkey, but also in other countries in the region and in the world, is actually promote access to credit through credit lines, which provide medium-term credit, not just short-term credit. 

    And we do that for trade, for exporters; we also do it for small- and medium-sized enterprises; we do it in industries like renewable energy and energy.  And I think it’s a very important part – it’s a small part, and obviously, we can’t make up for all the demand of the private sector around the world.  That’s impossible.  We’re like a little drop in the bucket, compared to the total that’s needed.  But I think it’s important, both in terms of giving a little bit, but also important as a signal to the world that, I think, it’s actually possible to do this and watch the effect.  And there are some good results in some of the countries that we see.

    And lastly, a note on jobs:  We haven’t talked about people.  We’ve all talked about abstract things, like firms and profits and investment opportunities.  There is a hard truth, which is that the people who have suffered are really the individuals and the families because lots of them are unemployed all around the world.  And that’s very clear in the United States.  It’s also clear in Europe. 

    It’s less clear in this country, and I think one thing that’s remarkable in this country is the speed at which employment has actually stabilized, and unemployment has begun falling again.  One important part of that, of course, is the informal sector.  So you have a lot of recovery in the informal sector.  I’ve been talking for a while, so I’ll stop.  (Laughter.)  But so I think we actually agree on most things.

    MR. SAK:  Okay, that’s basically the situation that we are in now.  We are at the transitory stage.  There are still problems.  And as far as – I mean, I can’t ask what you expect things to be like, let’s say, five years from now.  I don’t think it’s possible to do that at the moment.  But how do you envisage 2011, for example? 

    How do you see the environment in 2011, better than this one or – I can ask this to you, too – or do you expect anything like these trade war things to deepen the pressure on – I mean, kind of government-induced pressure on currencies to continue like this?  Because there are so many discussions about the overvaluation, et cetera, and that discussion is in many countries now.

    MR. BIEGUN:  I would hope – and I think this is our view as a company, as well – that things will get better.  So full stop, that’s our general expectation.  At a very slow pace, with lots of strain on policymakers and governments because of chronic unemployment – unacceptably high unemployment – but still, things get better.

    On the currency side, this spat is so new that it’s hard to see how far it’s going to go, honestly.  And there’s more players than Japan and the United States, as well.  Korea’s actually been an active intervener in its currency over a period of time.  The IMF just came out with a scathing report on Korea’s manipulation of the won, quietly, through what’s called secret-agent interventions, through commercial banks, but nonetheless doing it.

    China, of course, is a subject of a global debate.  So the currency issue is a big one, and it’s huge for Turkey, because the lira is getting strong.  And these things can, for a global manufacturer, can absolutely erase the competitive advantage.  If you get a 20 or 40-percent swing on a currency against an importer on a $20,000 automobile, that’s $4,000.  That’s decisive.  There are things I worry about.

    I don’t want to sound hopelessly optimistic, and let me just tell you the things that I worry about.  One is, I travel around the world – I actually work with all of our global enterprises and meet with governments in every market.  And every single government has one strategy:  export-driven growth.  And my question is, if everybody’s exporting, who’s going to be doing the buying? 

    And I really worry about that, because the other side of that is protectionism.  We’ve seen an economic model that’s developed in Asia that’s export-driven growth with protective markets, particularly in the auto industry.  I worry about that, and I think the currency wars are a fixture of this newfound devotion to export-driven growth.

    Otherwise, protectionism is a worry.  Turkey’s a fairly well-situated country from which to export.  It’s got a competitive cost base and it has access to the European Union market.  But that has an upside and a downside.  The upside, of course, is that Turkey had access to one of the largest consumer markets for its goods, duty free.  That’s a great boost for the economy.

    But when the European Union expands its reach in trade, through free trade negotiations, Turkey is not an automatic beneficiary.  And in fact, what we’re increasingly seeing is, as the European Union negotiates free trade, the party with which they’ve negotiated refuses to reach a deal with Turkey because those countries understand Turkey has the potential to actually export into their markets.  So that’s very problematic for us.

    On the slightly more positive side, we see – we’re forecasting a conclusion to Russia’s negotiations to join the WTO.  And if that’s the case, when Russia does officially sign – (inaudible, audio interference) – document, probably at the end of next year, all the duties that they have that – (inaudible) – the situation are going to be, by agreement, required to stamp (ph) back and then decline over a period of seven years.  That’s going to be very consequential for Turkey because Russia, I think, stands as probably one of the most promising markets for Turkish imports on a global basis.

    MR. SAK:  Mm-hmm.  How does a commercial banker see 2011 when you look from here?  I mean, you can jump on those issues – these trade war issues, currency wars – (inaudible) – I may say that, and also, there are regulations that are coming towards the banks.

    MR.    :  I would like to talk more about the region because globally – (inaudible, audio interference) – well, Turkey is a very good example.  The growth rate in Turkey could be the core issue or core – (inaudible) – for the development of the region after the priorities have been set on what, of the list of the eight construction projects – (inaudible).  Because building –

    MR. SAK:  That is going to be anyway, related to petroleum prices.  You also mentioned about the Russian role, Russian economy, et cetera – imports.  Isn’t that also tied to the petroleum prices and that is somehow related to the global – (inaudible) – situation at the end of the day?

    MR.    :  Yes – (inaudible) – are on the table, including linking natural gas and now, making connection between – (inaudible) – which allows the goal to be achieved for energy – (inaudible) – of the region. 

    MR. SAK:  (Inaudible, audio interference.)  Do you have anything to add?  Okay, so let me just sum up quickly, as the minister is here.  (Inaudible) – it should be all right.  So when we look at trade and finance issue in 2010, there are positive developments around the globe, but – (inaudible). 

    As far as I understand from what you have mentioned, we are still in the transitory stage and there is still a role for the public sector and public policy to – (inaudible) – U.S. government agencies, also, seem to be important in the process.  That’s the message that I got.  I don’t want to say we are pessimists, regarding the issue, but we are not that optimistic on this panel, as far as I see.  So let me close by saying that and yield the floor to Ross, now. 

    ROSS WILSON:  Ladies and gentlemen, our next speaker was supposed to be Minister of Finance Simsek.  His staff called us just a couple of minutes ago to advise that his flight was delayed from Ankara to come here, or I think from – (inaudible) – to come here.  And rather than hold everybody here for what would be a very long time and disrupt the dinner, we will just conclude this particular session. 

    I understand it was a good session.  I know it was a good session with good leadership from my friend, Guven Sak.  Minister Simsek may be able to join us for dinner at Topkapi Palace, and that would be a wonderful thing.  I believe the transportation to Topkapi begins at about 5:45.  There will be a series of buses leaving, basically, as they get filled. 

    Reception starts at Topkapi at 7:00.  For those who wish, there is an opportunity for tours of the Topkapi Palace grounds, which is very interesting if you’ve not been there.  And people will be seated at some point not long after, maybe, 7:30, 7:45, somewhere in that timeframe.  So we’ve very sorry about Minister Simsek.  We look forward to seeing you at Topkapi.

    (END)


    Read More
  • BSEEF 2010 - Session 3: Critical Infrastructure Protection: 09/30/10 - Transcript

    Back to Black Sea Energy and Economic Forum 2010 event page

    THE ATLANTIC COUNCIL OF THE UNITED STATES

    BLACK SEA ENERGY & ECONOMIC FORUM 2010

    SESSION III: CRITICAL INFRASTRUCTURE PROTECTION: SECURITY, BORDERS AND ENERGY

    WELCOME/MODERATOR:
    ROSS WILSON,
    DIRECTOR,
    DINU PATRICIU EURASIA CENTER,
    ATLANTIC COUNCIL OF THE UNITED STATES

    SPEAKERS:
    Luca Izzotti,
    senior vice president for strategy and planning,
    SELEX SISTEMI INTEGRATI, S.P.A.

    VICE ADM. TIMOTHY JOSIAH,
    SENIOR DIRECTOR OF HOMELAND SECURITY,
    RAYTHEON COMPANY

    ALEXANDROS PETERSEN,
    NONRESIDENT SENIOR FELLOW,
    DINU PATRICIU EURASIA CENTER,
    ATLANTIC COUNCIL OF THE UNITED STATES

    PAUL TWOMEY,
    FOUNDER,
    ARGO P@CIFIC

    THURSDAY, SEPTEMBER 30, 2010

    Transcript by
    Federal News Service
    Washington, D.C.

    ROSS WILSON:  For any of you who don’t know me, my name is Ross Wilson.  I’m the head of the Dinu Patriciu Eurasia Center at the Atlantic Council, and I’m happy to welcome all of you here.  Thank you for joining us for this session on critical infrastructure protection.  Before introducing the panel, I thought I’d just kind of suggest to all of us here we kind of think about what we mean when we talk about critical infrastructure, pull that topic apart a little bit. 

