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Press Briefing: Upcoming G8-Summit [Rush Transcript; Federal News Service, Inc.]

Speakers: Stephen Sestanovich, George F. Kennan Senior Fellow for Russian and Eurasian Studies, Council on Foreign Relations; Director, CFR Independent Task Force on U.S. Policy Toward Russia, David G. Victor, Adjunct Senior Fellow for Science and Technology, Council on Foreign Relations; Director, CFR Independent Task Force on Energy and U.S. Foreign Policy, and Steven Simon, Hasib J. Sabbagh Senior Fellow for Middle Eastern Studies, Council on Foreign Relations
July 7, 2006
Council on Foreign Relations New York, NY

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LEE FEINSTEIN: Welcome to the beautiful and commodious conference room of the Council on Foreign Relations in Washington, and thank you for joining us for the curtain-raiser for next week’s G-8 meeting. Some of you, I know, will be traveling with the president and secretary of State and others, will be reporting back here. And for both of those audiences we’ve assembled a good group of folks to address some of the main issues that will be the topics of conversation next week.

We have bios for all of us, so I will not get into extended introductions, but let me briefly acknowledge my colleagues, Steve Sestanovich, who is senior fellow, Kennan fellow, on all things Russian and former Soviet, and the project director of the council’s report, which I think you all have, titled “Russia’s Wrong Direction.”

We also have to my right David Victor, who’s an adjunct fellow at the Council on Foreign Relations, and one of this country’s preeminent scholars in the area of energy and energy policy, which is the nominal, principal topic of next week’s meeting.

And we have, I’m very pleased to say, Steve Simon, who has just recently joined us at the council as a senior fellow. You have his bio. He is one of our experts on terrorism and the Middle East, and I’m very pleased he can join us.

The meeting is on the record, and we will proceed as follows. Each of the fellows will give brief presentations, and then we will open it up to your questions. Steve will address questions related to the state of U.S.-Russian relations and Russia’s internal development. David Victor is next up, and he will discuss energy issues to be addressed at the summit and also related subjects. And Steve Simon will talk about Iran, issues related to Iraq, if he so chooses, et cetera. And I may add a word or two at the end about the subject du jour of North Korea and possibly its relationship to what has happened this week.

So with that, I will turn the floor over to Steve Sestanovich.

STEPHEN SESTANOVICH: Thank you, Lee.

I want to touch on four things. First of all, a few words about the overall context of the summit. Secondly, about the context of Russian-American relations. Third, about how democracy will figure in the meetings that President Bush has, both bilateral and multilateral. And finally, a couple of what I’ll call “watch out fors.”

First about the overall context of the summit. This G-8 meeting seems to me to be one that has an unusually large number of moving parts. The G-8 is always a very scripted event, but there are a lot of issues that have emerged that create some uncertainty about the results; how North Korea will be handled, how Iran will be handled, how energy will be handled.

There are also a good number of issues for a bilateral agenda between President Bush and President Putin, and they will have quite a lot of meeting time. They will meet on Friday evening, on Saturday at lunch, and after. That’s the only bilateral meeting, as I understand it, that President Bush is going to have with anybody there. And on that agenda is, of course, the WTO, relations between Georgia and Ukraine and the United States and NATO and, of course, Russia.

A third issue, Russian democratic development, may play some role in both of these categories, the multilateral and the bilateral, although how is still very unclear. So much for the overall context of the summit.

The context of Russian-American relations. I think it is generally acknowledged that these have become more contentious of late. Vice President Cheney, his famous speech in Vilnius gave a new and more contentious tone to the relationship. President Putin has responded with his own—responded and, I would say, escalated with his own comments, which were a stinging rebuttal, his famous references to the United States as “comrade wolf,” even if he called President Bush yesterday a decent friend.

His aides have gone a little further in the escalation. His adviser Mr. Surkov has rejected a lot of American complaints, saying that when the Americans talk about democracy, really they’re only thinking about hydrocarbons. And one of his other advisers has said, “They talk about democracy, but they just want to get into our pockets.”

The usual pattern—I mean this administration’s strategy in some ways seems to be to have some of this tough talk out on the table before the meeting so there doesn’t have to be so much of it at the meeting itself. And I think two factors probably make it more likely that this tone will not continue at the meeting.

First of all, it’s the usual pattern for presidents to want to make nice when they’re in each other’s company, and secondly, the emergence of some of the security issues that we’ve already alluded to.

