TESTIMONY BY AMBASSADOR RICHARD L. MORNINGSTAR,
SPECIAL ADVISOR TO THE PRESIDENT AND SECRETARY OF STATE

Thank you, Chairman Hagel, for providing this opportunity to update you on the status of U.S. efforts to promote a network of
multiple pipelines and an East-West energy transportation corridor that will bring Caspian energy to world markets and, in
particular, to discuss what needs to be done to make the Baku-Ceyhan Main Export Pipeline commercially viable. Having just
returned from a trip to the region, I can state that we have made substantial progress on our Caspian energy strategy and toward
realizing both the trans-Caspian gas pipeline and the main export pipeline for oil.

Explaining the objectives of our Caspian energy policy is central to underline what measures the U.S. should use to implement this
policy. U.S. support for multiple pipelines and the East-West energy transport corridor is part of our broader foreign policy interests
in the region. In general, our Caspian energy policy addresses four strategic objectives in the Caspian region:

Strengthening the independence, sovereignty, and prosperity of the new Caspian states and encouraging political and economic
reform;

Mitigating regional conflicts by building economic linkages between the new states of region;

Bolstering the energy security of the U.S. and our allies and the energy independence of the Caspian region by ensuring the free
flow of oil and gas to the world market place;

And, enhancing commercial opportunities for U.S. companies.

All of these objectives are important in their own right. They are also closely inter-related. For example, enhancing commercial
opportunities means increasing foreign investment. Higher levels of investment by energy and other companies should lead to
sustained economic growth, and when accompanied by economic reform, the promise of greater prosperity for the populations of
the new independent states. The establishment of market institutions and prosperity goes hand in hand with the emergence of
democratic institutions, which, coupled with economic growth, will solidify the viability of these states as independent and
sovereign countries. These energy transportation and development projects will also encourage these states to cooperate with
each other in pursuit of mutual economic interests. As these linkages evolve, they will help bind the economies of these countries
into broader European and global economic institutions.

MULTIPLE PIPELINES

The fundamental objective of U.S. policy in the Caspian, therefore, is not simply to build oil and gas pipelines. Rather it is to use
those pipelines, which must be commercially viable and environmentally sustainable, as tools for advancing the sovereignty and
independence of the new independent states and for establishing a political and economic framework that will strengthen regional
cooperation and stability and encourage reform for the next several decades.

The strategic objectives I’ve outlined, along with the political and economic framework that they underlie, explain why U.S. policy
endorses five particular pipelines in the Caspian region.

The two early oil pipelines: The northern route to the Russian Black Sea port of Novorossiysk, which has been operational for two
years, and the western route to the Georgian Black Sea port of Supsa, which will become fully operational in April.

The Caspian Pipeline Consortium (CPC) Pipeline from Kazakhstan to Novorossisyk: Construction is scheduled to begin in the next
few months.

The trans-Caspian gas pipeline (TCP) and the Baku-Ceyhan Main Export Pipeline (MEP) for oil.

Allow me to elaborate for a moment on the status of these last two pipelines: TCP and the Baku-Ceyhan MEP.

TRANS-CASPIAN GAS

The trans-Caspian gas pipeline represents the gas transportation component of the east-west corridor. TCP will compliment
Baku-Ceyhan, enhance regional cooperation, provide alternative outlets to international markets and is vitally important to
Turkmenistan’s future. Faced with no reliable export route for its natural gas through Iran or Russia, Turkmenistan’s economic
problems will grow increasingly severe absent a trans-Caspian gas pipeline and economic reform. The TCP will provide
Turkmenistan with its most viable option for reaching gas markets in Turkey and Europe, thereby creating a vitally important
revenue stream and increasing regional linkages between Central Asia and the Caucasus. But beyond the benefits of gas
revenues, TCP provides a vehicle for integrating Turkmenistan and the transit states into the international financial community,
thereby encouraging an extended process of economic reform.

TCP is now moving ahead at a healthy pace. Last October, Presidents Demirel and Niyazov signed a preliminary gas purchase
agreement. In January, Enron presented its TDA-funded feasibility study to the Turkmen government. And, on February 19, I
witnessed the signing of an agreement between Turkmenistan and the U.S. company PSG International to lead the consortium to
build TCP. The presidents of Turkey, Azerbaijan and Georgia have confirmed publicly their support for the project. We hope a
formal gas purchase agreement and an intergovernmental agreement, which are critical for arranging financing, can be signed in
the coming weeks. TCP is a success story for U.S. Caspian policy.

BAKU-CEYHAN

With the necessary positive incentives, the Baku-Ceyhan MEP will be a commercially viable route to carry Caspian oil to the deep
water of the Mediterranean, thereby creating a robust economic linkage between Central Asia, the Caucasus, and Turkey.
Baku-Ceyhan will avoid the commercial, political, environmental and safety risks posed by a significant increase in oil shipments
through the Bosporus. Moreover, Baku-Ceyhan will ensure that Turkey remains an integral player in the region’s economic
development thereby helping to ensure the sovereignty and independence of the new independent states in the region.

Commercial negotiations on a Baku-Ceyhan MEP have been taking place on a regular basis and have resumed again in Ankara
this week. The relevant companies now seem to understand why the above political realities make Baku-Ceyhan so important. This
realization has helped change the commercial and political landscape surrounding Caspian pipelines. Turkey clearly shoulders a
major responsibility for providing the incentives required to make Baku-Ceyhan commercially attractive. However, low oil prices,
capital expenditure reductions, and disappointing exploration results are important factors that must be addressed during
negotiations. We believe Turkey is willing to offer the necessary incentives, and believe that continued discussions between the
companies and countries of the region will lead to an agreement, that takes into account questions of oil price and volumes, to
build a commercially attractive pipeline to Ceyhan.

FACILITATING FINANCING

In addition to facilitating these discussions, the Administration views its proper role with respect to Caspian pipelines as a catalyst
for financing through our trade finance and investment agencies. Last May, Energy Secretary Peña announced our Caspian Sea
Initiative, an unprecedented effort by our three finance and investment agencies, the Trade and Development Agency (TDA), the
Overseas Private Investment Corporation (OPIC), and EX-IM Bank, to coordinate their efforts to promote investment in energy
projects throughout the Caspian region.

The first major step in this effort was TDA’s launching last April of a feasibility study for the trans-Caspian gas pipeline. Last
October, TDA announced a new grant of $823,000 to BOTAS, the Turkish pipeline company, for technical assistance. This grant is
allowing BOTAS to access U.S. technical, financial, environmental, and legal expertise for negotiations of the Baku-Ceyhan MEP
and TCP. TDA has recently provided similar assistance to the Turkmen Government for the TCP.

TDA, OPIC and EX-IM Bank have also opened the Caspian Finance Center in Ankara, Turkey – the first of its kind. The Caspian
Finance Center, staffed by representatives of our three trade finance agencies, will spearhead U.S. efforts to mobilize financing for
projects in the region. Congress has already underscored its support for this effort. Last year’s House Appropriations Committee
report language for the Foreign Operations Bill encourages OPIC to raise its internal limits on participation in Caspian energy
projects, subject to normal due diligence and prudent underwriting practices. My colleagues from TDA, EX-IM Bank, and OPIC,
who have joined me at the table this afternoon, can provide additional information on their agency’s efforts in support of Caspian
energy development in general and Baku-Ceyhan in particular.

