Order Code IB95024
CRS Issue Brief for Congress
Received through the CRS Web
Armenia, Azerbaijan, and Georgia:
Political Developments and Implications
for U.S. Interests
Updated December 3, 2001
Jim Nichol and Julie Kim
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

---

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Obstacles to Peace and Independence
Political Instability
Armenia
Azerbaijan
Georgia
Regional Tensions and Conflicts
Nagorno Karabakh Conflict
Civil and Ethnic Conflict in Georgia
Economic Conditions, Blockades and Stoppages
Russian Involvement in the Region
Military-Strategic Interests
Caspian Energy Resources
The Protection of Ethnic Russians
The Roles of Turkey, Iran, and Others
Overview of U.S. Policy Concerns
Aid Overview
U.S. Security Assistance
U.S. Support for Economic Reforms
Trade and Investment

---

IB95024
12-03-01
Armenia, Azerbaijan, and Georgia:
Political Developments and Implications for U.S. Interests
SUMMARY
The United States recognized the inde-
some humanitarian aid (P.L. 104-107) and
pendence of all the former Soviet republics by
again in 1997 ( P.L. 105-118) to widen permit-
the end of 1991, including the South Caucasus
ted aid. The FY2001 foreign operations appro-
states of Armenia, Azerbaijan, and Georgia.
priations law (P.L.106-429) permitted humani-
The United States has fostered these states’
tarian and democratization aid, border security
ties with the West, including membership in
and customs support to promote non- prolifer-
the Organization on Security and Cooperation
ation, Trade and Development Agency aid,
in Europe (OSCE) and NATO’s Partnership
Overseas Private Investment Corporation
for Peace (PFP), to end the dependence of
insurance, Eximbank financing, and Foreign
these states on Russia for trade, security, and
Commercial Service activities. The current Bu-
other relations. The Clinton Administration
sh Administration supports an end to the aid
pursued close ties with Armenia to encourage
prohibition on Azerbaijan, in consideration of
its democratization and because of concerns by
Azerbaijan’s assistance to the international
Armenian-Americans and others over its fate.
coalition to combat terrorism. In October
Close ties with Georgia have evolved from
2001, the Senate passed a FY2002 appropria-
U.S. contacts with former Soviet Foreign
tions bill that would allow the President to
Minister Eduard Shevardnadze, now Georgia’s
waive Sec. 907 under certain conditions
president. Growing U.S. private investment in
through December 2002.
Azerbaijan’s oil resources strengthened U.S.
interest there. The United States has been
In the South Caucasus, U.S. policy goals
active in diplomatic efforts to end conflicts in
have been to buttress the stability and inde-
the region, many of which remain unresolved.
pendence of the states through multilateral and

bilateral conflict resolution efforts and to
Faced with calls in Congress and else-
provide humanitarian relief. U.S. aid has also
where that the Administration develop policy
supported democratization, free market re-
for assisting the new independent states (NIS)
forms, and U.S. trade. The Bush Administra-
of the former Soviet Union, then-President
tion supports U.S. private investment in
Bush proposed the Freedom Support Act in
Azerbaijan’s energy sector as a means of
early 1992. Signed into law in 1992, P.L. 102-
increasing the diversity of world energy suppli-
511 authorized funds for the NIS for humani-
ers, and encourages building multiple oil
tarian needs, democratization, creation of
pipeline routes to world markets. In the after-
market economies, trade and investment, and
math of the September 11 terrorist attacks in
other purposes. Sec. 907 of the Act prohibited
the United States, the three South Caucasus
most U.S. government-to-government aid to
countries have expressed support for the U.S.-
Azerbaijan until its ceases blockades and other
led operations in Afghanistan and campaign
offensive use of force against Armenia. This
against the Al-Qaeda terrorist organization.
provision was partly altered in 1995 to allow
Congressional Research Service ˜ The Library of Congress

---

IB95024
12-03-01

MOST RECENT DEVELOPMENTS
Congress is expected shortly to consider the conference report for H.R. 2506, the
Foreign Operations Appropriations bill for FY2002. On October 24, the Senate passed its
version of the bill that includes a waiver of the Section 907 restriction on assistance to
Azerbaijan through December 2002, provided that the President determines that doing so
would support U.S. efforts to counter terrorism and would not undermine efforts to negotiate
a peaceful settlement between Armenia and Azerbaijan. In an earlier letter to the Senate
Foreign Relations Committee, Secretary of State Colin Powell appealed to Congress to lift
Section 907 restricting U.S. government aid to Azerbaijan, in order to facilitate U.S.-led
efforts to counter the Al-Qaeda terrorist organization. The House passed its version of H.R.
2506 on July 24, 2001. It repeated language from previous years on exclusions from Section
907 limits on aid to Azerbaijan, but did not include a waiver. Both bills provide earmarks
for assistance to Armenia and to Georgia.
On November 1, Georgian President Shevardnadze dismissed his cabinet in the wake
of public protests following a police raid on a television station. Shevardnadze has said he
will not step down himself. Tensions have also increased in and near the breakaway
republic of Abkhazia. In October, Georgian guerrilla forces reportedly backed by Chechen
rebels engaged Abkhazian separatists in the Kodori Gorge region. A U.N. helicopter was
shot down on October 8, killing nine on board. The upsurge in fighting has caused dozens
of deaths. Georgia and Russia have mobilized their forces to the region. In November,
Russia announced the withdrawal of its forces from the Gudauta military base in Georgia,
belatedly fulfilling a 1999 pledge to do so by July 1, 2001.
Leaders from twelve Commonwealth of Independent States held a summit meeting in
Moscow on November 29 to mark the 10th anniversary of the CIS. Russian President Putin
said the organization has an important unifying, coordinating, and stabilizing function in
the region. At the summit, Georgian officials accused Russia of bombing Georgian territory
near to the border with Chechnya.
BACKGROUND AND ANALYSIS
Armenia, Azerbaijan, and Georgia are
The Caucasus States: Basic Facts
located in the South Caucasus region of the
former Soviet Union. This region borders Area: The region is slightly larger than Syria:
Turkey, Iran, the Black and Caspian Seas, and Armenia is 11,620 sq. mi.; Azerbaijan is 33,774
sq. mi.; Georgia is 26,872 sq. mi.
Russia’s northern slopes of the Caucasus Population: 17.4 million, similar to Australia;
Mountains (termed the North Caucasus). Armenia: 3.8 m.; Azerbaijan: 8.1 m.; Georgia:
Historically, the South Caucasus states served as 5.5 m. (World Bank estimates for 2001)
a north-south and east-west trade and transport GDP: $10.2 billion; Armenia: $1.9 b.;
“land bridge” linking Europe to the Middle East Azerbaijan: $5.3 b.; Georgia: $3.0 b. (World
and Asia, over which the Russian Empire and Bank estimates for 2000)
others at various times endeavored to gain
control. In ancient as well as more recent times,
oil and natural gas resources in Azerbaijan attracted outside interest. While Armenia and
Georgia can point to past periods of autonomy or self-government, Azerbaijan was not
CRS-1