A very senior administration official said to me recently, “We’re not going to rip into him just before we sit down to try to do business.” And I think that’s clearly going to be the watch word here. There’s not going to be a lot of ripping into him. We’ve seen this many times before.

But the question that’s still asked is, in what way have difficult issues—and in particular the issue of Russia’s internal evolution—been addressed in the run-up to these meetings?

I’d point you to the press conference that the foreign ministers had last week after their session in Moscow, at which Secretary Rice was asked about the importance of Russia’s de-democratization, and she said, “We’ve raised this in the past, and we’ll do so again,” at which point, Foreign Minister Lavrov interjected, “Yes, but it didn’t come up in today’s meeting.” A rather dry deflation of her point. And it’s not too clear that it’s been on the agenda at the G-8 at any stage.

There’s a European appetite in particular for addressing this issue multilaterally. It’s very unclear, and it is very limited, and it’s rather unclear that the United States has been able to achieve a—what I call a G-7 consensus about the significance that this issue has in the group’s relations with Russia, or about the importance of kind of raising it bilaterally.

If you ask this question—at the end of the meeting—and this became a big question after January 1 in particular with the confrontation between Russia and Ukraine—would—has Russia—will Russia have, at the end of the meeting, have seen a coordinated effort by the U.S. and the Europeans to elevate this issue, either multilaterally or bilaterally, in a significant and visible way? I think the answer looks to be no.

Now, I said that democracy is the issue, although prefigured—previewed in many ways in Russian-American relations prior to this summit, it is not going to be a particularly visible issue in the meeting. Pre-summit briefings have indicated that it is going to be touched on in some way when the president and Putin speak privately. And I think it’s clear that because—(off mike)—all of them being in this—by calling attention to this issue, it’s clear that the—whatever the public handling of the issue will be that the stage is set for very close scrutiny of body language, that the—there will be a lot of questioning, I’m assuming from those of you who are around this table, of senior officials and perhaps even the leaders themselves as to how it’s being addressed.

And so let me just add one word here about how this figures into Russian policy, because Russian officials have increasingly used the term sovereign democracy as the label for—what Putin is trying to achieve, and what it seems to mean is almost that foreign—resisting foreign interference is a core legitimizing principle of the Putin era. There’s been a lot of hilarious talk lately, I think, about the U.S. wanting to control Russian energy totally, which no one has dreamed of that I know of, from people, of course, who have been establishing their own control over Russian energy. But leave aside the hilarity of this, I think that it is clear that Russian officials see a significant political benefit to pushing back against this—(off mike).

Finally, let me touch on what I call the—a couple of “watch out for” issues that you might be on the lookout for the way in which they figure in the encounters of the leaders, one related to Russian domestic politics. There has been a revival recently of third-term talks for Putin, much more visible in public, both pro and con.

You may be interested to know that the head of the constitutional court has been publicly warning about the dangers of absolute power for the president, for President Putin, and the indulgence that he can receive from the public and other political figures because of his popularity.

The second “watch out for” issue involves relations with its neighbors, and in particular I’d mention two here. One is the extra prominence that the Georgia and Ukraine interest in achieving NATO membership has gained recently, particularly in Russian statements. And this may be—and one interesting question will be whether this is addressed in the bilateral meetings between Bush and Putin.

There is not a NATO consensus about how to address the membership interest of these two countries but, I think, a strong recognition on the part of NATO members of the importance of not seeming to back down on this question and not handing Russia a veto over it.

Many Russians have spoken recently about Russia’s opportunity, in dealing with these two cases, of blocking NATO enlargement for the first time in the—since it began sort of almost 10 years ago.

And finally, the question of frozen conflict—this is an issue that American officials have said they want to put on the agenda. It has—by “frozen conflict,” I refer to the separatist stand-offs in a number of states of the former Soviet Union—Moldova, Georgia, Armenia and Azerbaijan.

The American officials said they wanted to put this on the agenda. They’ve not succeeded in getting it on the formal agenda, but it appears that it will be addressed, as it was in the ministerial last week, under “other business.”

It appears that it was discussed briefly. The word that was used by some officials was “touched on,” which may mean very briefly.