Senator Hagel, you called this hearing to discuss what the U.S. government, both the Administration and Congress, can do to
make a main export pipeline from Azerbaijan through Georgia to Turkey commercially viable. We believe our proper role is that of
facilitator – to encourage the companies and countries of the region to negotiate in good faith on the commercial and political
factors that must be satisfied in order to make any of these pipelines viable. We are not attempting to force private companies to
build uneconomic pipelines. Turkey and the companies involved bear the brunt of the responsibility to make Baku-Ceyhan
commercially viable.

Estimates on the ultimate cost of a Baku-Ceyhan pipeline have varied widely – from a low of $2 billion to a high of more than $4
billion. But consensus appears to be building on a cost range below $3 billion. Turkey is considering offering a maximum cost
guarantee or completion guarantee whereby the Turkish government would be responsible for any cost overruns on the Turkish
portion of pipeline construction.

U.S. financing through TDA, OPIC and EX-IM Bank plays a critical role in making financing available, in mitigating risk to investors,
and in placing the weight of the U.S. government squarely behind the successful realization of these projects. OPIC’s political risk
insurance will also play a major role in protecting and encouraging investment. Flexibility will be required to allow our financing
agencies the wherewithal to structure their involvement in these groundbreaking multi-country infrastructure projects. The Caspian
Sea Initiative is an example of how we have tailored our efforts to meet the unique requirements for financing and investment in the
Caspian region. We do not ask for direct subsidies but we do ask Congress to work with us to provide the legislative and political
support necessary to allow these agencies to be as flexible as possible.

As Secretary Albright and Deputy Secretary Talbott have testified before Congress, Section 907 of the FREEDOM Support Act
(FSA) continues to impede our ability to work effectively in Azerbaijan and remains a serious obstacle to diplomacy in the region.
Section 907 has not advanced our efforts for peace. Moreover, progress on broad-based economic development and the East-West
corridor is undermined by our inability to promote economic, legal and regulatory reform in Azerbaijan. In short, Section 907
hinders U.S. interests. We strongly urge Congress to lift the legal restrictions on non-military assistance and repeal Section 907.

CONCLUSION

In conclusion, let me underscore that we are making solid progress on establishing an East-West energy transportation corridor. A
few years ago, few people took this idea seriously. Today however we are moving ahead on all five pipeline projects: early oil
pipelines, CPC, Baku-Ceyhan, and trans-Caspian gas. The U.S. Government stands ready to provide financial support for these
projects through the activities of TDA, OPIC, and EXIM Bank. The Administration and Congress are united in our determination to
support commercially viable projects. Ultimately however it is up to the countries and the companies of the Caspian region to work
together to develop commercially attractive, environmentally sustainable projects. The U.S. will continue to serve as a facilitator of
these discussions, in pursuit of multiple pipelines and the East-West corridor that will serve our commercial, political, and
economic interests.

Good afternoon, Mr. Chairman and members of the Subcommittee. My name is Edward M. Smith and I am President and Chief
Executive Officer of PSG International. PSG is a pipeline development company that integrates all of the services needed to bring a
pipeline from concept to operation. We were organized in 1998 to finance, build, own and operate pipelines, risking our own capital
to fund development costs and make equity investments. We do this in partnership with our customers – both countries and
corporations – who move their resources to market.

PSG is a 50/50 partnership of GE Capital Structured Finance Group and Bechtel Enterprises. Bechtel Enterprises is the
development, financing and ownership affiliate of Bechtel Group Inc., a leading global engineer-constructor. GE Capital Structured
Finance Group – SFG – is part of the General Electric Company’s financial services arm – GE Capital. SFG is an investor and
provider of innovative financial solutions for clients in the global energy, commercial and industrial, communications, and
transportation sectors. Importantly, both Bechtel and GE Capital have considerable experience in financing and developing major
projects like the TransCaspian pipeline.

I am happy to be here this afternoon to discuss with you the strategic economic importance and commercial viability of the
TransCaspian natural gas pipeline project. PSG has been awarded the project by Turkmenistan with the support of Turkey, both
countries friendly to the United States. I will briefly describe the project and our plans for development, as well as the importance of
the project to the countries in the region and to the United States.

The principal points I will seek to make are that the success of the TransCaspian project is critical to the interests of the United
States in the region and that the project will not succeed without the active support and assistance of the United States
Government. That support is required in two areas. The first is in helping to solve geopolitical threats to the project. The second is
in providing critical support to the private lenders and investors in the project through the financing and insurance programs of OPIC
and USEXIM, technical support from TDA and the support of the US Congress.

I will also try to show how important it is that the support be provided quickly. A competing pipeline, the Blue Stream project, is in
an advanced stage of development. Iran, too, has its own ongoing program to provide gas to Turkey. While the Blue Stream and
Iranian projects are substantially less attractive strategically, economically and politically than the TransCaspian, it is likely that
only one major gas line to Turkey can be developed at a time. The backers of the Blue Stream project and Iran are therefore
pushing very hard to position their projects as a barrier to the TransCaspian project. Turkey has announced its preference for the
TransCaspian and it is important that PSG and the US government support Turkey’s conviction and help it to maintain its position
by tangible evidence of performance.

Before I continue, I would like recognize the substantial help that the project has already received from the US government. I would
like to thank you, Mr. Chairman, for the support to American interests in the region that you have shown. The progress of the
project to date and the fact that an American company has been chosen to lead the development are due in no small part to your
support. I would also like to thank Ambassador Morningstar and Secretary Richardson for their tireless and effective efforts to
support the development of a sound energy policy for the Caspian Basin. Their profound knowledge of the issues and the deep
respect they have earned from the leaders in the region have enabled them to be effective guides for the development of the energy
resources of the region.

The TransCaspian pipeline is a private sector enterprise. Almost all of the ownership interests in the project will be held by private
sector companies. By the time construction begins, private sector companies will have risked millions of dollars in development
expenses, with no assurance of recovery. Several hundred millions of dollars more will be required from the developers as equity
investments to support the financing of the project. For the TransCaspian project, however, this commitment by private enterprise
will not be sufficient for the successful development of the project. The unsettled political nature of the countries of the Caspian
Basin, together with the active opposition to the project by the government of Iran and the backers of the Blue Stream project,
primarily Russia, mean that this private sector enterprise will not succeed without the active partnership of the US government.

The TransCaspian project will not succeed if it is exposed to a substantial risk of uncertainty as to the jurisdiction over the route of
the pipe or of the regulatory regime that will apply to the pipeline, as currently exists for the Caspian Sea. We expect that the
immediate problem of dividing jurisdiction between Azerbaijan and Turkmenistan can be solved by the parties with the help of the
United States. But the broader questions of jurisdiction in the Caspian Sea can only be accomplished through the agreement of all
of the countries bordering the Caspian Sea. Unfortunately, it is virtually certain that agreement will not be reached in the time
required to support the development of the TransCaspian project. Iran and Russia realize the importance of resolving this issue for
the success of the TransCaspian project, and for that reason their interests must be taken into consideration.