---

IB95024
12-03-01
independent before the 20th century. After the Russian Empire collapsed in 1917, all three
states declared independence, but by early 1921 all had been re-conquered by Russia’s Red
(Communist) Army. They regained independence when the Soviet Union collapsed in late
1991. (For background, see CRS Report RS20812, Armenia Update; CRS Report 97-522,
Azerbaijan; and CRS Report 97-727, Georgia.)
Obstacles to Peace and Independence
In the ten years since achieving independence, the South Caucasus states have had
difficult experiences in developing fully sovereign and independent states and robust
democratic and free market systems. Persistent regional conflicts further undermine these
efforts.
Political Instability
Armenia. Armenia appeared somewhat stable until 1998. Then-President Levon Ter-
Petrosyan had been effective in orchestrating a major victory for his ruling and other pro-
government parties in 1995 legislative races, in obtaining approval for a new constitution
granting him enhanced powers, and in orchestrating his reelection in 1996. Nonetheless, he
was forced to resign in February 1998, reporting that his endorsement of OSCE peace
proposals had not been supported by others in his government. Former Prime Minister
Robert Kocharyan won March 1998 presidential elections. Armenia’s last parliamentary
elections were held in May 1999, and produced a plurality (61 out of 131 parliamentary seats)
for the ruling Unity bloc coalition. Illustrating the ongoing challenges to stability faced by
Armenia, on October 27, 1999, gunmen entered the legislature and opened fire on deputies
and officials, killing Prime Minister Vazgen Sarkisyan and Speaker Karen Demirchyan, and
six others. The killings may have been the product of personal and clan grievances. Abiding
by the constitution, the legislature met and appointed Armen Khachatryan as speaker (a
member of the ruling Unity bloc), and Kocharyan named Sarkisyan’s brother the new prime
minister. Political infighting intensified until May 2000, when Kocharyan appointed former
Soviet dissident Andranik Margaryan the new prime minister. Kocharyan has co-opted
several opposition party officials into his government in order to increase political stability.
He has announced that he will run again in the 2003 presidential election, which will take
place alongside the next parliamentary elections. (See also CRS Report RS20812, Armenia
Update.)
Azerbaijan. Azerbaijan has had three presidents and other acting heads of state since
independence, and has suffered several coups or attempted coups. A constitutional
referendum in 1995 granted Azerbaijani President Heydar Aliyev sweeping powers. He has
arrested many of his opponents. Aliyev’s health problems and age (78) have raised the
question of political succession. Observers believe he is grooming his son Ilkham to be his
successor, although in August 2001 he announced that he would stand for re-election in 2003.
The 1995 legislative and 1998 presidential elections were marred by irregularities, according
to international observers. In late June 2000, the Parliamentary Assembly of the Council of
Europe (PACE) approved Azerbaijan’s membership, conditioned on its compliance with
commitments, including holding a free and fair legislative election. OSCE and Council
observers to the November 5, 2000, legislative election judged it “seriously flawed,” though
CRS-2

---

IB95024
12-03-01
they said it showed some progress compared to previous elections; the U.S. Helsinki
Commission differed with this assessment, seeing virtually no progress. Problems included
the disqualification of most opposition candidates seeking to run in single constituency races,
ballot-box stuffing, and irregular vote tabulation. Although international observers also
judged January 2001 legislative run-off elections as seriously flawed, PACE admitted both
Azerbaijan and Armenia as members later in the month.
Georgia. Georgia experienced political instability during the early 1990s, and a fragile
stability in the second half of the decade. President Shevardnadze has survived several coup
attempts and has prevailed over most political rivals both within and outside of his Citizens’
Union Party (CUG). According to some critics, U.S. policy has relied too heavily on personal
ties with Shevardnadze (and with Aliyev in Azerbaijan), whose successions could bring
instability and setbacks to U.S. interests. The OSCE reported that legislative races in
October-November 1999 in Georgia appeared mostly fair, but a lack of transparency in the
electoral law and irregularities in voting marred full compliance with OSCE standards. In the
April 2000 presidential elections, Shevardnadze received 80% of 1.87 million votes cast. The
OSCE reported that the election did not meet its standards, though “fundamental freedoms
were generally respected during the election campaign and candidates were able to express
their views.” Problems included government aid to the incumbent, biased state media, non-
uniform and non-transparent vote counting and tabulation, and ballot box stuffing.
Shevardnadze’s age (73) and stated intention not to seek another term in 2005 have fueled
speculation about possible successors, although no obvious candidate has yet emerged.
Shevardnadze has supported a proposal to reinstate a prime minister position, which may
reduce somewhat the powers of the presidency.
Along with unemployment and poverty, corruption is viewed by the Georgian public as
a leading concern. In August 2001, the shooting death of a popular television anchor, widely
thought to be a political assassination, prompted considerable public outrage at organized
crime and possible government involvement. Some members of the government have
resigned in protest of the lack of progress on economic reforms and anti-corruption measures.
On November 1, Shevardnadze fired his entire cabinet in the aftermath of massive public
rallies protesting a police raid on a television station. It is unclear whether the recent
upheaval may lead to early elections.
Regional Tensions and Conflicts
U.S. and international efforts to foster peace and the continued independence of the
South Caucasus states face daunting challenges. The region has been the most unstable in the
former Soviet Union in terms of the numbers, intensity, and length of its ethnic and civil
conflicts. The ruling nationalities in the three states are culturally rather insular and harbor
various grievances against each other. This is particularly the case between Armenia and
Azerbaijan, where discord has led to the virtually complete displacement of ethnic Armenians
from Azerbaijan and vice versa. The main languages in the three states are mutually
unintelligible (also, those who generally consider themselves Georgians – Kartvelians,
Mingrelians, and Svans – speak mutually unintelligible languages). Few of the region’s
borders coincide with ethnic populations. Attempts by territorially-based ethnic minorities
to secede are primary security concerns in Georgia and Azerbaijan. Armenia and Azerbaijan
view NK’s status as a major security concern. The three major secessionist areas — NK,
Abkhazia, and South Ossetia — have failed to gain international recognition, and receive
CRS-3