The question is, will there be anything to show for this discussion, any commitment by Russia to—that it can be held to later? It has, as I mentioned, been addressed in a number of preparatory meetings for the summit, but in what officials tell me is a non-confrontational way, meaning that there are a lot of hortatory urgings about seeing these conflicts as, quote, “something we all need to work harder on.”

With that, let me conclude and turn the program back to you, Lee.

FEINSTEIN: Let me just acknowledge Anya Schmemann, who has joined us. Anya is the most important person in the room, in that she is the Washington director of communications at the Council. Thanks, Anya for setting this up.

ANYA SCHMEMANN ( CFR D.C. press liaison): Thank you.

FEINSTEIN: David?

DAVID G. VICTOR: Thanks, Lee.

Energy issues are listed as the first item for attention. That’s partly because Russia is a big energy producer, has the world’s largest gas reserves, very large oil reserves, as well. And it’s partly because unless you’ve been living in a cave, energy is a kind of big deal right now. And so there’s been a lot of discussion about whether it was smart for the Russians to put this on the agenda and so on. That just strikes me as uninteresting to talk about because it would be inconceivable that the Russians would host a summit on their soil and not talk about energy issues. It would be more of an issue if they didn’t put that first on the agenda.

Most of the issues that will be addressed related to energy are there because of their own momentum, though oil prices, first and foremost, is what most of the countries are going to be worried about. They’ll say a lot of things about it. There’s basically nobody in the room who can do anything about oil prices. The Russians have some problems of production on their own. But the folks in the room don’t have a lot of leverage over those outcomes.

Natural gas, I’ll say a little bit more about that. That’s a huge issue for the Europeans. Climate change is another topic. Development, the role of energy in development is another topic. And then also the nuclear fuel cycle. And there’s lots of other ornaments that have been put on this tree, but those are the main five topics.

My sense is that the summit is going to produce essentially nothing productive on any of these topics. And that’s because, if you think about the way that a summit like this operates, none of the functions that a summit like this can provide—none of those functions actually produce any outcome that’s different from the status quo on any of the energy issues.

So one reason you put a topic like this on an agenda of a G-8 summit is you want to help set the agenda because maybe nobody’s been paying attention to something, which is what the Brits did last year with the Africa development.

People have been paying attention to energy and gas pumps. Shutting off the gas flow through Ukraine definitely got the Europeans focused on this issue earlier this year.

Another reason you put it on the agenda is you want to force the bureaucracy to get something done. All the bureaucracies in all the countries all very focused on these issues.

Another reason you might want to put it on the agenda is you want to give some kind of instructions to the international organizations to go out and do something. And that could be something that’s very productive, although last year in Gleneagles, they put together a very impressive plan of action, and much of the—I think much of the documents—the documentation that comes out of this summit will endorse in large measure what was set up then, and people will continue on.

So those are issues like improving the data, the quality of data on the oil markets. There are issues like getting the World Bank to spend more money in a focused way on dealing with energy poverty in the developing world, in particular in Africa and issues like getting the International Energy Agency to start talking in a more structured way with China and India, large energy consumers.

All of that was in motion anyway. So now they’ll just say that’s a great idea, and let’s keep on doing what we’re doing. But it’s unlikely that anything productive will come out of that.

The issues that are very difficult to deal with, where you could imagine leaders getting together and striking a deal—or there was this fantasy of a grand bargain floating around in the American press for a while—on most of those issues, it’s not that the sides don’t understand each other’s position. It’s that they’re, in effect, at a point of deadlock.

So the issues that will be sitting in the background, where you could imagine possibly some useful negotiation, but I think we’re at the point where nothing is going to come of this—those issues are investment inside Russia. This is not a new issue. The Western energy companies are really keen to invest more in the Russian energy sector. I’m not sure all of them fully understand the risks involved, but you got to do something, and so they want to invest in the Russia energy sector. That’s something the Russians have known about for a long time, and it’s something that is working its way through right now.

For the Russians, one of the biggest issues is access to the so-called downstream in the U.S. and European markets. They want to gain access to a full chain of being able to transmit energy resources and then market those energy resources in the largest markets in Europe and the United States. Both of those markets are open right now, for the most part, and actually Gazprom in particular has been running around Europe buying stakes of gas distribution companies to do exactly this, on its own. And there’s a big fight brewing on that front, but there’s nothing that the G-8 can do about that.