Turkmenistan, Azerbaijan and Georgia have all suffered crippling economic contractions since the fall of the Soviet Union. The
development of oil and gas pipeline projects are fundamental to the economic health and perhaps the survival of these countries.
With so much riding on the outcome of the commercial arrangements for these pipelines, there will be pressure for each country to
squeeze as much out of the deal as possible. While we understand the plight of the affected countries, and are determined to
provide fair compensation to each for the benefits provided, there is a danger that competition among them for the maximum
economic advantage could make the project uneconomic. The US government can play an important role in helping each of the
affected countries to co-operate in establishing a viable commercial structure that provides fair benefits to all.

The TransCaspian Project and Its Importance

The TransCaspian pipeline will carry natural gas from Turkmenistan to Turkey by way of the Caspian Sea, Azerbaijan and Georgia.
The pipeline as currently envisaged will be approximately 1200km long and 42” in diameter (with two 28” diameter pipelines used
offshore under the Caspian Sea). The length of the pipeline may vary depending on the final selection of gas fields in Turkmenistan
and the delivery point in Turkey. Pending determination of the final routing of the pipeline, we estimate that the capital cost of the
project will be around $2.5 - $3.0 billion. The line will carry 16 billion cubic meters of natural gas a year to Turkey, and will later be
expanded by an additional 14 billion cubic meters a year for sales to Europe.

On February 19, 1999, PSG signed an agreement with the government of Turkmenistan under which PSG will lead the
development of the TransCaspian pipeline project. The government of Turkmenistan selected PSG in co-operation with the
government of Turkey. In the February 19 agreement, PSG and the government of Turkmenistan established a milestone schedule
for development of the project. The principal tasks to be accomplished in the upcoming months are:

Establishment of a development consortium. We expect that other companies will join the development consortium in the coming
months.

Agreement on terms for the sale of gas by Turkmenistan to Turkey. All of the parties understand the importance of reaching
agreement quickly on the terms of the sale of gas.

Agreement on transit issues. The terms under which a pipeline will be built and regulated in all four countries – Turkmenistan,
Azerbaijan, Georgia and Turkey – should be settled soon.

Within the next nine months, PSG and the government of Turkmenistan expect to negotiate a series of agreements among the
development consortium and the governments of Azerbaijan, Georgia and Turkey that establishes the legal and commercial
framework for the project.

Another essential task is the establishment of an environmental protection program for the project. PSG understands that all
aspects of the development of the TransCaspian project, including especially the Caspian Sea crossing, must comply strictly with
both local and international standards for environmental compliance. A comprehensive environmental plan is under development to
guide the progress of the project.

The success of the TransCaspian project is of tremendous importance to Turkmenistan and Turkey, and to the United States.

Turkmenistan – Turkmenistan was once a major exporter of natural gas through a pipeline network that linked Turkmenistan with
the rest of the Soviet Union. Since the fall of the Soviet Union, however, Russia has largely blocked Turkmenistan’s access to that
network. Thus, natural gas production in Turkmenistan has fallen from 2.25 trillion cubic feet in 1993 to less than 0.75 trillion cubic
feet in 1997, with production in 1998 and 1999 even lower. Turkmenistan’s only other significant export is cotton, and the recent
cotton crops have been poor. It is no exaggeration to say that the survival of the country as a stable and independent nation may
depend on quickly opening routes to export Turkmenistan’s natural gas.

Turkey – Turkey is in desperate need of natural gas supplies to support its plans for economic growth. Massive amounts of new
power plant capacity will be added in the coming years, most of it fueled by natural gas, yet Turkey’s own production of natural gas
meets under 3% of domestic consumption requirements. Nearly all of Turkey’s gas comes from Russia, and Turkey wants to
diversify its import sources. The natural gas that goes to Turkey, and eventually elsewhere in Europe, will provide a cleaner
alternative to oil and coal that will help Turkey and Europe in meeting their Kyoto environmental requirements.

US – The Caspian Basin has enormous reserves of oil and gas. Estimates from the US Energy Information Administration are that
proven oil reserves for the region are estimated at 16-32 billion barrels, comparable to those in the United States (22 billion barrels)
and North Sea (17 billion barrels). Natural gas reserves are even larger, accounting for almost 2/3 of the hydrocarbon reserves
(proved plus possible) in the Caspian region. Based on proven reserves, Kazakhstan, Turkmenistan and Uzbekistan each rank
among the world’s 20 largest natural gas countries. Proven gas reserves are estimated at 236-337 trillion cubic feet, comparable to
North American reserves (300tcf). The US government recognizes that it is of great importance that the countries of this
energy-rich region remain independent and stable sovereign states.

Geopolitical Issues

The TransCaspian project faces special challenges arising from instability in the Caspian Basin, and from the strong opposition to
the project by the government of Iran and the advanced state of development of the Blue Stream project. The principal geopolitical
challenges are four: 1) competition from the Blue Stream project; 2) uncertainties concerning the legal status of the Caspian Sea;
3) co-operation by the affected local governments and 4) competition from gas supplies from Iran.

1. Blue Stream.

The Blue Stream project is being promoted by a joint venture between Gazprom, the Russian gas company, and ENI of Italy. The
project would send gas under the Black Sea from Russia to the Turkish city of Samsun on the Black Sea coast. Two things are
important about the Blue Stream project. First, if it goes forward, the TransCaspian project will suffer a serious delay. Second, the
Blue Stream project is not the best choice for Turkey, or for the countries of the Caspian Basin or for the strategic interests of the
United States.

Turkey already depends on Russia’s Gazprom for its pipeline gas. The Blue Stream project would make Turkey essentially totally
dependent on Russian pipeline gas for years to come. Turkey is understandably worried about the consequence of such
dependence and wants to diversify its supply. That is why the government of Turkey reaffirmed just yesterday its preference for
TransCaspian over Blue Stream. But Turkey must have natural gas, and it will take that gas from Blue Stream if there are no other
timely options.

Blue Stream is not a good choice for the countries of the Caspian Basin because its success will delay the only viable export line
for Caspian Basin gas. Russia has already shut off the existing gas lines that could accommodate export of Caspian Basin gas
through Russia to markets in Turkey and elsewhere in Europe. It is safe to conclude that the only gas to go through Blue Stream
will be Russian gas. That would mean that the catastrophic economic conditions in Turkmenistan and elsewhere in the Caspian
Basin would continue, with the threat of growing instability in the region and increasing influence from Iran.

Both the Blue Stream and TransCaspian projects will bring natural gas to Turkey, but only one of the projects will be developed at
a time, because of the size of the market in Turkey. Turkey’s demand for natural gas is very great and would seem to be big
enough to support the development of both projects. But it is not. The enormous cost and risks involved in developing projects of
the size of TransCaspian require a high level of confidence that the market will be there when the gas arrives. Turkey’s projections
look to substantial increases in the demand for gas in the future, but projects can only be developed now based on the gas
demand that can be confirmed now, and that demand is large enough to support only one major pipeline project coming on stream
in the next 3 to 5 years. We are therefore convinced that once one of the two projects is widely seen as heading for a successful
financing, the other project will stall, probably to be delayed by as much as 5-10 years.