---

IB95024
12-03-01
major economic sustenance from, respectively, Armenia, Russia, and North Ossetia. Also,
Georgia’s Ajaria region receives backing from Russia for its autarchic stance toward the
Shevardnadze government.
The South Caucasus states, because of ethnic conflicts, have not yet been able to fully
partake in peace, stability, and economic development some ten years after the Soviet
collapse, some observers stress. Countries are faced with on-going budgetary burdens of
arms races and caring for refugees and displaced persons. Other costs of ethnic conflict in
the region include threats to bordering states of widening conflict and economic decline, and
the inability of the region or outside states to take optimal advantage of energy resources or
trade and transport networks.
Nagorno Karabakh Conflict. Since 1988, the separatist conflict in Nagorno
Karabakh (NK) has resulted in 15,000 deaths, about 1 million Azerbaijani refugees and
displaced persons, and about 300,000 Armenian refugees. About 20% of Azerbaijan,
including NK, is controlled by NK Armenian forces. Various mediators have included Russia,
Kazakhstan, Iran, the United Nations, and the OSCE. The OSCE began the “Minsk Group”
talks in June 1992. A U.S. presidential envoy was appointed to these talks. A
Russian-mediated cease-fire was agreed to in May 1994 and was formalized by an armistice
signed by the ministers of defense of Armenia and Azerbaijan and the commander of the NK
army on July 27, 1994 (and reaffirmed a month later). Moscow talks were held by the sides,
with token OSCE representation, along with Minsk Group talks. With strong U.S. backing,
the OSCE at its December 1994 Budapest meeting agreed to send OSCE peacekeepers to the
region under U.N. aegis if a political settlement could be reached. Russia and the OSCE
merged their mediation efforts. The United States, France, and Russia co-chair meetings of
the Minsk Group.
A new round of peace talks opened in Moscow in 1997. The presidents of Azerbaijan
and Armenia recognized a step-by-step peace proposal as a basis for further discussion,
leading to protests in both countries and to Ter-Petrosyan’s forced resignation. New
Armenian Foreign Minister Varden Oskanyan instead called for the withdrawal of NK forces
from areas of Azerbaijan as part of a simultaneous and comprehensive settlement of NK’s
status that excluded it as part of Azerbaijan. Azerbaijan rejected a new Minsk Group
proposal in November 1998 embracing elements of a comprehensive settlement, citing
vagueness on the question of NK’s proposed “common state”status. At U.S. urging,
Kocharyan and Aliyev met in April 1999 and agreed to stepped-up presidential talks. The
October 1999 assassinations of Armenian political leaders set back the peace process.
In 2001, the two presidents met in Paris on January 26 and March 4-5 and in Key West,
Florida, on April 3-6, 2001. In Key West, no documents were signed and the two presidents
talked mainly through intermediaries. By some accounts, the sides discussed elements of a
new fourth peace plan that may include territorial concessions and the establishment of land
corridors. Former U.S. Special Negotiator for NK and Minsk Group co-chairman Carey
Cavanaugh stated on April 16 that there had been progress in the talks and that there was “a
potential for reaching peace this year.” Indicating the Administration’s high-level concern,
the two Presidents flew to Washington D.C. after the talks and each met with President Bush,
who reportedly highlighted U.S. support for settling the conflict and facilitating economic
development (including Caspian energy) and regional stability (including Georgia’s). Talks
planned for June in Geneva were postponed, however. President Aliyev in July 2001 assured
CRS-4

---

IB95024
12-03-01
the co-chairs that Azerbaijan remained committed to a peaceful settlement. Some in Armenia
see a “window of opportunity” for a peace settlement, since succession problems in
Azerbaijan do not yet jeopardize the talks, and Azerbaijan has not yet used its oil revenues
have to beef up its armed forces. In the aftermath of the September 11 terrorist attacks,
international mediators have emphasized renewed commitment to reach a political settlement.
New U.S. Special Negotiator Rudolf Perina has said that the new international environment
resulting from the anti-terrorism campaign has increased the importance of resolving regional
conflicts and restoring stability. (See also CRS Issue Brief IB92109, Armenia-Azerbaijan
Conflict.)
Many in Congress have supported a U.S. role in the peaceful resolution of the NK and
Abkhaz conflicts. Some criticized the former Clinton Administration for appointing one
envoy to deal with the NK, Abkhaz, and Dniestr conflicts, for frequently changing this envoy,
for not appointing a senior official, and otherwise failing to give the envoy “timely support”
to achieve a peace settlement. Some have criticized Russia’s attempts to dominate peace talks
and prospective peacekeeping and called f or greater U.S. efforts to ensure a multinational
role. The South Caucasus funding category reflects an attempt to facilitate peace by pledging
rebuilding aid. Until this year, Congress repeatedly voted to retain Sec. 907 to prod
Azerbaijan, and has also directed humanitarian aid for NK and its refugees.
Civil and Ethnic Conflict in Georgia. Several of Georgia’s ethnic minorities
stepped up their dissident actions, including separatism, in the late 1980s and early 1990s.
South Ossetians in 1989 called for joining their territory with North Ossetia in Russia or for
independence. Repressive efforts by former Georgian President Gamsakhurdia triggered
conflict in 1990, reportedly leading to about 1,500 deaths and 50,000 displaced persons,
mostly ethnic Georgians. In June 1992, former Russian President Yeltsin brokered a
cease-fire, and a predominantly Russian military “peacekeeping” force numbering about 1,700
(according to The Military Balance) has been stationed in South Ossetia. A coordinating
commission composed of OSCE, Russian, Georgian, and North and South Ossetian
emissaries was formed to promote a settlement of the Georgian-Ossetian conflict.
Rapprochement remains elusive.
Abkhazia. The Abkhaz conflict has recently heated up after several dormant years.
In July 1992, the Abkhaz Supreme Soviet declared its effective independence from Georgia.
This prompted Georgian national guardsmen to attack Abkhazia. In October 1992, the U.N.
Security Council (UNSC) approved the first U.N. observer mission to a NIS state, termed
UNOMIG, to help reach a settlement. In September 1993, Russian and North Caucasian
“volunteer” troops that reportedly made up the bulk of Abkhaz separatist forces broke a
cease-fire and quickly routed Georgian forces. The U.N. sponsored Abkhaz-Georgian talks,
with the participation of Russia and the OSCE, leading to a cease-fire. In April 1994, the two
sides signed framework accords on a political settlement and on the return of refugees. A
Quadripartite Commission was set up to discuss repatriation, composed of Abkhaz and
Georgian representatives and emissaries from Russia and the U.N. High Commissioner for
Refugees. In May 1994, a cease-fire was signed by Georgia and Abkhazia, providing for
Russian troops (acting as CIS “peacekeepers”) to be deployed in a security zone along the
Inguri River that divides Abkhazia from the rest of Georgia. The Military Balance estimates
that about 1,500 Russian “peacekeepers” are deployed. The conflict resulted in about 10,000
deaths and over 200,000 refugees and displaced persons, mostly ethnic Georgians.
CRS-5