    I’ve been to a number of conferences like this that focus on the Black Sea, focus on Caspian Basin energy, and if this topic – when this topic appears on the agendas of conferences like this, it usually means pipeline security and that was certainly the case 10 years ago, 15 years ago, when Ambassador Morningstar, Ambassador Mann, a couple of other people here and I were working on Baku-Tbilisi-Ceyhan – big preoccupation with pipeline security, both in Azerbaijan and in Turkey and for good reasons. 

    Attacks and threats on BTC, attacks and threats on pipelines in Iraq, elsewhere in the region, certainly remind us that there are serious pipeline security challenges that companies seeking to mitigate risk and countries seeking to mitigate risk will want to address. 

    Another critical infrastructure protection set of issues I think concerns other infrastructure like airports, bridges, ports, other sort of vital transportation security, and I think that’s something that’s come to the fore in the United States, particularly in the wake of September 11, 2001, and indeed one of the mandates of our Department of Homeland Security is to try to focus in a more concerted and serious way on those things, on border – and to focus a number of different issues together – border security, transportation security, maritime security, customs, cyber security and other similar kinds of issues. 

    The last actually, cyber security, is something that we wouldn’t have talked about at all at one of these conferences 10 or 15  years ago, even one that dealt – that wasn’t so much focused on, say, the Black Sea, Caspian Sea region.  In February 2010, the then-director of the office of national intelligence – U.S. Office of National Intelligence – Dennis Blair, identified cyber terrorism as a serious potential threat to America’s electricity grid, financial sector and other essential networks. 

    I think the recent news that many of us will have read about the so-called Stuxnet virus, if that’s the correct way to pronounce that, a sophisticated program apparently designed to disrupt power grids and other industrial infrastructure, particularly the Siemens software that Iran uses to run its Bushehr nuclear power plant, makes this conversation particularly timely.  Anyway, to sum up, I think this issue of infrastructure protection takes in a whole lot of different things.

    I’d like to introduce our panelists to each of you and then ask you to speak a little bit about some of the concerns you have related and issues that you focus on related to infrastructure protection.  Vice Adm. Timothy Josiah is senior director of homeland security for the Raytheon Company, which is a leader in defense and homeland security technologies in the United States and around the world.  I know Raytheon is a very serious presence right here in Turkey.  In addition to his private-sector expertise, Adm. Josiah also brings 33 years of experience in the U.S. Coast Guard, where he played a key leadership role in the aftermath of the 9/11 attacks in the United States. 

    Dr. Paul Twomey is the founder of Agro P@cific, a high-level international advisory firm that advises a wide range of companies on their Internet and technology businesses.  He is, in addition, a board member of the Atlantic Council and is a leader on Internet protocol and governance issues, worked with a number of governments. 

    Mr. Luca Izzotti will be representing Selex Sistemi Integrati in lieu of its chief executive officer, Marina Grossi, who was unable to be here unexpectedly today.  Mr. Izzotti is the senior vice president for strategy and planning at Selex, which is a subsidiary of Finmeccanica.  Mr. Izzotti holds a degree in mechanical engineering, is responsible for the development of a wide range of sensing technologies and combat systems, hopefully bring a useful technological – a different, maybe, technological perspective from those of us more focused on policy matters. 

    Alexandros Petersen is a nonresident fellow with the Atlantic Council’s Dinu Patriciu Eurasia Center, my center at the council.  He’s held a variety of positions at research institutions and think tanks in Washington, D.C., London and Brussels. 

    So with no further ado, let’s – I’ll ask our panel to – I don’t want to phrase a particular question at this point.  What I think would probably be more useful is to take your piece of the critical infrastructure pie, what kinds of issues are the most important, what kinds of issues maybe are people not paying attention to, what would we be most concerned about and what should this region be most concerned about looking ahead over the next couple of years, five years, 10 years and more?  Adm. Josiah, maybe to start out with you, if I might?

    ADM. TIMOTHY JOSIAH:  Sure.

    MR. WILSON:  Oh, and I should say actually – this first thing I should have said, excuse me – is that the original moderator for this panel got stuck in transit and was unable to rearrange his travel to get here and that is why I am privileged to be able to substitute for him.  Please, Admiral?

    ADM. JOSIAH:  So first maybe a picture of critical infrastructure the way we see it so you’ll understand maybe some context for my comments.  In Raytheon, we decided long ago that physical security for a small facility, a large facility, a section of a border, a coastline, a pipeline or a whole country all had great similarity and that we should be trying to build very scalable systems integration capabilities to integrate easily any kind of a sensor that was needed for a particular system. 

    So that’s kind of where we are today and I’m not going to talk really at all about what Raytheon brings to the table, just that that’s our view of the world, that configurable systems where you don’t have to write software, where the right sensors can be integrated are the key to a good security system.

    We have spent a lot of time looking at energy security and are working in particular in some offshore oil and gas infrastructure areas to try to provide the right kind of security there.  As I listened to the presentations here for the last day or so, it’s really almost all pipeline focused and these pipelines are crossing many boundaries, different types of terrain, certainly international boundaries and borders.  They’re going over and under water and through political subdivisions, near population areas, near sensitive environmental areas. 

    To us, as much as having a good, well-built pipeline with isolation so you can shut it down if something happens, there needs to be a very close level of collaboration between the pipeline owner and operator and governments and there needs to be  an alignment of policy and strategy and technology to make sure that if something happens, whether it’s a terrorist attack or some kind of mechanical failure or some kind of failure of a human being, all of which can have a disaster occur and with the same kinds of consequences, that there’s a pretty close relationship that goes to understanding the systems and minimizing the impact that might occur. 

    So we always encourage anybody that we work with to begin with a good understanding of threat and vulnerability risk and to think about design from a risk-based perspective.  We don’t have any customers that just build it whatever it costs.  There are ways to think about what the risk is and to prioritize the safety and security add-ons to any kind of a system.  So if the pipeline, and if we talk about pipelines as going past a population center or an environmentally sensitive area or through a port or under a water – or over a waterway like the straits of Istanbul, those may be places where special both safety and security things are taken into effect.

    It’s quite possible to buy a very good system that senses when anybody is approaching the perimeter or structure that you’re concerned about, be it a pipeline, but often it’s very difficult to get any kind of a response resource there in real time. 

    So it’s lots of sophisticated technology that can be applied but it’s really not of a whole lot of use unless you can react in time and that may mean an initial reaction by the private sector that may own and operate the pipeline.  It may mean the need for collaboration with local authorities so they can use police or fire or other emergency responders to get there and it also probably means a collaboration at the national level with something as important as one of these pipelines that we’ve been discussing here that comes through.

    So we think that for any large-scale system like a pipeline crossing international boundaries, there needs to be a concept of cooperation that’s knitted to the actual surveillance sensor system that provides the basic level of security for the system.  That sounds simple but that may mean a system therefore that whether it’s a collaboration document that’s agreed on by different levels of government across geographic sectors – it may be different governments in a region and maybe if you’re in Europe, it’s the EU as well. 

    So those sorts of things could be quite complex but necessary if you’re actually going to be able to respond and prevent something from happening or respond and minimize and mitigate what happens from an accident.

    MR. WILSON:  I think your last point is particularly important.  You referred to an integrated system and crossing borders, which in my experience in this part of the world generally means you don’t have an integrated system anymore because of severe shortcomings in cooperation and real collaboration as you go across.   BTC, a little bit of an exception, but even there, Azerbaijan is responsible for security in Azerbaijan, Georgia for Georgia.  Turkey is especially is responsible for security here.

    I think there – I know actually that there are some quite significant issues that had to be worked out to develop even a modicum of cooperation and coordination and in effect BTC had to do its own virtual collaboration.  Alex, I know you were involved in some of that.  Do you want to speak to some of that in the broader political context a little bit?

        ALEXANDROS PETERSEN:  Sure.  Well, unfortunately it looks like maybe we are going to be talking about pipelines, at least the first two speakers, a little bit.  But I will.  I think it dovetails rather well with the admiral’s presentation, what I’m going to say, which is looking at it, we talk about in this part of the world often when we’re talking about infrastructure security bringing models from outside of the region into the region, things that have worked in North America, things that have worked in the European Union while actually – you mentioned some of the difficulties cross-border with the BTC. 

    Well, there have been, yes.  But interestingly, the BTC has through a number of processes related to the way in which security was implemented by BP as the operating company for the pipeline in Azerbaijan and Georgia and providing security there, working very closely with not only the national governments but also local authorities, as you mentioned.  The BTC pipeline has actually become an industry standard for the way in which security has been implemented. 