The Blue Stream project appears to be moving forward. The Italian government has pledged substantial financing support for the
project, and with only two countries i nvolved rather than four, the inter-governmental agreements are well advanced. Nonetheless,
there is plenty of time for TransCaspian to pass Blue Stream because TransCaspian is a far better project for everyone involved,
except Russia.

Dependence on Russian gas is not the only objection to Blue Stream that Turkey can raise. The project involves tremendous
technical challenges. Unlike the relatively easy passage under the Caspian Sea planned for TransCaspian, the Black Sea poses
what may be an insurmountable barrier for Blue Stream. The passage under the Black Sea will hit an unprecedented depth of 1.4
miles at one point. There are substantial questions as to whether it is even possible with today’s techniques to lay a pipeline in
water that deep, especially given other problems in the Black Sea. But even if the project is technically possible, the cost of laying
and maintaining the pipe is uncertain, and may make the project commercially infeasible.

The US government has a crucial role to play in helping Turkey see that it need not rush into the Blue Stream project to assure a
reliable source of natural gas.

2. The legal status of the Caspian Sea.

There are two principal subjects of jurisdiction in the Caspian Sea. The first concerns ownership of the sea bed and of the subsea
natural resources. Resolution of this issue is needed to determine which country has jurisdiction over offshore oil and gas deposits,
as well as the route of the TransCaspian pipeline. The second concerns jurisdiction and management of the water of the sea for
fishing, navigation and environmental protection. While the first issue has understandably been given the most attention, resolution
of both issues is essential for the successful development of the TransCaspian project. The regulatory regime that applies to the
pipeline, especially as it relates to environmental rules, must be clear in order for the project to proceed.

For each of these two subjects of jurisdiction there are two possible solutions. Either the Caspian Sea will be divided into national
sectors, with one country having exclusive jurisdiction within its sector, or the Sea will be subject to a condominium arrangement,
which means that it would be jointly managed by all of the states bordering the Sea. Different solutions are possible for the two
subject areas. Thus, there may be a sector division for subsea resources and a condominium solution for regulation.

All of these issues are yet to be resolved. There is disagreement among the affected countries as to whether national sectors or a
condominium is the best approach, and whether the same or different approaches should apply to subsea resources and
regulatory matters. Generally, Russia and Iran have favored a condominium approach, and Azerbaijan, Kazakhstan and
Turkmenistan have favored national boundaries.

Those countries that have agreed there should be national sectors disagree on the location of the boundaries of those sectors.
Specifically, Turkmenistan and Azerbaijan have failed so far to agree to the boundary between their sectors through which the
TransCaspian pipeline will pass. However, recent statements by President Aliyev of Azerbaijan, indicate willingness to delink the
TransCaspian pipeline from the subsea oil resources.

What must be done, therefore, is to create a mechanism to provide adequate protection to the TransCaspian project against the
risk of a change in the jurisdictional ar rangements for the sea from that assumed at the time the financing for the project is
established. We believe that the US government has an important role to play in creating and sustaining this mechanism.

3. Co-operation of the transit countries.

As I mentioned earlier, the co-operation of Turkmenistan, Azerbaijan and Georgia is crucial to the success of the project. That
co-operation requires that the transit countries take a realistic view of the benefits they can derive from the project. We believe
those benefits will be substantial. The project will bring clean natural gas to Georgia and Azerbaijan, which will allow both countries
to reduce their dependence on more-polluting fuels. The project will also provide jobs for citizens of the transit countries and
significant work for local contractors. However, given the crippling economic contractions that Turkmenistan, Azerbaijan and
Georgia have suffered since the fall of the Soviet Union, there will be pressure for each country to squeeze as much out of the deal
as possible. The US government can play an important role in helping each of the affected countries to co-operate in establishing a
commercial structure that provides fair benefits for all.

4. Gas Supplies from Iran.

The TransCaspian project also faces competition from Iran. Iran would like to supply Turkey directly with its own natural gas. The
Iranians would also like to be the transit country for Turkmen gas. Pipelines are currently under construction that would permit
Turkmen and Iranian gas to flow to Turkey through Iran. Both Turkey and Turkmenistan realize the risks of depending on Iran for
something as important as the supply of natural gas. But both countries will be willing to run those risks if the TransCaspian
project is not developed in a timely way.

Financing Issues

We estimate that the capital cost of the project will be around $2.5 - $3.0 billion. The line will carry 16 billion cubic meters of
natural gas a year to Turkey, and will later be expanded by an additional 14 billion cubic meters a year for sales to Europe. Based
on our discussions with the financing markets to date, we do not believe it will be possible to attract commercial bank debt or the
participation of the capital markets without strong support from the US government. In addition to the full participation of all of the
traditional programs, the government and relevant agencies will need to be flexible and to act as a catalyst to help the private
participants deal with political and financial risks as they arise.

Support is needed from all the financing agencies. TDA grants to affected governments will be essential to ensure that the
governments receive accurate and impartial advice. OPIC will play a crucial role in providing political risk insurance for both equity
and debt and direct lending for the project. USEXIM will have an important role as well in providing financing. In addition, the US
can provide vital support to the project in helping to attract financing from multi-lateral agencies, such as the IFC and the World
Bank.

PSG has been gratified by the strong support for the project already shown by all of these US agencies. It is clear to us that each
agency is dedicated to finding creative solutions to the challenges of this project. That dedication is essential for the success of
TransCaspian. The agencies and Congress will need to take a very careful look at the limits imposed on their support programs
and the terms under which they provide loans and insurance. Exceptions to these limits and terms may be required. The project
will require support in providing direct protection to the project’s lenders and investors against extraordinary political and other
risks.

Congress and the Administration can play a crucial role in promoting the TransCaspian project by providing a guarantee for risks
arising out of the uncertainty of jurisdiction over the Caspian Sea. In order to expedite financing and development, I propose that
the US government should provide a direct indemnity that embodies the US government’s stated position that the only hurdle to the
Caspian crossing should be a bi-lateral agreement between Azerbaijan and Turkmenistan. By providing the project with protection
against risks such as changes in law concerning the Caspian Sea or claims or actions by other countries, the US government
would allow PSG to move much more quickly to secure financing for the project and begin construction. The provision of this
protection would help convince Turkey that the TransCaspian pipeline will supply it with gas ahead of either Blue Stream or the
Iranian pipeline.

Concluding Remarks

I would like to thank Ambassador Morningstar and the representatives of OPIC, USEXIM and TDA for their participation at this
hearing and their support for the TransCaspian project. The most important message I can leave with you, Mr. Chairman and
members of the Subcommittee, is the need for speed. We must move quickly to develop the TransCaspian project if we are to beat
the Blue Stream and Iranian options. I ask for your help in accomplishing this.

Thank you for the opportunity to appear before this subcommittee. 