---

IB95024
12-03-01
The U.S. Special Negotiator for Regional Conflicts works with the U.N. Secretary
General, his Special Representative, and other Friends of Georgia (France, Germany, Russia,
the United Kingdom, and Ukraine) to facilitate a peace settlement. There are 104 UNOMIG
military observers as of October 2001, including two U.S. personnel. The UNSC agreed that
cooperation with the CIS (Russian) forces was a reflection of trust placed in Russia. Under
various agreements, the Russian “peacekeepers” are to respond to UNOMIG reports of
ceasefire violations, carry out demining, and provide protection for UNOMIG’s unarmed
observers. The U.N. Secretary General, the UNSC, and the U.S. Administration have
officially viewed the cooperation of the Russian “peacekeepers” with UNOMIG as mainly
unobjectionable.
After a hiatus of two years, U.N.-sponsored peace talks were reconvened in mid-1997.
In late 1997, the sides agreed to set up a Coordinating Council to discuss cease-fire
maintenance and refugee, economic, and humanitarian issues. Coordinating Council talks and
those of the Quadripartite Commission have been supplemented by direct discussions between
Abkhaz “President” Vladislav Ardzinba’s envoy and the Georgian State Secretary. The
Quadripartite Commission held a contentious meeting in April 2001, in the context of
growing guerrilla actions. Scheduled meetings of the Coordinating Council have been
postponed repeatedly, twice at the request of the Abkhaz side. Sticking points between the
two sides include Georgia’s demand that displaced persons be allowed to return to Abkhazia,
after which an agreement on broad autonomy for Abkhazia may be negotiated. The
Abkhazians have insisted upon recognition of their effective independence as a precondition
to large-scale repatriation. The U.N. and the Friends of Georgia have been preparing a
document on power-sharing that they hope the two sides will use as a basis for talks, but have
not yet been able to agree on a final draft. Moreover, in October 2001, the U.N. Secretary-
General noted a shift in international focus to crisis management rather than the promotion
of a political settlement.
Increasing tensions over the past several months led to an upsurge in fighting in October
2001 in the Kodori Gorge region of Abkhazia, resulting in approximately 75 deaths. The
clashes have revived the threat of renewed violent conflict between Georgian forces and
Abkhaz separatists backed by Russia. A U.N. helicopter was shot down by a missile on
October 8, killing all nine persons on board; the assailants remain unknown. Abkhaz officials
claim that Georgian irregular forces have been joined by at least 200 Chechen rebels arriving
from the border area with Chechnya. Georgian officials deny any direct involvement in the
fighting, but mobilized the armed forces to the Abkhaz border. On October 11, the Georgian
parliament voted to demand the withdrawal of Russian peacekeeping troops from Abkhazia.
Russian President Vladimir Putin said he would consider their withdrawal, and both Putin and
Shevardnadze pledged increase efforts to avert a renewed war and to reduce the threat of
terrorism.
Economic Conditions, Blockades and Stoppages
The economies of all three South Caucasus states greatly declined in the early 1990s,
affected by the dislocations caused by the breakup of the Soviet Union, conflicts, trade
disruptions, and the lingering effects of the 1988 earthquake in Armenia. Although gross
domestic product (GDP) began to rebound in the states in the mid-1990s, the economies
remain fragile and subject to outside shocks such as Russia’s 1998 financial crisis. Armenia’s
GDP in 2000 was about $2,600 per capita, Azerbaijan’s was about $1,400, and Georgia’s
CRS-6

---

IB95024
12-03-01
was about $1,500 (Economic Intelligence Unit estimates, purchasing power parity).
Widespread poverty and regional conflict have contributed to high emigration from Armenia,
Azerbaijan, and Georgia.
Transport and communications obstructions and stoppages have severely affected
economic development in the South Caucasus and stymied the region’s emergence as an
East-West and North-South corridor. Since 1989, Azerbaijan has obstructed railways and
pipelines traversing its territory to Armenia, and for a time successfully blockaded NK. These
obstructions have had a negative impact on the Armenian economy, since it is heavily
dependent on energy and raw materials imports. Turkey has barred U.S. shipments of aid
through its territory to Armenia since March 1993. P.L. 104-107 and P.L. 104-208 mandated
a U.S. aid cutoff (with a presidential waiver) to any country which restricts the transport or
delivery of U.S. humanitarian aid to a third country, aimed at convincing Turkey to allow the
transit to U.S. aid to Armenia. According to the U.S. Embassy in Baku, Azerbaijan’s
poverty-stricken Nakhichevan exclave “is blockaded by neighboring Armenia,” severing its
“rail, road, or energy links to the rest of Azerbaijan.” Iran has at times obstructed bypass
routes to Nakhichevan. Georgia has cut off natural gas supplies to South Ossetia. Russia at
times has closed its borders with Azerbaijan and Georgia because of conflict in Chechnya.
In 1996, the CIS supported Georgia in imposing an economic embargo on Abkhazia, but
Russia announced in 1999 that it was lifting most trade restrictions, and a railway was
reopened in mid-2000.
Russian Involvement in the Region
Russia has appeared to place a greater strategic importance on maintaining influence in
the South Caucasus region than in Central Asia (except Kazakhstan). Russia has exercised
most of its influence in the military-strategic sphere, less in the economic sphere, and a
minimum in the domestic political sphere, except for obtaining assurances on the treatment
of ethnic Russians. Russia has viewed Islamic fundamentalism as a potential threat to the
region, but has cooperated with Iran on some issues to contain Turkish and U.S. influence.
Russia has tried to stop ethnic “undesirables,” drugs, weapons, and other contraband from
entering its borders, and to contain the contagion effects of separatist ideologies in the North
and South Caucasus. These concerns, Russia avers, has led it to establish military bases in
Armenia and Georgia. The states have variously responded to Russian overtures. Armenia
has close security and economic ties with Russia, given its unresolved NK conflict and
grievances against Turkey. Georgia has objected to Russia’s actions related to the conflict
in Chechnya, its military bases in Georgia, and its support to Abkhaz separatists. Azerbaijan
has been concerned about Russia’s ties with Armenia.
Military-Strategic Interests
Russia’s armed presence in the South Caucasus is multi-faceted — including military
base personnel, “peacekeepers,” and border troops. The first step by Russia in maintaining
a military presence in the region was the signing of the Commonwealth of Independent States
(CIS) Collective Security Treaty by Armenia, Russia, and others in 1992, which calls for
mutual defense consultations. Russia prevailed on Georgia and Azerbaijan to join the CIS in
1993, but they withdrew from the collective security treaty in 1999. Russia also secured
permission for two military bases in Armenia and four in Georgia. Russian forces help guard
CRS-7