    Part of the reason for that – so I would stress I think sort of two levels in this.  One is the very sort of 30,000-foot level and then one is the very local level.  So the first, the very high level, is the framework under which a company, an extractive company such as BP is able to put together a security framework for this enormously complex energy project.  It is, in fact, an oil pipeline and a natural gas pipeline, together a number of pumping stations and other infrastructure along the way and as you mentioned, going through three different countries who don’t necessarily coordinate as much as they ought to. 

    So it’s a major thing and the framework that allows, I think, an extractive company such as BP or the BTC Consortium to do this effectively is called, in this case, the Voluntary Principles on Security and Human Rights, which is a legal framework that was actually drafted by the U.S. State Department and the U.K. Foreign Office together with input from a number of sort of international NGOs because not only is it the voluntary principles on security, it’s also the voluntary principles on human rights. 

    So part of the idea is that as, if you will, Western-based extractive companies working in other parts of the world need to apply international standards to the way in which they provide for security, they also need to provide for this important human rights aspect and I’ll come back when I talk about the lower level of security, but why this is so important, the human rights aspect, but this international legal framework which then countries sign up to. 

    So a number of Western countries and then a number of countries in which there have been projects have signed up to this so that there you have, if you will, far better coordination between, in this case for example, the U.S. and U.K. governments that drafted these voluntary principles but also, then, the host governments at the national level so they’re all on the same page about what is required because the voluntary principles breaks down in a rather clear way what is required from all the different actors. 

    So once you sign, for example as was the case with the BTC, security protocols with each government, it becomes quite clear how they ought to, at least on paper, work together and you can use that then as a framework. 

    So it’s extremely important, I think, to have that framework there from the get-go and I think it’s enormously important at least in the BTC case and part of the reason why it has in fact become then the industry standard for infrastructure protection, particularly for pipelines, but now it’s being applied in lots of other areas, and it’s worth nothing, for example, that the World Bank and EBRD have actually adopted the voluntary principles as a framework for lots of their operations in other parts of the world based on the BTC model providing security for projects that they are involved in or that, for example, IFC is involved in in specific infrastructure projects around the world based on the BTC experience. 

    So you have that overall framework in which you have the input of – it’s drafted by governments, the input of NGOs – in this case, for example, Human Rights Watch and Amnesty International – organizations that you normally don’t see working with, for example, BP or other members of the – that are part of the BTC Consortium. 

    But in this case you do and I think that’s incredibly important and why is that incredibly important?  Because let me just briefly talk about sort of at least in this case – and Ambassador Wilson mentioned this – this is something that has been talked about quite a bit in this part of the world and I think it’s worth kind of reminding us what are the sort of basic three baskets of risks that one comes across – sort of pipeline infrastructure –

    MR. WILSON:  Maybe just a quick summary so we can go on.

    MR. PETERSEN:  Sure, sure.  I mean, you have basically in this part of the world the spillover of potential conflict, whether it’s the Nagorno-Karabakh conflict or the conflicts in Georgia.  Then you have sort of deliberate terrorist attacks or sabotage.  Some are trying to blow up the pipeline or some other kind of sabotage or then you have, which is more of a perennial problem which is in this part of the word when you don’t have a pipeline that’s, for example, underground the way that BTC is which is tapping of the resources going through the pipeline from local communities.

    That brings me to the final, the sort of local bit, which I said you have this overall legal framework which then allows you to provide for the key pieces, not just the technological pieces of infrastructure protection but what I think are the really important ones, which is in fact the relationship with the local communities because, sure, a company such as BP as the operating company can come in and provide all kinds of fancy monitoring systems and those are required.  They’re necessary. 

    That said, the force multiplier, if you will, of having good relationships with the local communities so that they have a stake in infrastructure protection so that, number one, they’re not, as was initially considered a problem with the BTC pipeline, that they might tap into it to get oil either because they live in poverty or they want more fuel for something, but then also to actively involve them in it, right?  So they have a stake. 

    For example, in this case, part of the reason why it’s become an industry standard is you had horse patrols, for example, along the right-of-way of the pipeline that were organized by BP as the operating company but the horse patrols were actually local individuals from the villages along the right-of-way.  So they would patrol their section of the pipeline and it gave them a stake.  They received a salary from the operating company in this case to do that and it became an enormously successful program that in other ways has been replicated in other parts of the world. 

    Another one is having community liaison officers in the villages, in the local communities along the way to address concerns that they have about, for example, eminent domain issues and so on.  So if you will, another one, a key thing of course is development projects which is a key thing that the BTC Consortium did was providing lots of local development projects.  Now, you might say, well, a lot of people did at the time.  What’s the direct connection between a development project and why is it that you do these?  Is it for corporate social-responsibility reasons? 

    Well, actually no, it’s for hard security reasons, right?  Because as soon as you get that local community on your side, you begin to get the intelligence that you need, the local intelligence about what potential threats may be.  You get the local community actively, for example, in terms of the horse patrols, protecting that infrastructure, and then you get an extremely good relationship going forward in which you ameliorate, at least to some extent, frictions that could lead to some of the three baskets of risk that I talked about. 

    Just another piece I’ll add to on the end of it, yeah, is that training is a very key part of this.  So along with that relationship with the local communities under the human rights sort of umbrella, it was extremely important in this case that the BP operating company and the BTC Consortium provided for training for, in this case, the Georgian and Azerbaijani pipeline security forces in what you might call Western standards of human rights way of operating so that their relationship with the local communities didn’t compromise the infrastructure security of this pipeline either.

    MR. WILSON:  Good.  Thank you very much.  Paul, maybe you can help us rise above the world of pipelines and look a little bit more broadly at issues including some of the kinds of things that you do in the cyber Internet sphere.

    PAUL TWOMEY:  Yeah, well, I was just amused by the idea of horse patrols versus the Internet.

    MR. WILSON:  Horse patrols and the Internet.

    MR. TWOMEY:  Yeah.  So first, I’d start with an apology.  I should do a public apology.  For the last 10 or 15 years, I’ve been heavily involved in promoting the Internet as a great and good thing, the last 10 or 11 years in leadership of ICANN, the organization that actually coordinates the backbone of the Internet, and we found at ICANN in ’89 – sorry, ’99 – there were less than 60 million users of the Internet.  Now, there’s about 1.8 billion and there is one point I’d build in.  If you used a browser, you go into a browser and you type in a URL, sometimes you’d find those funny telephone number things at the bottom, 202.46., whatever, whatever. 

    Now, it’s heresy, but they’re telephone numbers for computers.  That’s a complete heresy.  If there are any engineers here, they would stone me to death.  We have 4.2 billion of those and we’re running out this year, and we’re moving to a new system which has 340 trillion, trillion, trillion of those addresses and we think they plan to last for 50 years but there are worries that they’ll run out in 20.  So why am I making that point? 

    The point is everything is connected now in ways that I would say nobody in this room, myself included, has any, any comprehension about, degree to which things are connected.  Every device that you have – most households – we’ve taken OECD countries now, you’re moving to an environment where most houses will have 20 devices that are connected to the Internet in ways that people won’t understand.  Why do I make this point?  Because it’s absolutely true in energy, it’s absolutely true in most manufacturing and production. 

    In all the survey work I have seen of major power stations, including nuclear power stations, you ask the same questions.  You say to people, is your system connected to the Internet, and the answer you get from the CIO is, no, and every auditor I know manages to get Internet connection into the supply room within a couple of hours.  You say to them, is your system connected to the Internet?  No.  Do you use voice over IP?  Oh yeah, sure.  Where’s your voice over IP?  Is it in the control room?  Yes, of course it’s in the control room. 

    Well, you know, I will find a way and I’m not a geek and I will find a way where the Internet connection and the supposedly separate SCADA systems are connected.  So my public apology is that those of us who have been heavily promoting the Internet and what it should be doing for is that it produces amazing, simply amazing empowerment of individuals and amazing reductions in transaction costs across the economy, just quite incredible. 

    Three-quarters of – my home country is Australia – three-quarters of the total productivity in Australia between 1995 and 2005 simply came from ICT take-up and the use of the Internet and that’d be pretty much true in the United States and you can basically go country by country and it’s these big impacts of this uptake of this reduction of transaction costs. 

    The trouble is it’s made it easier for the crooks because they run business models and do the same thing and probably most significantly – well, in some respects in this area significantly – it has certainly increased the capacity both of state-based espionage and state-based cyber warfare to think about how they can use these tools specifically in this arena. 

    So to take us to the cause célèbre of this week, Stuxnet, which is a new malware thing that’s getting a lot of attention, and actually pretty clever, is a further illustration of the cleverness of people who can actually find ways of getting around even not being connected.  So it looks like this piece of malware was built by five-to-10 people over a six-month period. 

    It used four zero-day attack vectors, which is basically jargon for saying four times cleverer than anything else we’ve seen, to get inside – to get inside a Microsoft operating system that immediately targeted a Siemens Block 35 command control software specific to power stations, or it seems to be specific to power stations. 