Mr. Chairman and distinguished Members of the Subcommittee, thank you for your invitation to me to testify today on behalf of
Conoco Inc. concerning an area of vital interest for the United States. Senator Hagel, the private sector appreciates your leadership
and personal interest in issues related to the Caspian Region, as well as your statesman-like approach to establishing foreign
policy. Trade, commercial interests, and foreign policy increasingly intersect at critical points in this complex world. Your
Subcommittee appropriately exercises jurisdiction in this vital area of international economic policy as an important component of
foreign relations in the next millennium. My remarks are limited to 10 minutes as requested. However, we have submitted more
extensive written testimony for the formal record.

The Subcommittee asked for comments on a specific area of interest, the oil and gas export pipelines connecting the Caspian
area to regional and world markets. I certainly will honor that request, but first allow me to set the stage from the point of view of an
American energy company doing business internationally and multi-nationally. Conoco is organized under American law and
traces a proud history back 124 years to our origins in the rough-and-tumble American West of the post-Civil War era. However, we
also operate in 40 countries around the world, employ citizens of virtually all of those countries, and attempt to create value for our
multi-national stockholders.

When I joined Conoco almost 35 years ago the company was decidedly American with only a few important operations outside of
North America. Today, Conoco is one of legions of global companies with a few important operations in North America.

Let me also say that just because we are commercially driven does not mean we are amoral or insensitive to certain policy
objectives aimed at changing government behaviors judged to be inappropriate under commonly agreed standards of international
behavior. We are deeply concerned about the safety of our people who travel around the world and live in foreign countries. We
have strong ethical values and will not violate those standards even where the FCPA doesn’t apply. We have a strong interest in
seeing the lofty objectives of U.S. policy succeed -- even though our contributions to these goals have to be at the periphery. Just
because we respond to commercial motivations doesn’t mean we aren’t patriotic.

Conoco is active in the Caspian Region. The company has several projects at different stages of maturity in several countries of the
region.

With that preamble, I’d like to address the Caspian area and your specific interests. The countries adjoining the Caspian Sea and
the “extended” region from the Caucasus to the Central Asian countries formerly affiliated with the Soviet Union are already proven
storehouses of energy. The U.S. Department of Energy credits the region with crude oil reserves about equivalent to the North Sea,
and the area has tremendous natural gas reserves. In the case of both oil and gas future drilling may identify oil reserves more
equivalent to the major reserves of the Gulf countries and gas reserves not dissimilar to those of Qatar or Iran. It is clearly a region
of emerging importance to the world…I think we can agree on that.

You may be surprised to learn that Conoco doesn’t necessarily believe that the petroleum wealth of the area makes it strategic to
the United States. Almost no natural gas and a limited volume of oil from this area will naturally seek the U.S. markets for many
years. What is important is the economic growth of the countries of the region. Healthy economies will yield stability and create
general trade, which will integrate these countries into the global economy. Conoco and its competitors can help with that
economic development. To be sure, we want to profit from the investment of our capital, technology and brainpower. That’s what we
do in the private sector, but the real profit comes from having strong, peaceful, sovereign partners across this entire region.

The main problem, as we all know, is that the energy reserves of the region are “landlocked” in terms of physical distance and
cost-to-ship. Both the oil and the natural gas reserves are a long way from major regional or world markets or tidewater, or both.
That is the crux of the situation.

The rich resources and necessity for cooperation on transportation routes for the landlocked Caspian countries will determine what
the future roadmap in the region looks like. It is important that the countries of Eurasia learn to work together, so they may
participate in the benefits of economic growth.

Pipeline Issues

Oil and gas development and transportation have different strategic implications because of the nature of the market. However,
transport of these resources out of the region remains a serious and expensive challenge. No route is without significant political
risk due to conflicts along various proposed and potential routes.

The private sector has witnessed unprecedented advocacy by high officials of the U.S. Government for specific commercial
projects, most notably for pipelines, especially one particular route – that from Baku, Azerbaijan to Ceyhan, Turkey. The
trans-Caspian gas pipeline from Turkmenistan to Azerbaijan is also part of this East-West gameplan. Ultimately pipeline routes out
of the region will be determined by commercial factors influenced by geopolitics. However, it is important to distinguish between a
project being commercially viable and commercially attractive. If projects are marginally economic, they won’t attract the private
sector capital which will make them a reality. If projects can’t return 2-3% above the weighted cost of capital, investors will simply
walk away.

We in the oil and gas industry are used to factoring political risk into our calculations for long-term energy investments. However,
given the high level of political risk in the region, projects will have to be commercially attractive in order to be able to bring in the
necessary capital to move forward. Only those parties who invest their capital to make these projects a reality can appropriately
determine which risks, political or financial, are acceptable.

Operating in the Current Price Environment

Our inability to export and transport our energy production to world markets through the region in an economical way makes the
Caspian less competitive in the current oil price environment. Capital is in shorter supply due to low oil prices. The continued
existence of low oil prices into the foreseeable future makes projects in the region less attractive than they were just two or three
years ago. In addition, there are other opportunities that appear to be opening up in the region – even Saudi Arabia and Kuwait are
possibilities. The Caspian is surrounded by huge, competing energy resources in the Middle East and Russia. Looking forward two
or three years, the politics of the Caspian region could significantly change to make other options attractive. Whatever the
developments, it is clear that the United States Government and American companies are in general agreement that there should
be multiple pipeline routes out of the region. One need only look at many of the former Soviet states to see the problems having
only one outlet can cause.

Investments have to make sense commercially in an environment in which there are notable policy constraints -- real risks to
commercial companies, such as U.S. sanctions against Iran. I will return to this issue later in my testimony. However, at this point
it suffices to say that most energy companies operating in the East Caspian believe a transport route through Iran would be highly
competitive and probably represent the lowest capital costs. Eliminating Iran from the equation as a potential supplier of gas to
Turkey, for example, would deprive Turkey of a relatively inexpensive supply of gas. Ultimately, the delivered price of energy
produced must be competitive in world markets in order to support long-term viability. In effect, our government is asking industry
to subsidize the sanctions imposed against Iran. This is an exercise in private sector subsidization of government geopolitical
theory.

Pipelines are only one of many components important to maximize the economic development of the Caspian region. Economic
growth will require a favorable investment climate established through a satisfactory legal framework and tax reforms. Contract
sanctity must be secured to support capital investments in energy resources upon which the future economic development of the
region depends. In today’s energy price environment, we have to phase-in large-scale investments, because few in the private
sector want to risk developing multi-billion dollar, long-term projects. Conoco proposes thinking of developing pipelines in smaller,
multiple phases -- especially for natural gas because that market develops gradually. In the case of oil, significant volumes must
be available at the outset to justify the cost of pipeline construction and operation.