---

IB95024
12-03-01
the Armenian-Turkish border. The total number of Russian troops has been estimated at
about 3,100 in Armenia and 5,000 in Georgia (The Military Balance 2000-2001). Another
100,000 Russian troops are stationed nearby in the North Caucasus. In 1993, Azerbaijan was
the first NIS to get Russian troops to withdraw (about 350 Russian troops remain at the
Gabele radar site). In January 1999, Georgia assumed full control over guarding its sea
borders, and in October 1999, most of the Russian border troops left, except for some liaison
officers. Armenia has argued that its Russian bases provide for regional stability by protecting
it from attack. Russia has said that it has supplied weapons to Armenia, including S-300
missiles and Mig-29 fighters for air defense, to enhance Armenia’s and NK’s security.
Azerbaijan and Georgia have raised concerns about the spillover effects of Russia’s military
operations in its breakaway Chechnya region. In December 1999, the OSCE agreed to
Georgia’s request that it send observers to monitor Georgia’s border with Chechnya.
Since the September 11 terrorist attacks in the United States, Russia has stepped up its
campaign against separatist rebels in Chechnya, claiming links between them and Osama bin
Laden. Georgia is on the front line of this renewed conflict. Georgia has accepted thousands
of Chechen refugees, but has not acknowledged the presence of armed rebels among them.
Russia officials have criticized Georgia for harboring Chechen militants in the Pankisi Gorge
area, which they consider to be a staging ground for the Chechen rebels. They have
demanded that Georgia extradite Chechen rebels to Russia. Some Russian officials have
threatened military action in Georgia to eliminate the Chechen rebel threat. At the November
29 CIS summit in Moscow, Georgian officials raised complaints about alleged Russian army
incursions into Georgia during air attacks on Chechnya.
Russia’s Bases in Georgia. In 1999 Russia agreed to provisions of the adapted
Conventional Armed Forces in Europe (CFE) Treaty calling for Russia to reduce weaponry
at its bases in Georgia, to close its bases at Gudauta and Vaziani by July 2001, and to discuss
closing Russian military bases at Batumi and Akhalkalaki. Russia moved some weaponry
from the bases in Georgia to bases in Armenia, raising objections from Azerbaijan. On July
1, 2001, Georgia reported that the Vaziani base and airfield had been turned over by Russia
to Georgia. The Russian government, however, reported that it was unable to turn over the
Gudauta base by the deadline, ostensibly because it had not had enough time to build weapons
warehouses and replacement barracks in Russia, and because fearful Abkhazians had
hampered the withdrawal. It proposed that the base be turned into a rehabilitation center for
Russian “peacekeepers.” Some observers speculated that Russia would use the anti-terrorism
issue after September 11 as an excuse not to withdraw from its military bases. However, in
November, Russia announced the withdrawal of its forces and equipment from the Gudauta
base. The Georgian foreign ministry has questioned some of the terms of closure, such as the
continued presence of some 600 Russian troops on the base. With regard to the Batumi and
Akhalkalaki bases, Russia has proposed that it would need 14-15 years and $150 million to
close them, but might be able to move more quickly if the West paid for the closings.
Georgian officials have spoken of a period of 2-3 years for their closure.
Caspian Energy Resources
Russia has tried to play a significant role in future oil production, processing, and
transportation in the Caspian Sea region. Russia’s oil firm LUKoil has investment stakes in
the Azerbaijan International Oil Consortium (AIOC) and other consortiums, and Transneft
in an oil pipeline to Russia’s Novorossisk Black Sea port. In an effort to increase influence
CRS-8

---

IB95024
12-03-01
over energy development, Russia’s policymakers during much of the 1990s insisted that the
legal status of the Caspian Sea be determined before resources could be exploited. Iran and
Turkmenistan initially endorsed Russia’s view of a “closed sea” or “lake,” where resources
are commonly exploited. Russia changed its stance somewhat by agreeing on seabed
delineation with Kazakhstan in 1998 and with Azerbaijan in January 2001, prompting
objections from Iran. Russian President Putin criticized Western private investment in energy
development in the Caspian region, and appointed a special energy emissary to the region.
As part of this new assertiveness, Russian energy firms stepped-up their efforts to gain major
influence over Caspian energy resources and routes.
The Protection of Ethnic Russians
As a percentage of the population, there are fewer ethnic Russians in the South Caucasus
states than in most other NIS. According to the 1989 Soviet census, there were 52,000
ethnic Russians in Armenia (1.6% of the population), 392,000 in Azerbaijan (5.6%), and
341,000 in Georgia (6.3%). These numbers have declined since then. Russia has voiced
concerns about the safety of ethnic Russians in Azerbaijan and Georgia. Many observers
argue that the issue of protecting the human rights of ethnic Russians is a stalking horse for
Russia’s military-strategic and economic interests.
The Roles of Turkey, Iran, and Others
The Clinton Administration generally viewed Turkey as able to foster pro-Western
policies and discourage Iranian interference in the South Caucasus states, though had some
concerns about a Turkish tilt to Azerbaijan in the NK conflict. Critics of Turkey’s larger role
in the region also caution that the United States and NATO are liable to be drawn by their ties
with Turkey into regional imbroglios. Turkey seeks good relations with Azerbaijan and
Georgia and some contacts with Armenia, while trying to limit Russian and Iranian influence.
Azerbaijan likewise views Turkey as a major ally against such influence, and as a balance to
Armenia’s ties with Russia. Armenia is a member of the Black Sea Economic Cooperation
zone, initiated by Turkey, and the two states have established consular relations. Roadblocks
to better Armenian-Turkish relations include Turkey’s rejection of Armenians’ claims of
genocide in 1915-1923 and its support for Azerbaijan in the NK conflict, including the border
closing. Georgia has an abiding interest in ties with the approximately one million Georgians
residing in Turkey and the approximately 50,000 residing in Iran, and has signed friendship
treaties with both states. Turkey and Russia are Georgia’s primary trade partners.
Iran’s interests in the South Caucasus include discouraging Western powers such as
Turkey and the United States from gaining influence (Iran’s goal of containing Russia
conflicts with its cooperation with Russia on these interests), ending regional instability that
might threaten its own territorial integrity, and building economic links. A major share of the
world’s Azerbaijanis reside in Iran (estimates range from 6-12 million), which also hosts about
200,000 Armenians. Ethnic consciousness among some “Southern Azerbaijanis” in Iran has
grown, which Iran has countered by limiting trans-Azerbaijani contacts, raising objections
among many in Azerbaijan. Azerbaijani elites fear Iranian-supported Islamic extremism and
question the degree of Iran’s support for an independent Azerbaijan. Iran has growing trade
ties with Armenia and Georgia, but its trade with Azerbaijan has declined. To block the West
CRS-9

---

IB95024
12-03-01
and Azerbaijan from developing Caspian Sea energy resources, Iran has proposed either
common control by the littoral states or the division of the seabed into five equal sectors.
U.S. policy aims at containing Iran’s threats to U.S. interests (See CRS Issue Brief IB93033,
Iran). Some critics argue that if the South Caucasus states are discouraged from dealing with
Iran, particularly in building pipelines through Iran, they face greater pressure to
accommodate Russian interests. (See also below, Energy.)
Among non-bordering states, the United States and European states are the most
influential in the South Caucasus in terms of aid, trade, exchanges, and other ties. U.S. and
European goals in the region are broadly compatible, involving integrating it into the West
and preventing an anti-Western orientation, opening it to trade and transport, obtaining
energy resources, and helping it become peaceful, stable, and democratic. The South
Caucasus region has developed some economic and political ties with other Black Sea and
Caspian Sea littoral states, besides those discussed above, particularly with Ukraine, Romania,
Kazakhstan, and Turkmenistan. Azerbaijan shares with Central Asian states common
linguistic and religious ties and concerns about some common bordering powers (Iran and
Russia). The South Caucasian and Central Asian states have common concerns about
terrorist threats and drug trafficking from Afghanistan. Energy producers Kazakhstan,
Turkmenistan, and Uzbekistan have considered trans-Caspian transport as a means to get
their oil and gas to Western markets. As Central Asia’s trade links to the South Caucasus
become more significant, it will become more dependent on stability in the region.
Overview of U.S. Policy Concerns
By the end of 1991, the United States had recognized the independence of all the former
Soviet republics. The United States opened an embassy in Azerbaijan in March 1992. The
United States established close ties with Georgia after Eduard Shevardnadze, formerly pro-
Western Soviet foreign minister, assumed power there in early 1992. The United States
pursued close ties with Armenia, because of its profession of democratic principles, and
concerns by Armenian-Americans and others over its fate. Faced with calls in Congress and
elsewhere for a U.S. aid policy for the NIS, then-President Bush sent the Freedom Support
Act to Congress, signed with amendments into law in October 1992 (P.L. 102-511). Other
authorizing language includes the “Silk Road Strategy Act” in Consolidated Appropriations
for FY2000 (P.L.106-113), that calls for enhanced policy and aid to support conflict
amelioration, humanitarian needs, economic development, border controls, transport and
communications, democracy, and the creation of civil societies in the South Caucasus and
Central Asia.
Focusing on the Armenia-Azerbaijan conflict over the breakaway Nagorno Karabakh
(NK) region, the Freedom Support Act’s Sec. 907 prohibits U.S. government-to-government
assistance to Azerbaijan, except for nonproliferation and disarmament activities, until the
President determines that Azerbaijan has taken “demonstrable steps to cease all blockades and
other offensive uses of force against Armenia and NK.” U.S. aid was at first limited to that
supplied through international agencies and private voluntary and nongovernmental
organizations (NGOs). A provision in P.L. 104-107 eased the prohibition for FY1996, by
stating that “assistance may be provided for the Government of Azerbaijan for humanitarian
purposes, if the President determines that humanitarian assistance provided in Azerbaijan
through NGOs is not adequately addressing the suffering of refugees and internally displaced
CRS-10