    Now, coincidently, the Bushehr – I don’t pronounce that word properly – Ross does a much better job than I do – power station in Iran runs those systems, and indeed if you were watching any television programming of inspectors going through that plant and you were looking for this, you would have seen it on some of the screens and people have gone back. 

    Basically, if you run an energy company or anything like that and you’ve got any media come in, turn the screens off.  You wouldn’t believe the number of people who go through looking at all the visual they can to see what operating systems are sitting on the computer screens in the background of the video. 

    So if you look at the background of the video, you can see what operating system that power plant was running and this has been a very clever piece of software.  It was probably introduced through infection of the Russian consultants who were working there and they probably were brought in with a USB key that they didn’t know they were doing and the impact of it is that it has the ability to turn of devices or to change devices that operate in 100-millisecond type timeframes.

    The Siemens corporate operating system – these sorts of command-and-control SCADA systems are very widespread in the factory floors, very widespread in energy, very widespread in pipelines, et cetera, et cetera, and this thing is one of the first public – is the first public illustration of a very sophisticated attack.  It’s either been done by a nation-state or it’s been done by some very well-financed private individuals. 

    So it’s cheaper, there’s less blood, you’ve got no attribution and it can be more effective than things you would use kinetic for, to use the American language.  What we used to say is blow up where I come from, where you blow things up.  It’s cheaper and more effective.  So I sell fear really in the sense that this is going to be one of those areas that people are going to have to take very seriously.  I mean, I know they do.  We’ve got surveys already which show 60 percent of respondents from critical infrastructure providers saying that they’ve been targeted by foreign government representatives, 90 percent saying they were targeted by fairly sophisticated criminal-type attacks. 

    It is going to be an environment where we’re going to have a series of policy issues in front of us about what limitations are we going to put upon these sort of tools and cyber weapons, et cetera.  But for the people who actually run these things, for the people who actually are making money on relying upon them, the bottom line is we’ve all taken – in some respects, you can’t run pipelines without this stuff. 

    So we’ve all taken the economic benefits of these new technologies.  What many of us have been lax in is understanding what threats came with the benefit and every technology in human history has brought threats.  What we’ve done is say – and often it’s frankly an age issue, how old were you when this all came in. 

    People have said I don’t understand how it works but boy, look at the efficiencies.  I’ll have one of those, thanks, or, that looks really great.  I’ll take all the money, please, and what they haven’t understood or actually even wanted to understand is what’s the risk that comes with it and the risk that comes with it is the reflection of its benefit – huge connectivity, a lot of anonymity and you can do very clever things with it. 

    So cyber is going to be – because it’s becoming the underpinning – it is the underpinning technology of the 21st century, it’s going to be a thing that’s going to occur in all discussions around critical infrastructure protection at all layers.  Most of the power – I’ll finish with this – most of the power plants that have been looked at in terms of this area and said were you aware were not aware that they were connected to the Internet, even when they were very careful about what had gone on in the control rooms. 

    What they didn’t realize was the equipment manufacturers had all put Internet connectivity into the devices they supplied to monitor and maintain.  Okay, so even thinking in your household now, what we’re going to be moving to is your refrigerator and your washing machine and others are going to basically like your computer does now, constantly – your computers constantly go back, keep telling the software companies what needs to be updated. 

    So unless you’ve got great software on your own computer, you don’t know whether your computer is talking to some bad guy or talking to your software operator.  We’re going to have the same problem with all sorts of devices. 

    So I think there’s going to be a whole sort of wake-up process we need here, not just about how do you counter cyber issues but how does it get into your business risk management, how does it get into your risk transfer and your insurance processes and how does it get into your legal reviews of supplies.  What are they telling you they are actually doing and what legal liabilities they have if that gets exploited.  I could go on for hours but I’ll now stop.

        MR. WILSON:  Technologies, devices, hopefully you can sort of spread the gap between pipelines on the one hand and some of the issues that Paul was talking about.  Please, take five minutes and then we’ll have some questions.

    LUCA IZZOTTI:  Yeah, I’m surprised to hear some issue that I have already heard on other system design like our traffic control of our civil system, military system.  The problem is always the same and starting from this cyber-security factor, I want to point out that the solution is never just technological.  So it’s not a technology race and we do not need to make antivirals more powerful than Stuxnet because very often ,the solution is procedural.  You just lock your grid and nobody can enter and you solve the problem. 

    So this is just to point out how this design of the security into a system is many-fold, not just one issue but (every issue ?) together.  Do you know where infrastructure comes from?  Comes from Latin – I’m Italian, so I love Latin.  An infrastructure means a structure between other structures.  So that is the problem.  You have to defend something that is entangled to other things.  If you have a pipeline, you need to have power for the pumps and things like that in oil fields.  So you need to have water because we are to pump water into the oil spill and things like that. 

    So you have to clarify how this entanglement between these different systems is designed and very often it is not designed at all.  It just happens.  You have the customer.  That’s one single point in the system.  So the issue of security is an integrated issue and infrastructure is the most integrated system that you can address.  This is true from an engineering point of view but this is true from a general point of view.  All of our experiences in Sistemi Integrati is as you said, that the biggest problem that you get are in people integration, in organization integration. 

    So when you start to address the security design in a complex system, you start with an engineering design.  But then you have to match these engineering functionalities with a real organization and in this case you have a program, if the system is spread among different organizations because you have to locate clearly functionalities to use and to operate and very often these organizations have some legal constraints. 

    For example, they cannot share their data and things like that.  In terms of, for example, in the maritime security area, you are a Coast Guard admiral.  You know that there are problems like this.  You cannot share data, military data with the Coast Guard, for example. 

    So in line of principle, you can just interconnect the military system with the civil system and you have a wonderful maritime picture but you are not allowed to do that because they are different organizations.  So which is the lesson?  The lesson is that in the system design, you must take a clear eye on the constraint put by organization and you need to work with the organization to design a system that is really usable. 

    In our experience, this can be done effectively and quite often it also calls for change in organization which is not easy because of law things and other constraints.  But in some cases, like in the maritime security in Italy, the government had decided to have an inter-ministerial board where all the relevant organizations were participating to guarantee the security of a big infrastructure system like the maritime surveillance system. 

    I think that this is a valuable experience.  Unless you organize in transnational, transversal to different organizations, forum or panel or operational team, you cannot solve the problem and in this respect, the industry must take a role because you cannot spend very – set up the team and then you come in and say this is the system that you have to use.  You must build the system together with this kind of organization. 

    Then one last issue on this big thing, this is in the design approach.  From the industry point of view, there are also other factors that I want to point out that are related to the local people around the infrastructure.  When you build a security infrastructure or you put security into a system, in some way or the other you are forced to make offsets, that means to make people, look at people who work there simply because the market where you need more infrastructure are the markets where the labor cost is lower. 

    So as a business model, you are forced to move richness, wealth, part of the work at the local level and this put on a positive circle because we have to work at the start with the local organization to provide security, then you have to work with the local level forces because it’s better for you, you save money, and in this way you become more involved in the process and you’ve tried to reach the consensus that you could.  In this way, there is a positive feedback because the security rises and then you attract new investment. 

    For this reason, the terrorists, the unlawful organization, try to cut these positive feedback process to drain resources.  If they succeed, the impact is not just the blow up of something but is the very factor that they interrupted this positive circle and that the effect in the medium term is much higher because the investment will stop.  The company will not take the risk to build infrastructure there. 

    So in conclusion, this security issue is not real.  I have not heard about security, whether you were speaking about these big pipelines.  But this must be taken into account at the very beginning of that process of the design because of the constraints that I said because unless you do that, you can have a very bad surprise. Yes, security has a cost but also not to invest in security has a big cost and from my view, this cost is much higher than the benefit that you get if you invest in security.  9/11 is a good example of that.

    MR. WILSON:  Fascinating discussion, a lot of things I didn’t know anything about.  We have a few minutes for questions.

    Q:  Hi, one question.  We’re talking about all – everything is very good.  But I’m thinking of the example when does a security issue in pipelines that are always going to – (inaudible) – terrorists.  Take Iraq for instance.  Now, there’s going to be new pipelines going to be built.  Whether American companies or Italian companies – (inaudible) – willing to send their executive there to look at the projects because they cannot get their insurance policies sorted out so that they could be kidnapped. 

    So what I’m talking about is if you cannot go there effectively, help these areas where you have problem, how are you going to resolve it?  So are we not just making a round circle?  My question is like will Raytheon or Sistemi Integrati commit to those projects accept the Italians and Americans to work physically, hands-on, on the projects?

    MR. WILSON:  My answer might be you’re talking politics maybe more than security, but –

    ADM. JOSIAH:  We think that pipeline security through these areas is a difficult problem because they’re vulnerable over great distances.  They have equipment every so often to either isolate them or pumping stations. 