Iran – A Key Player that Cannot Be Ignored

Because of Conoco’s history in the region, it will be no surprise that I must address Iran and the complexities of U.S.-Iranian
relations. One cannot contemplate a map of the Caspian without factoring in Iran. It is simply too important to the region. Sooner or
later, Iran will emerge from its revolutionary isolation with no help from the United States unless our policy changes. The world took
positive notice two years ago when Iran democratically elected a moderate President -- Mohammed Khatemi. This political
development has facilitated a gradual opening up of relations with a society which appears to be demanding internal change and
enhanced, normalized external relations. We in the West should do everything we can to ensure that President Khatemi remains
in power. His policies and philosophies offer the best hope for the present and deserve support. However, the situation in Iran
remains delicate, and it is difficult for foreigners to know exactly what is appropriate to do. Some say that supporting President
Khatemi may result in a negative backlash and undermine his authority from within. That is possible, but he nonetheless deserves
support as he and other Iranian leaders deal with unimaginably complex internal issues which we hope will lead to a consensus
that Iran should fully rejoin the “family of nations.”

Four years ago, the Iranian government, coming out of its revolutionary past, tried to reach out to the American government through
a commercial deal with Conoco to develop oil and gas in the Sirri fields off the coast of Iran. This was during the administration of
President Rafsanjani and his leaders in the petroleum industry. It is important to note these leaders were not discredited by the
failure to finalize the transaction with Conoco. They continue to work in the background in very powerful ways and are important to
Khatemi’s continuing policy credibility. We lost the Sirri opportunity to a European company because of U.S. Government policy.
This field and its larger successor project, the South Pars Field, are now under contract to the French firm Total, with partners
Gazprom, the Russian gas monopoly, and the Malaysian oil company, Petronas. These are resources no longer accessible to
American interests. But Iran still wins, as do our competitors. I find it almost tragic that the French are building relations in Iran in
ways we cannot.

Based on our experience and contacts in the region, it is clear that other foreign competitors are prepared to follow the lead of
Total, Gazprom, and Petronas. It is also clear that the host governments of the foreign companies investing in Iran are prepared to
defend their economic interests. As a practical matter, the United States government has no leverage over the activities of these
foreign firms, and our unilateral sanctions policy (which includes extraterritorial provisions and secondary boycotts) is straining
relations with our allies with whom we should be cooperating. Clearly, there’s something wrong with this picture.

It is important to realize that Iran is not just important for its own sake. Iran is a potentially important key to unlock access to the
rich resources of the Caspian Region itself. Therein lies the real challenge for American oil companies active in the Caspian region:
If foreign energy companies have the ability to do business with Iran while American firms are forced to sit on the sidelines, there is
a strong likelihood that the governments and state-owned oil companies of the region will perceive European and other foreign
energy companies to be partners of choice, because American companies cannot compete on the same terms. Why should
Kazakhstan and Turkmenistan not want to export their energy production by the most cost-competitive route possible? After all,
they are interested in maximizing their potential profits and revenues from the vast resources they own.

If American oil companies are left on the sidelines as minor players in the Caspian, the U.S. Government will have a reduced level
of influence with the governments of the region. Conoco is here to be a constructive component in the economic development of the
region, but will find its role limited as a useful corporate citizen if it cannot compete on the same terms as foreign companies.
American companies are surrounded by sanctions in the region: Iran, Azerbaijan, Afghanistan, Syria, Libya. A very constructive
role for the U.S. Government would be to help unravel the political tensions throughout this part of the world. Then, we will see
political stability and rational policy development. Our ability to do business in the Caspian is directly linked to how the
governments manage their conflicts. These new nations haven’t yet had the chance to realign according to their own design and
are trying to grow in economic self-determination.

The Iran-Libya Sanctions Act (ILSA) is proving to be a counter-productive foreign policy tool for defending American interests in the
region, motivating the desired behavior in Iran or causing other countries to accept U.S. policy leadership in this area. Utilizing this
tool risks distracting the Administration into a defense against repeated challenges by foreign governments and companies. This
ultimately slows down progress toward developing a more strategic vision for the region by driving a wedge between the United
States and our allies worldwide. Iran is clearly a country in transition. This is the beginning of an evolution toward a
post-revolutionary Iran which, however cautiously, is beginning to reach out to the West. We need to build trust on both sides, and,
if successful, the benefits of dialogue will ultimately help create stability in two regions – the Caspian and Persian Gulf. I believe
the Congress should recognize that ILSA has created more problems than it solved and repeal the sanctions on Iran.

Section 907 of the Freedom Support Act

Current U.S. policy in the Caspian region often does not seem to make commercial sense. This is not only true of sanctions on
Iran, but also of the politically inspired sanctions on Azerbaijan in the form of section 907 of the Freedom Support Act. This single
provision has the effect of impeding our ability to defend the national security interests that I mentioned earlier. Senators Hagel
[and Smith], I commend your leadership on the Silk Road Strategy Act, introduced by Senator Brownback, and sponsored by a
bipartisan group of Senators who are interested in doing the right thing for U.S. policy in the region. It is time to create a level
playing field for all the countries in the region, and we should not exclude Azerbaijan from this equation.

Conclusion

Two things are clear to me in evaluating the geopolitical situation in the Caspian Region: (1) There is much at stake for our national
and energy security, and (2) it is time for the United States to lead – not react. Leadership demands engagement – not isolation.

Ultimately we conduct our own political risk analyses before we invest. However, when corporate executives look at the obstacles
to American participation in what should be one of the most exciting, lucrative and nationally important engagements of our time,
we are forced to conclude that Washington sometimes creates more political risk for us abroad than many of the actual foreign
countries in which we conduct commercial relations.

I believe business decisions are appropriately made by the private sector, which has to assume the risk of financial investments.
My company’s vision sees a strong partnership between the U.S. Government and the private sector working together to think
strategically and build a solid economic foundation in the Caspian Region, create political stability and fulfill our national security
interests in the future. 

Mr. Chairman and distinguished members, thank you for inviting Amnesty International USA to testify before your subcommittee. I
would like to request that the full text of my written statement be made a part of the record of this hearing. I will summarize it in my
oral presentation.

Amnesty International is a worldwide volunteer movement that works to promote all the human rights enshrined in the Universal
Declaration of Human Rights and other documents. We have 300,000 members in the United States. Amnesty International
campaigns to free all prisoners of conscience; ensure fair and prompt trials for political prisoners; abolish torture and the death
penalty, and end political killings and "disappearances." Amnesty International neither supports nor opposes punitive measures
such as sanctions, divestment, or boycotts. Amnesty International is impartial and independent of any government.

As Congress considers the Caspian Sea pipeline, support for human rights improvements and democratic institutions needs to be
integrated as a fundamental pillar of US diplomacy. While US foreign policy toward the region has dramatically changed since the
Soviet period, human rights problems remain grave. The lack of basic rights in Turkmenistan, for example, remains similar to the
communist period. Some aspects of civil society are actually going backward in this post-Soviet era, such as freedom of the press
in Kazakstan.

But human rights restrictions affect not only political life. Business conditions are also undermined by the absence of rule of law,
lack of independent judicial institutions, absence of transparency in transactions leading to corruption and graft. Robust business
development and human rights protection are related. In considering any pipeline, the US needs to strongly support the
fundamental rights of society that will protect both businesses and human rights, including freedom of speech, press, assembly,
and the rule of law. The challenge is not human rights versus business. It is a false dichotomy. The challenge is between desirable
short-term and long-term goals. I will address here what are the key human rights problems in these countries, what the US policy
toward the region has been, what steps oil companies can take to address human rights concerns, and make recommendations
for US policy toward the region.