---

IB95024
12-03-01
persons.” Further easing was provided for FY1998 by P.L. 105-118, which permitted
humanitarian aid, support for democratization, Trade and Development Agency (TDA)
guarantees and insurance for U.S. firms, Foreign Commercial Service (FCS) operations, and
aid to prevent the spread of weapons of mass destruction. In FY1999 (P.L. 105-277) and
thereafter, changes included approval for Overseas Private Investment Corporation (OPIC)
activities and Export-Import Bank financing.
The State Department has argued that Sec.907 still restricts aid for anti-corruption and
counter-narcotics programs, regional environmental programs, and programs such as good
business practices, tax and investment law, and budgeting. The Defense Department has
argued that Sec. 907 restricts military assistance to Azerbaijan, including for possible energy
pipeline security. The Clinton Administration also argued that the repeal of Sec. 907 would
give it greater leeway to influence Azerbaijan and to play an even-handed role in brokering
the NK conflict. The 100 Member House-based Armenian Caucus, U.S.-based Armenian
groups, and others have argued against repeal until the blockade is lifted. On October 9,
2001, Senator Brownback introduced S. 1521, a bill to authorize the President to waive Sec.
907 for national security reasons. He has argued that lifting sanctions is necessary for the
fight against global terrorism. The bill was referred to the Senate Foreign Relations
Committee. In a letter to the committee, Secretary of State Powell requested a national
security waiver for Sec. 907, arguing that it severely constrained the U.S.’ ability to provide
support to Azerbaijan in the war against terrorism. The Senate-passed version of H.R. 2506,
the FY2002 foreign operations appropriations bill, would allow the President to waive Sec.
907 if he determined that doing so would support U.S. efforts to counter terrorism, would
support the operational readiness of U.S. armed forces or coalition partners to counter
terrorism, or was important to Azerbaijan’s border security; and, would not undermine
ongoing efforts to negotiate a peaceful settlement between Armenia and Azerbaijan.
U.S. policy toward the South Caucasus states includes fostering free market democracies
and promoting resolution of regional conflicts. Aid for resolution of the NK, Abkhazia, and
other regional conflicts supports these goals. The Bush Administration views the
establishment of a stable free market democracy in Azerbaijan as “critical to the achievement
of U.S. goals” in the region, including energy development to diversify world energy supplies,
U.S. energy security, and U.S. exports. Georgia is viewed as “an important geopolitical
linchpin in the Caucasus region,” since it is “the western portal to the Great Silk Road and the
newest conduit of Caspian oil to world markets ... a strategic gateway of energy and trade
routes linking East and West” (Congressional Budget Justification for Foreign Operations,
FY2002; see also below, Energy). Assistant Secretary of State for European and Eurasian
Affairs Ambassador Elizabeth Jones visited Azerbaijan, Georgia, and Armenia in August
2001. The Bush Administration named Ambassador Rufolf Perina to serve as the next Special
Negotiator for the NK and Eurasian conflicts. The Special Negotiator is co-chair of the Minsk
Group of states mediating the NK conflict and takes part in the Friends of the U.N. Secretary
General consultations and efforts of the Secretary General’s special representative to settle
the Abkhaz conflict. At the invitation of President Bush, Georgian President Shevardnadze
visited Washington in early October 2001, and received assurances of continued U.S. support
for Georgia’s independence and territorial integrity.
In the wake of the September 2001 terrorist attacks on the United States, U.S. priorities
have shifted toward the global anti-terrorist response. U.S. - Russian cooperation on many
fronts of this effort may carry profound consequences for the South Caucasus region.
CRS-11

---

IB95024
12-03-01
Observers expect the West to acquiesce to Russia’s own counter-insurgency campaign in
Chechnya and to its demands that Georgia help counter the Chechen rebel threat from its side
of the border.
In this new global environment, some observers point out that developments in this
region are largely marginal to U.S. interests. They suggest that the oil and other natural
resources there are not vital to U.S. trade and security and are, in any event, unlikely to be
fully developed and available to Western markets for many years. They urge great caution
in adopting policies that will heavily involve the United States in a region beset by ethnic and
civil conflicts. They are skeptical of arguments that there is a “power vacuum” in the region
that the United States must fill. U.S. aid for humanitarian and security purposes should
continue, but other aid should be curtailed, some argue, particularly since these states fall
short of U.S. goals for democratization, human rights, and peace settlements.
Other observers believe that U.S. policy toward the South Caucasus should be far more
active, given the new security situation. They call for greater U.S. aid and conflict resolution
efforts to bolster weak states and counter regional instability caused by warfare, crime,
smuggling, and terrorism. Of particular concern are Russian moves viewed as attempts to
pull these NIS back into the Russian orbit. Some argue that improved U.S. relations with
these NIS would serve to “contain” Russian and Iranian influence, and that improved U.S.
ties with Azerbaijan would benefit U.S. relations with other Islamic countries, particularly
Turkey and the Central Asian states. Many add that Azerbaijani and Central Asian oil and
natural gas deliveries would expand world supplies, making the United States and the West
less vulnerable to supply cutoffs in the Middle East. The governments of Azerbaijan and
Georgia have offered support and assistance to the U.S.-led anti-terrorist coalition.
Aid Overview
The United States is the largest bilateral aid
The FY2001 Estimate and FY2002
donor by far to Armenia and Georgia, and Armenia
Request (in millions)
is among the three NIS that have received more
FY2001
FY2002
than $1 billion in U.S. aid FY1992-FY2000 (see
Estimate* Request*
Table 1; the others are Russia and Ukraine).
Armenia
$91.5
$71.3
Georgian President Shevardnadze has often stated
Azerbaijan
$36.6
$50.0
that U.S. humanitarian aid made a critical
Georgia
$106.7
$97.2
difference in averting famine in Georgia in the early
*Includes Freedom Support Act (FSA),
1990s and helping it maintain its stability and
Agriculture Dept. food aid, Peace Corps, and
independence. The United States also supplied
security assistance.
critical food and heating oil to Armenia in 1993-
Source: State Department
1995, and has sent aid focused on ameliorating the
impact of the blockades. Armenia and Georgia
have regularly ranked among the top world states
in terms of per capita U.S. aid, indicating the high level of concern within the Administration
and Congress. Foreign Operations Appropriations for FY1998 (P.L. 105-118) created a new
South Caucasian funding category and earmarked $250 million of $770 million in NIS aid to
this category. FY1999 appropriations (Omnibus Appropriations, P.L. 105-277) sustained this
category, with Congress earmarking $228 million of $847 million in Freedom Support Act
aid, and in FY2000 and FY2001 (though without an earmark). Besides bilateral aid, the
United States contributes to multilateral organizations such as the International Monetary
CRS-12