    You’re asking the question so I assume that you probably know in Iraq, some of the tribal leaders were hired to provide people for physical security.  But every time the bad guys showed up, they would leave.  There have been the use of sensors has been tried.  There are some unattended ground sensors which are kind of seismic sensors that can give you a warning if people get too close. 

    Now, some of those pipelines in Iraq run through populated areas and that’s not of much use to know that people are around because there’s always people around.  So you have a problem of trying to understand what’s happening.  It’s a situational awareness through either sensors or human eyes, cameras; maybe you can build some barricades and try to have fences to keep people away. 

    But when you have something that goes over thousands of kilometers, there’s a great many places where the system is vulnerable and probably the biggest problem is even if you could be aware that something was happening, somebody’s got to be able to get there in time to prevent it from happening and that’s the concept of operations part. 

    That’s a commitment of resources and effort not probably by a company like Raytheon because we’re not into security – some other company or the government itself that’s very substantial and very expensive over the long term.  So it’s not a panacea answer in a country like Iraq, where the volatility is so great.

    MR. WILSON:  With so many security problems.

    ADM. JOSIAH:  Right.

    MR. IZZOTTI:  Can I add on to his point?  I agree absolutely with you.  Basically, you can militarize everything and you put that at military level and start industry stuff.  But from an industry perspective, the best way to manage that is to involve the local people, make them work so they will help you in the security and the investment for you is much better than to put money and military system to defend the pipelines.  That doesn’t mean that if the bad guys appear with big weapons so you can defend yourself. 

    But the force, the amount of force that is required in this scenario to defend yourself from the big threats is much lower because, as the admiral said, it is important just to call the guys, the military guys in time to react and if you have a sensor on the ground, that means people, local people supporting you, you normally have this time.  So I think that industry take a vital role in delivering wealth to this population because basically he has an advantage in doing that for the reason that you quoted.  So I think it is a very important point.

    MR. WILSON:  Thank you.

    MR. PETERSEN:  If I could add just a quick point, a great counterexample to what I was talking about and this touches on the current situation in Iraq where we have the experience.  This is not an indictment necessarily against this particular company but we do have the experience, very well-known, of Shell in the Niger Delta which for the past almost 50 years now has been a perfect example of not liaising and coordinating with the local communities in the way that you could and having a problematic relationship with the central government.

    And we can see the result and you were talking about the sort of cost-benefit analysis of the security first and then what – I mean, frankly what Shell has lost over the years in terms of because they didn’t make the initial investment that they could have in providing for security in relationship to the local communities has been enormous frankly.

    MR. WILSON:  Other questions?  In the back there, yes please, if you could just identify yourself?

    Q:  Yes, good afternoon.  I’m John Supe (ph).  I’m the head of BP in Turkey.  Another hat I wear is that I’m the head of the BTC Consortium in Turkey as well and I was delighted to hear such a passionate description of how well we’re doing in terms of securing the pipeline for our shareholders.  My question is about asymmetric risk.  Do I need this?

    MR. WILSON:  Probably not.

    Q:  My question is about asymmetric risk, the type of risk which is low-probability risk, high impact.   9/11 is an example we’ve seen.  Gulf of Mexico, although not security related, is another example of asymmetric risk.  Perhaps a little more closer to home, on BTC in 2008, we suffered a sabotage attempt, a small amount of explosive, weeks and weeks of media coverage on the spill and what have you.  What are the two or three main factors that companies who have major infrastructure need to consider in order to protect against asymmetric risk from a security perspective?

    MR. TWOMEY:  Well, cyber security is the ultimate asymmetric weapon at the moment.  Just ask the Chinese.  (Laughter.)  And the thing that’s really, for me, really fascinating about all the discussion of cyber security tools, cyber security weapons, is understand the enemy.

    And what is interesting in a lot of the discussion around cyber security issues in the commercial space and even a little bit in the national security space but certainly in the commercial space is that they get caught up I think in a quite bizarre, almost Asperger’s syndrome nature of engineering which is if I can’t give you absolute certainty about where something’s come from, attribution, the whole question of attribution, then I can’t tell you what it is. 

    So people treat these sort of risks as the cloud, the sort of – we’ve got the sense of the cloud out there and this thing came from the cloud and we don’t know what happened.  Well, I actually think we should be much more thinking about profiling and really sort of thinking about who are the potential risks and tracking those people.  I mean, it is feasible.  There are people who do, do this in the commercial space, let alone getting in through other agencies, of thinking much more who is likely to use one of these tools.  Who’s likely to produce these sorts of things?  Why would they do it?  What incentives would they have? 

    When you start thinking about that, let’s just take oil for example, there is going to be – I’m willing to put money on it now there will be a hacktivist attack.  There are going to be the same people who – if people are willing to put as much money to stop Japanese whaling in the southern oceans and ram ships into ships or whatever, somebody’s going to dream up that there’s got to be a way to stop the hydrocarbon fuel cycle and somebody’s going to say what’s the best way to do that and somebody’s going to get into contact with the mafia business model that can do this and somebody’s going to figure out it’s really damn cheap. 

    If you’re running hydrocarbons and you haven’t thought that through, shame on you frankly and that’s the sort of thing I think when you come to – when you talk about the asymmetric – is just think through incentives.  Who’s got incentives?  Who’s likely to start thinking about it?  What mechanisms can we start doing situational awareness, intelligence gathering about who might be there?  What sort of tools have they learned to use and I think the next bit on that in the cyberspace is basically on resilience. 

    There is no such thing as security.  There is no such thing in the Internet world as security.  It is impossible to build technology to put in the next fancy piece of hardware that will secure your system.  That’s all what’s – it’s necessary but not sufficient.  You’ve got to do all that nice techie stuff.  The next layer above that is simply the expectation that you’re going to be confronted with attacks.  How do you look at those attacks, how do you identify them, what resilience do you have. 

    It’s the same thing you’re doing for physical, right?  You’ve undoubtedly exercised somebody’s going to blow up a piece of the pipeline. You’ve undoubtedly thought about how to deal with that. You’ve undoubtedly thought what’s our response going to be.  It’s the same thing in the cyber world.  What are the responses we’re going to do?  How are we going to do them?  How are we going to respond to them?  Who’s going to do what, that sort of stuff.

    MR. WILSON:  Anybody else want to take a quick crack?  Admiral?

    ADM. JOSIAH:  Yeah, I’m kind of on the same theme as Luca here.  I’m going to use the Deepwater Horizon.  When you have something like that happen, whether it’s because of human error or mechanical failure or inadequate design or maybe somebody, some smart terrorist went down there with a remote-operated vehicle and blew up the – blew it up or whatever.  But there’s a lot of ways that something like that could happen. 

    The consequences of it are of course enormous.  The economics that spread to who knows how many companies at sea and ashore and we probably won’t figure out what the total impact there was for a long time. 

    But in a way, that comes from a failure to consider the worst case scenario that might have happened and I think if you look at some of the disasters that have taken place around the world, over and over again you see that it’s hard for governments or people to actually contemplate what could happen and what the economic consequences might be and prioritize and spend the extra money. 

    It’s hard to spend that extra money in this kind of a global environment to try to prevent or provide layers of protection of something to happen.  But in Raytheon, we espouse use something called the design basis threat, designing based on a high priority.  It might be small likelihood, big consequence kind of threat and then finding the worst case scenario to build your design around and so for us there’s lots of examples of this. 

    Katrina, which of course wiped out communications, the hurricane, in much of the Gulf Coast of the United States, but also shut down the oil industry for a good long time, all kinds of damage to the drilling rigs out there and I think there is remedial thinking taking place right now as to how to have some of those systems beefed up so that that quite can’t happen in as bad a way again.  But it comes back to this starting point where security and safety kind of merge together in our thinking here a bit.

    But you build it in at the design stage and you have to actual have the ability to think through how bad things might get and what the consequence might be so that you can see there’s a return on your investment by protecting the investment with that early design improvement.

    MR. WILSON:  It’s a good question, got some interesting stuff. Eric Melby?

    Q:  I’m Eric Melby.  Where do you draw the line between trusting your employees to protect all the infrastructure and suspecting that they might be either overtly or covertly an entry point for weakness?

    (Cross talk.)

    MR. IZZOTTI:  So I believe that you need to design a security system from the beginning taking into account the people as you are addressing, taking into account people miss a lot of things.  It doesn’t mean that you have a policized (ph) infrastructure where police is everywhere and the intelligence is everywhere. 

    But you need to have implemented into the system some things about your people that suggest strange behaviors.  So normally, without going into very sophisticated security system like those ones that belong to governments, you can implement quite weak security system that just rise a layer, tell you the reason something is strange which is out of the normal behavior. 