The Disturbing Human Rights Situation

What do these countries want? During the Soviet period, underground human rights activists looked to the United States as the
symbol of democracy and freedom. In 1994, following the fall of the Soviet Union, I remember meeting with human rights defenders
at a conference in Almaty, Kazakstan, and how they admired American ideals and freedoms. The new generation does not want to
be Soviet-style dissidents - they don't want to be martyrs - they want to be democrats. Let's not block them.

Despite the efforts of the tiny handful of brave activists, the human rights facts on the grounds are disturbing. The countries most
affected by the pipeline - Kazakstan, Azerbaijan, Turkmenistan, and Georgia - all have some of the most serious human rights
problems in the world. I will mention only a few selected cases to illustrate broad patterns, but Amnesty has concerns of torture in
every country in the Caucasus and Central Asia. I also will highlight cases of religious persecution.

While many in the US celebrated the end of the Soviet Union, heralding the victory of freedom over the "evil empire," the human
rights situation in Turkmenistan has scarcely changed since the Soviet days. The Turkmenistan government does not tolerate an
independent press or any activities of non-governmental human rights or political organizations. Turkmenistan continues to
imprison prisoners of conscience, and harass human rights defenders and opposition supporters.

Take the case of Durdymurad Khodzha-Mukhammed, who gave interviews to US-sponsored Radio Liberty which were reportedly
critical of the Turkmenistani regime. Last September he was walking home from a meeting at the British Embassy, when three
unidentified men in civilian clothes assaulted him. He was driven to a lake on the outskirts of Ashgabat, where they beat and
kicked him until he lost consciousness and then they left him. Two weeks after the attack he was still unable to walk by himself.
Durdymurad, a prisoner of conscience, had previously been confined against his will to a psychiatric hospital for political reasons
for two years. The practice of placing political dissidents in psychiatric hospitals is so abusive it has decreased in other Newly
Independent States. But it continues in Turkmenistan, just like the Soviet days. If this is how the government treats its citizens,
how can we be sure how it will it treat an uncooperative US business partner?

Elections likewise have been problematic. Recent presidential elections in both Azerbaijan and Kazakstan have been widely
criticized as unfair by the OSCE and the US delegation. Meanwhile, individuals suffered from the unfair practices in the elections,
including opposition supporters held in short term-detentions in Kazakstan. Mikail Vasiliynko was held incommunicado for three
days in September after travelling to Astana to distribute draft amendments to the constitution and the law on elections. The leader
of the opposition Azamat movement Petr Svoik and Mels Yeleusizov, leader of an environmental movement, also received
three-day administrative detention sentences.

In Azerbaijan, many citizens with political views about the presidential elections were punished by the government. Vahid
Qurbanov, a member of the Azerbaijan Democratic Party, was detained in September while trying to join a demonstration. He
alleges that he was severely beaten and detained. Law enforcement officials allegedly without provocation beat many people who
attempted to demonstrate in favor of opposition candidates or parties boycotting the presidential election. Torture and ill-treatment
by law enforcement officials continues to be widely alleged, with victims including journalists, demonstrators, and suspects in
criminal and political cases. Article 188-6 of the Criminal Code, which punishes insults or slander directed at the president of the
Azerbaijani Republic, is also used to criminalize free speech.

In Georgia, allegations of ill-treatment in detention continue. In September, three members of the Liberty Institute, a
non-governmental organization engaged in human rights monitoring, were reportedly beaten in the capital, Tbilisi, by members of
the Special Police Unit of the Ministry of Internal Affairs. Police detained Gogi Shiukashvshili in January 1998 on suspicion of
stealing wheels. He alleges he was initially beaten without explanation, and then beaten with truncheons over a period of 15 days
until he confessed to stealing wheels and several other crimes which he had not committed. He is quoted as saying, "I was beaten
by truncheons. My nose was broken as a result of the tortures and the beating. Presently I have severe headaches... I wake up at
night and tremble."

Against this continued pattern of systematic abuses, one possible area of small improvement is in regard to the death penalty,
which is especially important in this region because of a pattern of unfair trials. Abolishing the death penalty is a criterion for joining
the Council of Europe. Azerbaijan and Georgia have already abolished the death penalty, while Turkmenistan, Kyrgyzstan and
Armenia have taken serious steps towards the abolition. What these decisions show is that these countries are willing to make
significant human rights improvements if the international community demands the changes as the price of respectability and full
participation.

Religious Persecution

The countries of Central Asia and the Caucasus also limit religious freedom. Like China's restrictions on religious freedom, the new
Uzbek law on religion renders unregistered religious activity illegal, according to the Keston Institute, and should especially impact
Protestant Christians, New Religious Movements, and independent Muslims. One evangelical leader, Denis Podorzhny, the head
of the Word of Faith congregation, has not been able to regain registration for his group, despite having been arrested twice in 1996
and spending 12 days in jail, according to the Dept. of State Annual Human Rights report. Mission of Mercy head Olga Avitisova
tried for 7 years to register her Christian Humanitarian Association and eventually left the country.

In Uzbekistan, there have been widespread reports of harassment of "independent" Muslims, including short-term arbitrary arrest,
interference with worship and Islamic teaching, and even harassment for observing Islamic dress codes. The police arbitrarily
detained over 100 people in December 1997, especially men with beards, following the killing of several police officers and officials,
accusing them of being members of a strict Islamic sect, Wahhabists. Some 29 men were sentenced to long periods of
imprisonment in connection with the 1997 murders. Amnesty International has received allegations that many of the defendants
were tortured or forced under duress to give false evidence. One of them, Isroil Parpiboyev stated in court in July that he was
tortured with electric shocks. He also alleged that a bottle was inserted into his anus and that vodka was poured into his wounds.

The new draft law on religion in Kazakstan is also troubling according to Keston Institute, in which a disturbing number of
amendments seem to regard religious groups as potentially violent and harmful. In Turkmenistan, the Jehovah's Witnesses Oleg
Voronin and Roman Karimov were arrested for their conscientious objection to serve in the military services.

US Policy and the Political Context of a Pipeline

Given that we have briefly surveyed here the human rights situation in the region, let us now look at the relationship between
pipeline development and human rights. It is asserted that a pipeline can bring wealth, which will trickle down and create a
new-middle class, and consequently human rights improvements. What do we know about pipeline developments from other
regions of the world? In Nigeria, what has trickled down to the Ogoni people, is not wealth but environmental consequences, health
problems and repression. In Oman, after decades of oil wealth, has there been a dramatic improvement in human rights?

What does the US want? While not an expert on US strategic interests, it is widely argued that the US is supporting the pipeline
development because it wants to increase the independence of the Caspian countries from Russia, to isolate Iran, and to
strengthen ties with Turkey.

I can tell you, having spent time in the region, that the US should be equally interested in promoting stable and
democratically-minded partners. It is very short-sighted to potentially be seen as propping up a corrupt ruling elite, which lines its
own pockets and oppresses the people. The US should have learned this example from Suharto in Indonesia and Marcos in the
Philippines.