---

IB95024
12-03-01
Fund and the World Bank that aid the region. (See also CRS Issue Brief IB95077, The
Former Soviet Union and U.S. Foreign Assistance.)
While for most of the 1990s the Clinton Administration devoted the bulk of aid to the
South Caucasus to urgent humanitarian needs, increasing attention by the late 1990s was
given to fostering democratization. U.S. democratization aid includes advice on drafting
legislation, training judges, and electoral support. Section 907 restrictions on some support
for democratization in Azerbaijan were eased in FY1998 and thereafter.
For FY2002, the House passed H.R. 2506, the Foreign Operations Appropriations bill,
on July 24, 2001. The House bill repeats language from previous years establishing a South
Caucasus funding category, of which 15% may be devoted to foster peace settlements,
especially in the vicinity of Georgia’s breakaway Abkhazia region and Azerbaijan’s breakaway
Nagorno Karabakh region. Equal earmarks are provided for Armenia and Georgia (“not less
than $82.5 million”). The bill repeats language from previous years on exclusions from
Section 907 limits on aid to Azerbaijan. The Committee on Appropriations (H.Rept.107-142)
repeated last year’s warning that the level of assistance to a South Caucasus country, other
than humanitarian aid, depended on its willingness to resolve regional conflicts, including
cooperation with the Organization for Security and Cooperation in Europe’s “Minsk Group”
efforts to resolve the NK conflict. The Committee urged parties to the NK conflict to
strengthen compliance with the cease-fire, study post-conflict regional development, and set
up youth exchanges. The Senate passed its version of H.R. 2506 on October 24, 2001. It
earmarks $90 million each in Freedom Support Act assistance for Georgia and Armenia. The
Senate bill includes a waiver of Sec. 907 restrictions on assistance to Azerbaijan (Sec. 599)
through the end of December 2002. It adds an earmark of $4.6 million in military assistance
for Armenia.
U.S. Security Assistance

Besides economic and humanitarian aid, some U.S. security assistance has been
provided. The FY1997 Defense Authorization Act (P.L. 104-201) permitted aid for customs
and border enhancements to prevent the spread of mass destruction weapons. Sec. 517 of
Foreign Operations Appropriations for FY2001 (P.L.106-429) repeated prior year language
forbidding use of Freedom Support Act aid to enhance military capabilities. Conferees on
Foreign Operations Appropriations for FY1998 (H.Rept. 105-401) urged that “training and
infrastructure support for customs and border control by Georgian officials should be a high
priority,” and the State Department set up a Border Security and Related Law Enforcement
Assistance Program for Georgia. Some of this aid has been used by Georgia to fortify its
northern border with Russia and Chechnya. In 1997, a U.S.-Azerbaijan Bilateral Security
Dialogue was inaugurated to deal with joint concerns over terrorism, drug trafficking,
international crime, and the proliferation of weapons of mass destruction (WMD). To
facilitate the closure of Russian military bases in Georgia, the United States committed over
$10 million in FY2000. In October 2000, the Security Assistance Act of 2000 was signed
into law, authorizing nonproliferation, export control, border, anti-terrorism, and other
security aid for the South Caucasus states and earmarking such aid for Georgia. The United
States has signed many other agreements with the South Caucasus countries on military
cooperation, combating WMD proliferation, and securing nuclear materials.
CRS-13

---

IB95024
12-03-01
The Azerbaijani and Georgian presidents have stated that they want their countries to
join NATO; much greater progress in military reform, however, will likely be required before
they are considered for membership. All three states joined NATO’s Partnership for Peace
(PFP) and Azerbaijan and Georgia have actively participated in PFP exercises. Azerbaijani
and Georgian troops serve as peacekeepers in the NATO-led operation in Kosovo.The
“Cooperative Partner” PFP amphibious assault landing and natural disaster response exercises
were held on Georgia’s Black Sea coast in June 2001, involving 4,000 mostly U.S., Georgian,
and Turkish troops. Sec. 907 prohibits much U.S. PFP aid to Azerbaijan (including FMF),
and by U.S. policy similar aid is not provided to Azerbaijan’s fellow combatant Armenia.
Both countries, beginning in FY2001, are receiving some U.S. PFP aid for democratizing
their military establishments.
U.S. Support for Economic Reforms
The development of expertise for economic reform in Armenia has been fostered through
the Center for Economic Policy, Research, and Analysis (CEPRA), set up in FY1994. U.S.
aid to Georgia has included setting up a business service center in Tbilisi to encourage small
business development, and technical aid for monetary and fiscal reform, including through the
FY1996 creation of a Center for Economic Policy Analysis and Reform (CEPAR). A U.S.-
Armenia Task Force on Economic Cooperation held its first meeting in March 2001, and a
U.S.-Azerbaijan Task Force on Economic Development, set up in January 2000, held its third
meeting in March 2001. Both these task forces bring together high-level economic officials
and are headed on the U.S. side by the Coordinator of Assistance to the NIS. Congress
earmarked $15 million for FY1996 for the creation of a Trans-Caucasus Enterprise Fund,
emphasizing its interest in providing capital resources and technical assistance to private
enterprise. Congress provided an added $10 million in FY1997, but granted a Clinton
Administration request that, as alternatives to creating the Fund, allocations might be
transferred to other funding groups or to OPIC to support privatization. USAID in FY1997
transferred $5 million to OPIC, and in FY1997-FY1998 granted U.S. bank Shorebank and
the Foundation for International Community Assistance $20 million for micro- and small
business lending.
Trade and Investment
The Bush Administration and others maintain that U.S. support for privatization and the
creation of free markets directly serve U.S. national interests by opening new markets for
U.S. goods and services, and sources of energy and minerals. Among U.S. economic links
with the region, bilateral trade agreements providing for normal trade relations for products
have been signed and entered into force with all three states. Bilateral Investment Treaties
(BIT) providing national treatment guarantees have been signed (that with Azerbaijan has
been submitted to the U.S. Congress for advice and consent). OPIC has signed agreements
that are in force with all three states on financing and insuring U.S. private investment. The
Export-Import Bank has signed agreements with Armenia and Georgia for financing U.S.
exports. Peace Corps volunteers teach small business development, English language skills,
and health awareness in Armenia. With U.S. support, Georgia was formally admitted to the
World Trade Organization in June 2000, the second NIS (after Kyrgyzstan) to gain
admission. P.L.106-476, signed into law on November 9, 2000, states that the President may
determine that Title IV should no longer apply to Georgia and proclaim that its products will
receive permanent nondiscriminatory (normal trade relations) treatment. Citing “due regard
CRS-14