    So I think that it is very important to have a light counter of all your employees because if employees feel they are harassed by the security, they do not work appropriately. But not doing anything is a big mistake and for this reason you need to design the things at the very beginning. When you say what the company must care for, they need to care for security at the very beginning of the design phase, not later on, because in this way we can take into account into the system solution to this kind of problem.

    MR. WILSON:  Paul, anything you want to add?

    MR. TWOMEY:  The Internet and cyberspace is actually, I think, basically a biological system and I think one of the debates – I had this discussion in India and other places – this thing, the tendency to see it in terms of security is probably wrong.  I think the model is much more public health, that we actually should think of the way in which people could impact security much more like the public health model which means we’ve all got a responsibility to look after our own health .

    Somebody’s got to play the role of the doctor.  You’ve got to pressure them to go and see the doctor if you get sick.  Somebody’s got to be the Centers for Disease Control.  There’s got to be hospitals and then even if you in the normal environment had a system where everybody had to be healthy when they came into work and all that stuff, you’re going to get pandemics and people are just going to get sick.  So the trick is you’ve got to be resilient and respond to it. 

    Now, I think, to come to your question about your people, you want them to do the right thing.  You do the usual stuff. But you should make the assumption that just like they can all come down with bird flu, they might be the vectors in which you might get a cyber attack and as a consequence you should be thinking about that and I find it interesting certainly in the Western-Pacific part of the world.  

    It’s fascinating talking to executives who have got complete programs for SARS, know exactly what to do, these whole national program systems if SARS breaks out, but you talk about a cyber event and they just go, huh, and yet in some respects it’s a very similar sort problem but it’s all about building in the resiliency.

    MR. PETERSEN:  I’ll just make a quick three words.  I think it goes probably to your question but also the previous question, at least when we were doing reports on assessments of infrastructure security, one of which was for example BTC, is we talked about intelligence, redundancies and the relationships. 

    So part of the mitigating against what your employees might be doing are those redundancies but also intelligence about them, not necessarily in a kind of big-brother way.  But it’s also if you think about those three though, and relationship of course being good a good relationship with the people that you work with, good relationship with host governments, good relationship with security first responders, et cetera, et cetera. 

    But it’s also keeping in mind from the sort of private sector standpoint, fulfilling those three pillars – intelligence, redundancies and relationships –  is not necessarily something that can be done if you are trying to as a company do more for less.

    MR. WILSON:  Thank you very much.  I’m mindful that the next panel, which is the whole group, convenes at 3:45.  So please join me in thanking our panelists.  (Applause.)

    (END)


    Read More
  • BSEEF 2010 - Luncheon and Special Address: 09/30/10 - Transcript

    Back to Black Sea Energy and Economic Forum 2010 event page

    THE ATLANTIC COUNCIL OF THE UNITED STATES

    BLACK SEA ENERGY & ECONOMIC FORUM 2010

    LUNCHEON AND SPECIAL ADDRESS

    WELCOME:
    ROSS WILSON,
    DIRECTOR,
    DINU PATRICIU EURASIA CENTER,
    ATLANTIC COUNCIL

    MODERATOR:
    CEM DUNA,
    PRESIDENT,
    AB CONSULTANCY AND INVESTMENT SERVICES

    SPEAKERS:
    RICHARD MORNINGSTAR,
    SPECIAL ENVOY FOR EURASIAN ENERGY,
    U.S. DEPARTMENT OF STATE

    THURSDAY, SEPTEMBER 30, 2010

    Transcript by
    Federal News Service
    Washington, D.C.

    ROSS WILSON:  Good afternoon and welcome again to our luncheon on the second day of the Black Sea Energy and Economic Forum.  Eating is always an important part of these events, but the Atlantic Council, I think, puts a high priority on using every minute of the full time that we are in Istanbul together for substantive discussions that are of interest to us.

    This particular segment will feature two people.  First, Ambassador Cem Duna, who will essentially moderate a discussion following Ambassador Morningstar’s remarks.  Ambassador Duna has a long and distinguished career as a Turkish diplomat. 

    He served in some wonderful places – Copenhagen, the Hague, London – Jeddah, maybe not quite so wonderful – also in Geneva, as Turkey’s ambassador and permanent delegate to the United Nations office in Geneva and its chief negotiator during the GATT round of global trade negotiations. 

    In 1991 to 1995, he served as Turkey’s ambassador to the European Union and played a major role in the negotiations that Turkey had to join to form a customs union with the EU, or probably the EC at that particular time.  Currently, he’s president of AB Consultancy and Investor Services here in Turkey, a friend to many of us.

    Our keynote speaker is Ambassador Richard Morningstar, a longtime friend of mine, somebody I worked with closely in the State Department in the 1990s.  He is currently Secretary of State Hillary Clinton’s special envoy for Eurasian energy.  He’s been in that position since April, 2009.  He had a similar role for President Clinton and Secretary of State Albright when he served in 1999 to 2001 as special advisor to the president and to the secretary of state for Caspian energy – for Caspian Basin energy diplomacy. 

    He was, in addition – prior to that, in the Clinton administration, he served as special assistant to the president and advisor to the secretary on assistance to the states of the former Soviet Union, which position took him to every single one of the countries that emerged following the collapse of the Soviet Union.

    Ambassador Morningstar brings a tremendous depth of knowledge to the mission that he’s engaged in now.  I think he’s done a lot to refocus and regalvanize American diplomacy on energy issues.  We’re delighted to have him.  Please welcome Ambassador Cem Duna and Ambassador Dick Morningstar.  (Applause.)

    AMBASSADOR RICHARD MORNINGSTAR:  Well, distinguished ministers, distinguished former national security advisors and distinguished guests, first of all, thank you – thank you very much, Ross, and congratulations to you and to Fred Kempe and the Atlantic Council for this remarkable and amazingly successful conference that you are having in Istanbul this week.

    You know, when I started this job 18 months ago, I was frequently asked, what had changed since my work on regional energy issues during the Clinton administration?  I thought then that I had some good answers, the respective roles of Russia and Europe, the relative importance of gas versus oil, the emergence of an LNG spot market, expectations for the global economy.

    Recently, though, I’ve come to the conclusion that there is a simpler answer.  Just about everything has changed.  And what’s becoming clearer to me is that the pace at which basic assumptions about Eurasian energy security are changing is, if anything, increasing. 

    When I started my current job, to say nothing of when I was Caspian energy coordinator a decade ago, shale gas was not even discussed.  Prospects for future Russian-Ukrainian energy cooperation looked slim to none.  Few would have predicted that suppliers like Russia would be willing to renegotiate take-or-pay terms of existing agreements.  Nobody was predicting that the United States would become a net exporter of gas.

    The lesson that I draw from this is that any serious effort to address the complex, interrelated problems of Eurasian energy needs to be taken with humility.  Assumptions that look rock solid today can change and can change quickly.  If we build in that realization up front, we’re most likely to come out at the other end with solutions that work.

    That said, you obviously can’t plan without making assumptions.  And those assumptions need to be based on the best, most realistic analysis available of the context in which decisions will be made.  Based on my work of the past 18 months, let me share with you today my sense of the context of the realities we face in our work on Eurasian energy during the period ahead.

    First, we’re moving inexorably out of the world of zero-sum.  There may have been moments over the past decade when one or another player had the cash or the clout to pull others along with it on a specific project or projects.  Not anymore.  Political will is a necessary but not a sufficient condition for realizing major projects. 

    Lasting solutions to the problem of securing the orderly, efficient transportation of energy throughout the Eurasian marketplace will require a high degree of compromise and common benefit or they may well not happen, which is another way of saying that big ideas need to be bankable.

    At the risk of stating the obvious, some of the major projects that have been on the drawing boards for a while are breathtakingly expensive – too expensive, in most cases, for any single actor to pay for out of petty cash. 

    Given the uncertainty of energy markets and the aftershocks of the global financial crisis, finding financing for big, new projects will more than ever require a sound business case, one that not only makes sense in terms of economics, but that factors in the risks in a region where predictability can be an issue.

    One big challenge in making a convincing business case is the reality that energy demand and supply both loom as major question marks today.  While there is every likelihood that energy demand in Europe, including Turkey, will return to and eventually exceed pre-slump levels, it’s not at all clear how fast this will occur.

    And on the supply side, shale gas and other developments could emerge – and I emphasize could – emerge as real game changers.  Some argue, for example, that the U.S. could, in fact, become a substantial exporter of gas to Europe and global markets in just a few years.  There are companies that are working very hard on this.

    This means that some very big investment decisions may have to be made on the basis of best guesses that may or may not hold up.  And that implies, in the short- to mid-term that the smart approach to energy security, particularly for specific countries or regions may be local and incremental, an approach that focuses on getting the most out of or adding marginally to existing infrastructure.