For instance, it has been perceived by the human rights community in Almaty, Kazakstan that US support has wavered. The first
US Embassy in Almaty around 1993-1994 was very connected to the community and non-governmental organizations were
regularly invited to embassy meetings. But then the human rights defenders reported, and this is their perception- that US policy
shifted. They reported that in the period 1995-1997, the US embassy was so interested in making commercial deals, it was
reluctant to meet with human rights community for fear of offending some economic government minister who viewed them as the
political opposition. So pushing for economic development in this case was viewed by the defenders as hurting human rights
development. But I am happy to report that the situation has indeed changed, and my colleagues on the ground report that over the
last few months US Embassy has once again been supporting them.

When I was invited to this hearing, I called a friend in Kazakstan, a long-term human rights defender. He filled me in on the latest
human rights cases and updates. Finally, I said to him, "I know that human rights activists don't take positions on economic
development, and Amnesty formally takes no position. But what do you think, will a pipeline help the people of Kazakstan? Will
some of the wealth come to the people?"

My friend was quiet for a minute, and then he said, "In the long run, Kazakstan is not a transparent country. There is no ability to
control the situation. Even if in the high political elite there is an idea to create an American system of management, the
parliament has no competence to control the budget or to appoint officials. There will be no way to see through the process. I am
quite skeptical about the money flowing to ordinary people and not disappearing in the hands of the elite... Mainly, a pipeline would
provide sustainability to the current regime. In the end, however, it is better to build the pipeline than not build it, but there should
be preconditions." My friend did not oppose the pipeline per se, provided that it was combined with a strong policy of supporting
human rights and government accountability.

Mr. Chairman, that is the challenge: not only to build a pipeline, but while building pipeline to also help build a human rights
respecting country.

There are other reasons for building a rule-of-law state. It also will in the long run provide a better environment for American
businesses. As the academic Ian Brimmer wrote in World Policy Journal in Spring 1998, "Although dictatorships may be
oil-friendly, (and so facilitate our efforts to secure pipeline arrangements), questions of leadership succession will inevitably
undercut the long-term success of a US policy that turns a blind eye to the abuse of power."

As a Baker Institute study (April, 1998) noted, "At first glance, the rigor with which any attempt at political opposition in Central
Asia and Azerbaijan seems to have created a form of stability. However... the lack of prediction regarding succession is likely to
breed instability."

If the basic economic and social needs of the people are not met, the ground is potentially ripe for religious extremism, such as in
the case of Uzbekistan. We all need to be wary of the case in Algeria. The Baker Study continues, "While there appear to be few
institutions or groups promoting the spread of Islam at present, conditions could develop in the future that would foster the kind of
underlying conditions and forces that fuel Islamic political movements. These include a high incidence of political repression and
lack of democratic processes; visible corruption among members of the ruling elite; an increasingly younger population with
diminishing employment and educational opportunities; ... and a growing disparity between the richest and poorest part of the
population."

It is in the long-term interest of the United States to foster politically reformed partners. The US government should clearly and
consistently express the need to meet the international obligations for human rights norms and standards.

Overlapping Interests of the Business and Human Rights Community

So what are these overlapping interests of the human rights and business community? Respect for human rights goes
hand-in-hand with the development of the rule of law. Business managers with extensive foreign operations have learned that
neither their property, nor in some cases, their persons are safe in countries where there is no rule of law. Systematic human
rights violations may lead to conditions of social unrest, political instability and armed conflict - conditions which do not favor
long-term business investment. Transparent government, and integrity in national legal and fiscal systems, contribute to the
protection of human rights and reduce the political risk of investment. These elements are essential to the long-term political
stability needed to plan for growth.

My Kazakstani friend also said that without rule of law, if the economy lives on the bribe system, no company is absolutely
protected, because sooner or later the people in positions of power change. Western money, instead of going in the form of bribes
to people in power, should instead actually support public life. The countries need political freedoms.

What should companies do?

All companies should adopt an explicit company policy on human rights. Companies should establish procedures to ensure that
all operations are examined for their potential impact on human rights, and safeguards to insure that that company staff is never
complicit in human rights violations.

All companies should ensure that any security arrangements protect human rights and are consistent with international standards
for law enforcement.

All companies should engage the community and include a willingness to meet with community leaders and voluntary
organizations to discuss their role in the wider environment.

What should the US government do?

US policy should address these fundamental human rights problems, using both the carrot and the stick to continue to push for
human rights reforms. Human rights improvements should be a precondition for US government rewards, such as a state visit to
Washington.

The US government needs to be clear and insistent to the leaders of these countries about democratic principles and human rights
issues. In every interaction, human rights and rule of law issues should be raised. At times the US government has given
lip-service to all the above mentioned recommendations. But human rights should not be treated as empty words or an
afterthought. Human rights and development of a rule of law culture needs to become central to US policy.

The US government should push for changes both in the micro and macro level. The US government should urge these
governments to resolve the human rights violations that have already occurred. For example, they need to release prisoners of
conscience, allow for fair trials of political prisoners, investigate reported cases of torture and disappearances and punish the
officials responsible for these abuses. Society needs to heal. These are concrete improvements required in individual cases.

On the macro level, the US government needs to push for creating a human rights and rule of law culture. This means changing the
laws and implementation practices that create the above-mentioned violations, such as changing the law on insulting the honor and
dignity of the president, and the laws on speech, assembly, the press, religion, and other topics. The US government should
advise the governments that they are required to meet international standards. The US also should push for the development of
democratic institutions, such as the independence of the lawyers and the courts.

The US government should more actively support civil society and human rights groups. In the end, a strong civil society is an
essential guarantee to human rights protection.

Conclusion

I have heard countless toasts at dinner parties in the region thanking the great human rights leadership of the United States during
the Cold War. Defending human rights in these countries is incredibly dangerous work. The US does not have anything
comparable. Despite the danger, each new generation raises its hand against injustice. The human rights defenders in these
countries believe in our ideals of freedom. We have to live up to

them.

The fact is that mineral wealth controlled by a repressive, unrepresentative government is more likely to entrench abusive power
than undermine it. Whatever arguments there may be for general economic development creating shopkeepers and middle class
freedoms, they ring hollow in the context of massive payments made directly to government elites.

... The leaders of the new states have generally performed poorly in keeping the social bargain that their constituents had come to
expect from a Soviet style government.

Also, the US government needs to address the whole spectrum of problems in these countries, including the social and economic
crisis, the need to develop further democratic principles, and fostering participation in democratic reforms

To quote a recent Op-Ed in the Washington Post, "US policy is predicated on winning the personal favor of each leader currently in
power, which makes American policy overly dependent on unstable and authoritarian regimes in the region." (David Kramer, Dec.
1998)

In an another case of a student, officers found video and audio tapes of educational lectures on Islam for the Radio Liberty Uzbek
Service in the apartment of Bakhodir Nishonov. The student was charged with distributing lectures and themes on religious themes
and was sentenced to 3 years imprisonment.