---

IB95024
12-03-01
for the findings of the Congress,” President Clinton on December 29, 2000, determined and
proclaimed such permanent normal trade relations (see also CRS Issue Brief IB93107,
Normal-Trade-Relations).
Energy Resources and Policy. The U.S. Energy Department reports estimates of
11 billion barrels of proven oil reserves, and estimates of 11 trillion cubic feet of proven
natural gas reserves in Azerbaijan. Many problems remain to be resolved before Azerbaijan
can fully exploit and market its energy resources, including project financing, political
instability, ethnic and regional conflict, and the security and construction of pipeline routes.
The recent conflict in Afghanistan is likely to increase regional insecurity, which could affect
some or all of the Caspian Sea energy projects.
U.S. policy goals regarding energy resources in the Central Asian and South Caucasian
states have included supporting their sovereignty and ties to the West, supporting U.S. private
investment, breaking Russia’s monopoly over oil and gas transport routes by encouraging the
building of pipelines that do not traverse Russia, promoting Western energy security through
diversified suppliers, assisting ally Turkey, and opposing the building of pipelines that transit
Iran. In 1998, the Clinton Administration set up the post of Special Advisor to the President
and the Secretary of State for Caspian Basin Energy Diplomacy to coordinate policies and
programs of TDA, OPIC, the Department of Energy, and other agencies (this post retained
by the Bush Administration).
On May 17, 2001, President Bush announced his national energy policy, in the form of
a report issued by Vice President Cheney. It recommended that the President direct U.S.
agencies to support building the Baku-Ceyhan oil pipeline, expedite use of the pipeline by oil
companies operating in Kazakhstan, support constructing a Baku-Ceyhan natural gas pipeline
to export Azerbaijan’s Shah Deniz gas, and otherwise encourage the Caspian regional states
to provide a stable and inviting business climate for energy and infrastructure development.
In an April 2001 television interview, U.S. Ambassador Elizabeth Jones, then-Senior Advisor
on Caspian Basin Energy Diplomacy, indicated that the Baku-Ceyhan pipeline route had been
firmly established, precluding a route through Armenia, although the United States supported
the involvement of Armenia in regional energy matters. H.Con.Res. 162, introduced on June
14, 2001, calls for the United States to avoid supporting the Baku-Ceyhan pipeline or similar
projects that exclude Armenia.
U.S. companies are shareholders in about one-half of twenty international production-
sharing consortiums, including the Azerbaijan International Operating Company (AIOC),
formed to exploit Azerbaijan’s oil and gas fields. In 1995, Aliyev and the AIOC decided to
transport “early oil” (the first and lower volume of oil from AIOC and other fields) through
two Soviet-era pipelines in Georgia and Russia to ports on the Black Sea. The capacity of
each of these pipelines is around 100-115,000 barrels per day. The trans-Russia “early oil”
pipeline began delivering oil to the port of Novorossiisk in late 1997. Instability where the
pipeline crosses Russia’s Chechnya region halted oil flows in mid-1999, but a detour around
Chechnya was completed in April 2000. The trans-Georgian pipeline began delivering oil to
Black Sea tankers in early 1999.
The Clinton Administration launched a campaign in late 1997 stressing the strategic
importance of the Baku-Ceyhan route as part of a “Eurasian Transport Corridor.” In
November 1999, Azerbaijan, Georgia, Turkey, and Kazakhstan signed the “Istanbul Protocol”
CRS-15

---

IB95024
12-03-01
on construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. In October 2000, an oil
pipeline construction group, the Main Export Pipeline Company (MEPCO) was formed,
composed of the Azerbaijani State Oil Company (SOCAR; with a 50% stake), BP-Amoco
(25.41%), Unocal (7.48%), and others. MEPCO’s basic engineering feasibility study was
completed in May 2001. Estimates suggest that the 1,000-mile pipeline (carrying half a million
barrels per day) may cost $2.7-$3 billion and be completed in 2005. BP-Amoco leads the
pipeline project. BP-Amoco has also led negotiations between Azerbaijan and Turkey on
building a gas pipeline, estimated to cost $1 billion, parallel to the planned Baku-Ceyhan oil
pipeline. On September 29, 2001, Georgia and Azerbaijan signed an accord to transport and
sell natural gas from Azerbaijan’s Shah Deniz offshore field to Georgia and on to Turkey.
Ships operated by BP-Amoco conducting a survey of oilfields in the south Caspian Sea
off Azerbaijan’s coast on July 23, 2001, were buzzed by Iranian military aircraft and ordered
by an Iranian gunboat to leave the area. BP-Amoco suspended its survey in the field. In
August, the State Department expressed support for Azerbaijan in its efforts to explore
Caspian oil resources and called Iran’s threatening actions against two BP oil research ships
“provocative” and “counter-productive to efforts to achieve a peaceful resolution of Caspian
boundary disputes.”
Congressional interest has been reflected in several hearings on the South Caucasus and
Central Asia. Conferees on Omnibus Appropriations for FY1999 (P.L. 105-277) stated that
they “believe that the development of energy resources in the Caspian Sea region is important
for the economic development of the countries involved, as well as regional stability,”
endorsed “alternatives to a pipeline through Iran,” and supported “an east-west energy
corridor to assist in developing the region’s energy resources.” The “Silk Road Act”
language in P.L. 106-113 authorizes enhanced policy and aid to support economic
development and transport needs in the South Caucasus and Central Asia. The Europe
Subcommittee of the House International Relations Committee held a hearing on U.S.
interests in the Caucasus and Caspian region on October 10, 2001. Congressional action to
lift aid sanctions on Azerbaijan might provide a boost to energy development in the South
Caucasus.
Table 1: Cumulative Funds Budgeted (FY1992-FY2000) for Assistance
to the South Caucasus States
(FREEDOM Support Act and Agency Programs)
(millions of dollars)
Armenia
Azerb.
Georgia
Total
Democracy Programs
95.05
40.16
75.26
210.47
Market Reform Programs
238.35
20.82
126.09
385.26
Security Programs
13.53
7.11
100.12
120.76
Humanitarian Programs
705.41
160.42
530.39
1,396.22
Cross-Sectoral/Other Programs*
75.67
10.43
30.09
116.19
Funds Budgeted as of 9/30/00
1,128.01
238.94
861.94
2,228.89
*Includes healthcare, environmental, Peace Corps, USAID exchanges and training, and nuclear
reactor safety programs
Source: U.S. State Department, Coordinator’s Office
CRS-16

---