    Within Europe, for example, there is much that can be done in terms of connecting existing gas and electric networks and building gas storage that can pay significant dividends in return for minimal new investment.  Indeed, the EU has committed several billion euros for investment in such facilities.  The EU has also correctly recognized that improving energy efficiency, investment in renewables and liberalization of energy markets are smart moves that can make a real difference in the near term.

    But my final point in this quick reality check is that much of what I’ve just said notwithstanding, there will remain a place in the Eurasian energy security picture for new, major infrastructure projects.  At the end of the day, demand for Eurasian energy will exceed the ability of existing infrastructure to supply it.  There is nothing that comes close to matching the reliability and economies of scale that large-capacity dedicated pipelines or a similar fixed infrastructure can provide. 

    Based on the torrent of press releases that come through my office on a regular basis, it would appear that there are a lot of people out there who would agree with at least my final point.  South Stream, White Stream, MedStream, Blue Stream-2, an Arab pipeline, pipelines from Qatar, from northern Iraq, from Samsun to Ceyhan and Burgas to Alexandropoulos, from Turkmenistan to India and of course, Nabucco, ITGI and TAP. 

    It’s a confusing picture.  And of course, not all of these projects will get off the drawing board in view of the realities I’ve just been talking about.  So what is the Obama – what is the Obama administration’s approach to this plethora of projects?  Our approach is grounded in certain core principles.

    First, Europe’s energy security is in America’s national interest.  Our economies are interdependent.  An energy-secure Europe is in the U.S. national interest and vice versa.  Next, diversity is good.  Just as in investing, having alternatives in terms of sources of energy, suppliers and transit options will ultimately benefit all players.

    The best solutions are those that the market produces.  Indeed, given the need for bankability I described a moment ago, they are likely to be the only solutions.  Based on these principles, some of the projects and ideas that have surfaced have made more sense to us than others.  And we’ve said so.

    We have, for example, strongly supported the concept of a Southern Corridor to complement existing networks for moving gas from Eurasia to Europe.  We’re working with the EU and Ukraine to make the Ukrainian gas transit system more reliable.  We’re engaged on a wide range of energy issues with Russia.

    We’ve worked with international oil companies along with Azerbaijan and Kazakhstan to develop means to move the anticipated increase in Kazakh oil production to world markets.  We’ve facilitated exchanges of information and expertise on emerging technologies like shale gas, where the U.S. has unique experience.  We’ve worked across the region on realizing the potential of clean energy technologies, including energy efficiencies and renewable energy. 

    As we look ahead after 18 months of work, the principles I’ve enumerated will continue to guide U.S. policy on Eurasian energy.  At the same time, we should recognize that we’re entering what will be an especially important period for Eurasian energy, particularly as it relates to the diversity of gas supplies for Europe.  Indeed, in some respects, the period ahead will be decisive.

    What do I mean by that?  I mean, fundamentally, that a number of things will soon become clear.  First, it will become clear – and indeed it’s already clear – that there will be a southern energy corridor.  The June 7th conclusion of a Turkish-Azeri gas purchase transit agreement removed the last major uncertainty regarding terms for moving substantial volumes of Azeri gas across Anatolia.

    On that basis, the Shah Deniz-2 consortium, which is developing a large offshore gas field in the Caspian, is moving ahead with project planning.  Negotiations with potential buyers and shippers are underway.  Potential shippers of Shah Deniz gas, the Nabucco, ITGI and TAP consortia are lining up financing and putting in place the organizational structure to transport the gas. 

    A Southern Corridor is going to happen.  And I’d like to congratulate our Turkish hosts and their Azeri counterparts and commercial interlocutors for getting to yes after years of negotiation, although we do understand there are still details to be worked through.

    Second, it’ll become clear in the months ahead whether Turkmenistan will contribute to the Southern Corridor by shipping gas across the Caspian or will choose to focus on other routes for diversifying its energy exports, such as the TAPI project, which is – which they’ve been talking about a lot lately.

    The Nabucco consortium, supported by the EU, has worked hard to elicit a firm commitment from Ashgabat to ship its gas west.  The U.S., for its part, has supported the concept of a trans-Caspian gas pipeline since the ’90s.  This obviously is a sovereign decision for the government of Turkmenistan and it may well be that Turkmenistan will not agree to gas crossing the Caspian by pipeline in the foreseeable future.

    In that case, the window for its involvement as an early contributor to the Southern Corridor would inevitably close.  Given that, the Shah Deniz consortium – or given that the Shah Deniz consortium is looking to make their decision in the next six months, other sources of gas must be considered.  Even Azerbaijan might ultimately be a source of additional gas. 

    This leads to the third point.  It’s becoming clearer that prospects for bringing gas into the Southern Corridor from points further east and south are looking more promising.  At some point, hopefully sooner rather than later, but at some point, a new government will be formed in Iraq.  We hope that a priority of the new government will be to break the longstanding stalemate between Baghdad and Kurdish regional authorities on a hydrocarbon law and revenue sharing agreement. 

    This would bring important benefits to Iraq in terms of further development of its oil and gas infrastructure, of jobs and of revenue creation for both national and regional authorities.  It would also create the framework for a serious discussion of how to bring Iraqi gas into the Southern Corridor.

    Let’s be clear.  This is not going to be an easy discussion.  There are some domestic – Iraqi domestic priorities that need to be sorted out.  And in our view, any viable scheme for exporting resources from the north of Iraq must be endorsed by Iraq’s central government.  But there does seem to be a consensus among experts that Iraq does have ample gas in both the northern and southern parts of the country.

    Once these reserves are developed, Iraq should be able to meet domestic demand and export significant volumes without difficulty.  And we shouldn’t forget that Prime Minister Maliki said last year in Ankara that Iraq could provide 15 bcm of gas for Nabucco.  It’s also worth noting that Qatar is becoming an increasingly important exporter of gas to European markets and may now be more interested in exporting piped gas as well as LNG.

    Proposals for bringing Arab gas across the Syrian border to Turkey have also reemerged and reports of the size of the Tamar and Leviathan fields off the Israeli-Lebanese coast simply underscore the fact that to Turkey’s east and south, there is abundant gas to meet Europe’s long-term energy needs, even if other options remain blocked for now.

    One more thing will become clear in the months ahead.  Sometime between now and next spring, the Shah Deniz-2 consortium will decide which of the three groups vying to ship its gas to European markets gets the nod.  That decision will have profound implications for the three consortia, Nabucco, ITGI and TAP, whose business models rely on locking in early substantial volumes of Shah Deniz gas.

    Indeed, the consensus among industry experts is that given their competitive approach and the impediments to accessing non-Azeri sources of gas, only one of the three, at least in the short term, can remain viable after that decision.

    Commercial issues will principally determine the decision of the Shah Deniz consortium, whose members have a duty to their stockholders to cut the best deal that they can.  For our part, we have always said that we support the Southern Corridor.  Any of the three competing projects could, in our view, serve as the basis for that corridor.

    In fact, each of the pipeline consortia brings to the table elements that could provide added value to the Southern Corridor.  In the abstract, Nabucco would be preferable.  Nabucco has clear advantages in terms of meeting the needs of consumers in the eastern EU countries.  A dedicated large pipeline like Nabucco operating to international standards would have important advantages over existing infrastructure and might be the most profitable solution if operated at full capacity.  That’s why it’s important to do everything possible to line up additional early sources of gas from Iraq or elsewhere.

    The conundrum is that beefing up infrastructure could be, in the short term, the most cost-effective way to handle initial Shah Deniz-2 volumes, although that may prove – also prove to be easier said than done.  At the same time, no one seriously questions that in the long term, improvements to current infrastructure will be inadequate to handle expanding European and Turkish demand, and as new gas sources become available for the Southern Corridor, it will need a way to get to market. 

    So the question naturally arises, does this have to be an either/or moment?  The short answer is that although governments will continue to play a role, the markets will decide or will at least have the strongest voice in making the decisions involved.  But I think it would be a mistake to rule out outcomes that incorporate, through means like consolidation or staging, the stronger points of the various consortia.

    The challenge of the month ahead is to get the Southern Corridor up and running in a way that reflects current gas availability but also allows room to grow and that meets in a timely manner the needs of Europe’s less well-served consumers.  The competing consortia current business plans all fall short, in one way or another, of meeting that challenge.  Maybe this shouldn’t be surprising, since all three projects were conceived years ago in a very different environment.  Momentous decisions on Shah Deniz-2 gas are coming up fast.  It may be time to take another look at the assumptions underlying the competing projects for transporting that gas.

    This is a time when commercial creativity is necessary.  As I said at the opening of these remarks, a lot has changed with respect to Eurasian energy since I got into this line of work, but a constant has been, the markets reward those who can best adapt to change when circumstances require it.  I think that’s a good place to end.  Thank you.  (Applause.)

    CEM DUNA:  Thank you, sir, very much for this excellent presentation of the situation today.  I think it was President Putin who once said laying down pipelines is very easy.  All you need to do is put the pipes one after the other and bolt them and rail them and all that.  The difference is, he said, we have the – (inaudible) – and you don’t.

    Now, let me ask Ambassador the following question as a starter, and then I will take questions from the floor, and please, anyone who is asking questions, I will be grateful if we can have an idea about who he is or she is and then the question.

    I have in front of me an excerpt from the EU green paper on Turkey’s role as a transit country.  They say that Turkey is of strategic importance for the security of energy supplies to the EU, lying at the crossroads of various existing and future pipelines, carrying both oil and gas from many core producer regions, namely Russia and the Caspian Sea, the Middle East and the north of Africa.

    That fits very much to the picture that you have drawn in the long list of projects waiting to be implemented, if at all.  You have been very closely associated with the success of the BTC.  It was a project which, at the outset, no one really thought that it was doable.  But then, at one time, we had the constellation of stars arranged in such a way that it became doable and everybody was then supporting the project.  And it became a reality and it’s a success story today.

    What will be your interpretation of Nabucco, whether stars will realign itself and then we will have a more realistic approach to Nabucco and Nabucco as a project will come to life?

    AMB. MORNINGSTAR:  Well, first of all, to reiterate briefly what I said in the very opening of my remarks, I think the circumstances that surrounded the Baku-Tbilisi-Ceyhan pipeline are, in fact, very different than the circumstances that surround the Southern Corridor.  I mentioned some of those in my opening.  First of all, the role of Europe:  Europe had nothing to do with the Baku-Tbilisi-Ceyhan pipeline.  Russia is playing a different role than it did at that time.  There were any number of other differences that I mentioned. 

    There is also one other major difference that I didn’t spell out in my address.  Basically, at the time of the Baku-Tbilisi-Ceyhan pipeline, the companies who were producing oil in the western Caspian had no other choice but to get their oil out through that pipeline, because every other possibility was foreclosed to them.  Iran was not a possibility; Turkey, because of its position on the Bosporus, basically precluded a major Baku-Supsa pipeline.  There are already pipelines going through Russia, including the Caspian – the CPC, Caspian Pipeline Consortium that Chevron was so involved in.  There wasn’t a great interest in another pipeline going through Russia. 

    So the point at that time was, ultimately, if there was going to be oil leaving the western Caspian and going to the market, Baku-Tbilisi-Ceyhan was the only outlet open to the companies, and they in fact had to build it if they wanted to get their oil outlet. 

    This is a very different situation today.  First of all, there isn’t just one option to get gas from Azerbaijan to Europe.  We talked about at least three options today.  There may be others, so that the commercial realities are going to play – whatever they may be – are going to play a much greater role today, I think, than they did in the Baku-Tbilisi-Ceyhan context.  And it’s not going to be – whereas the producers, in effect, built the Baku-Tbilisi-Ceyhan pipeline, it’s going to be the consumers or the buyers that are going to build whatever pipelines come out of the Caspian with respect to gas. 

    So I think it’s a very different situation, and people always ask, well, why can’t we – why can’t this just be like it was with BTC?  Well, it can’t because it’s different.

    MR. DUNA:  Very good.  Now the floor is open for questions to Ambassador Morningstar.

    AMB. MORNINGSTAR:  (Chuckles.)  There’s somebody back there.

    MR. DUNA:  Where do you see that?  Oh, yeah. 

    Q:  Ambassador Morningstar, thank you very much for a very informative presentation.  Time and again, we come up with the difference between attitudes between Azerbaijan and Turkey and Europe and America concerning the necessity or otherwise of considering gas from Iran.  Yesterday, we heard the prime minister of Turkey saying, at one point, that he doubted the reserve base was there for Nabucco, and then suddenly, later on, in a separate section, saying that Nabucco was approved by Turkey and that everything was fine.

    It did seem to me as if he was trying to indicate that Turkey still looks to Iran as a source of gas for Europe.  I just wonder whether you would comment – whether you, yourself, consider that that is indeed Turkey’s position, or whether you think there is sufficient gas available without relying on Iran.

    AMB. MORNINGSTAR:  Well, we have Minister Yildiz right here.  Maybe – (laughter) – maybe he should better answer that question.  And I don’t know that I would want to interpret anything that he may have said.  I can only tell you what the United States’ position is, and I think it’s also consistent with the position of the EU and most EU member states, that in fact Iranian gas will not be part of the Southern Corridor, certainly for the foreseeable future, given the problems that we have now with Iran.

    I do believe that there is – that that is a position that is consistent between the U.S., between the EU and member states.  So I don’t think it’s an issue.  In fact, one of the interesting developments over the last month or so is the Trans-Adriatic Pipeline, who, frankly, we had not paid a whole lot of attention to, announced that Iranian gas would not be part of their project, and I think that was a reaction to the present situation with respect to Iran.

    MR. DUNA:  Mr. Minister, would you like to take the floor and give us your opinion?  (Laughter.)

    (Mr. Yildiz’s remarks are delivered via translator.)

    TANER YILDIZ:  First of all, bon appétit.  Are we not a minority?  Now, I am very glad – we are all very glad to see the participants in Istanbul, this beautiful city of Istanbul.  Yesterday, in his speech, our prime minister said something.  He drew attention to a responsibility.  We have resources on our right side; or our left side, we have consumption, he said, so those need to meet.  And the prime minister said that he thought that Turkey has the advantage of being a meeting point.
     
    As far as supply security in energy is concerned, this project is part of solving security problems, be it Nabucco, ITGI or TAP.  This is the reason why when we think of the interests of the countries of the suppliers, if the interest of the EU member countries and the suppliers meets, then this project can be realizable and there is no reason whatsoever this project cannot be realized.  It can be realized.

    Now, Turkey did what it had to do, and it will continue to assume its responsibility.  Turkey will keep maintaining its positive attitude, constructive attitude.  Turkey will do whatever it did in all other projects, as far as assuming the responsibility is concerned, in this project as well.  But I want to draw your attention to a particular point.  If there are, indeed, reserves, it means that it cannot just be a commercial project. 

    In fact, it’s an important point to underline.  If projects are only merely commercial, then you wouldn’t just pay attention to the type of gas, but one needs to take into account the situation, the developments that are taking place in the region, the developments that are taking place in the world.  Maybe the project was conceived as such because of the developments that took place, but I think that if you just described this project merely as a commercial project, then it will not be sufficient.

    Our prime minister believes in this project.  Without his political support, the intergovernmental agreement couldn’t have been signed, and it was signed in July, so our prime minister believes that this project can, indeed, be realized.

    AMB. MORNINGSTAR:  Just to briefly respond, I want to emphasize that the energy relationship between the United States and Turkey is excellent, and I agree with you, Mr. Minister, that you can’t totally separate political – the political from the commercial.  But for any project – as a necessary precondition for any project that has to be commercially viable, because, you know, the companies are not going to get involved unless they have an appropriate return.  But obviously, the politics will always play some kind of role, so I would agree with that.

    MR. DUNA:  No questions?

    AMB. MORNINGSTAR:  Was it so all-encompassing, what I said in my speech, that no one had any questions? 

    MR. DUNA:  Definitely that was the case.  Oh, there you are.

    Q:  Hi, Ian Hague, Firebird Management.  We’re investors in Russia, including in the energy sector, and one question that I sort of have been thinking about since the panel earlier in the day was to what degree is work actually proceeding on the South Stream project?  From what I can tell, it has more of the hallmarks of a political initiative than an actual bit of infrastructure. 

    AMB. MORNINGSTAR:  Well, unfortunately, Mr. Scaroni, who spoke last night, is not here today because he could probably tell you better than I can because of Eni’s involvement with Gazprom.  There have been memoranda of understanding that have been signed with some Eastern European countries, but that – they’re just memoranda of understanding.  There’s nothing binding. 

    There are any number of issues that will still have to be addressed on South Stream, such as, how does South Stream get financed?  It’s not just Russia coming up with all the money, because Eni is a 50-percent owner.  It may go down to 40 percent if EDF becomes part of it.  And they’re going to require non-recourse project finance in order to do their part.  So it’s unclear whether that would become available.  There are any number of regulatory issues that need to be sorted out.  So South Stream – there are issues with all pipelines.  Certainly South Stream has many issues as well. 

    But no, there have been – there’s been no, quote, concrete work that’s been done at this point.

    MR. DUNA:  Thank you.  It seems to me your presentation has been so substantive that – encompassing, as you say.  Well, I suppose we will be thanking you for this excellent presentation, and I think we can go back to our dessert.

    AMB. MORNINGSTAR:  Okay, thank you very much.

    MR. DUNA:  Thank you.  (Applause.)

    (END)


    Read More