Another area where there’s, in effect, deadlock and the G-8 will play no resolving it is on climate change. The Europeans, who are half the membership of the G-8, have a strategy for dealing with climate change that is, for the most part, based on the Kyoto protocol and based on their own European emissions trading system, which is moving along and with some hiccups. But that’s one scheme in place. The Japanese have a different system.

The Canadians were thinking about joining Kyoto, and then they had a change in government, and now they’re doing something else, although nobody knows what else.

The United States doesn’t want to do Kyoto, and it’s created an alternative that includes this thing called the Asia-Pacific Partnership. The key members of the Asia-Pacific Partnership include China and India, and they’re not part of the bulk of the G-8 discussions.

So there will be some language that says that we all take this problem seriously and we need to do something about the problem. But there’s no gain from a larger agreement on climate change.

So I think when you look in some detail at all the major energy issues, you don’t actually see—other than what the political process produces on its own, you don’t see any area where there are potentially gains from cooperation.

Let me—I like Steve’s category of “watch outs.” That’s a great category. So let me put four “watch outs” on your radar screen.

One are deals that look relevant but are actually irrelevant. (Laughter.) So there will be probably—I don’t know if it will happen at G-8 or not, but there will be a deal about LNG. The Russians want to sell liquefied natural gas to the United States. There’s been one of these already. It wasn’t actually Russian gas. Russians took title of gas that was going to France, and they sent the ship to the United States, and they called it Russian gas. Everyone wrote lots of articles about it.

It was a test to see whether, I guess, the ship could cross the Atlantic or something like that. I’m not sure why this was a big deal, but there are these deals that look like they’re the beginnings of some new energy cooperation that are really actually theater, but they give people something to talk about.

The second “watch out” concerns the Europeans and gas. When we talk about energy security, in this country we instinctively think about oil and imported oil, and we’re worried about oil prices and so on. I’ve spent over the two months a lot of time in Europe with European regulators, and when they talk about energy security, they’re almost always talking about gas supply. And so the simple term “energy security” is something under which lots of different ideas flourish.

And for the Europeans in particular the issue of gas supply is a big deal, and since Russia supplies about a quarter of the European gas and has reminded them, I think, accidentally about these troubles with gas supply, this is a big deal for the Europeans. Not a dog—we don’t have a dog in that fight, at least right now, but for the Europeans this is going to be a major problem. And in particular, there’s something brewing in the background on that, where the G-8 will be irrelevant, but it’s a huge deal for the way the Russians think about what’s going on. And that is, that the European competition authorities are being much more aggressive in forcing open the long-term contracts that are the basis of all Russian gas sales into Western Europe, and they’re forcing them open because they think those contracts are not competitive, they block competition, which is true. That was the idea behind the Germans and the French signing the contract originally is they don’t want the competition in their gas market, and the Russians don’t want competition in the export market as well.

As the European competition authorities whittle those things away, which is a process that’s really just beginning now, the Russians are getting very, very concerned about their position and their ability to maximize their revenues from gas exports. And that’s a big reason why Gazprom is in all across Western Europe buying up—(off mike). That’s going on, and it has to do with the European competition authorities and particularly the German cartel office, and I don’t even think the German cartel office is going to be at the meeting, so there’s nothing the G-8 can do about that, but that’s—those waves are crashing on the shores.

A third “watch out” is Turkmenistan’s gas. Russia has a huge problem in attracting adequate investment for gas supply, and our group at Stanford thinks that in the next few years they will actually possibly start reneging on some of their contracts for Western European supply. The way they’re filling the shortfall right now is they’re buying large amounts of gas from Turkmenistan at cut prices. In Turkmenistan, apparently they’ve been reading the newspaper, and they’ve figured this out. And they now want higher prices for their gas and are threatening to cut off the gas supply if they don’t get them.

My guess is that they’re aware that there’s a big summit happening next week, and you could expect some kind of a major—events related to that, which could be a very large deal. The Europeans, in particular, will react to that with some sensitivity.

And my last watch out of the nuclear fuel cycle—the Russians have proposed playing a significant role in some new scheme to internationalize or multilateralize—if that’s a word—the fuel cycle. The U.S. has had the scheme in this area. Mohamed El Baradei from the IAEA has a scheme in this area. The Russians are proposing to play a role in providing fuel services. There’s been some language floating around about endorsing that on the Russian side, and the Russians might well come out with an even stronger proposal on the fuel cycle at the summit.

And that, I think—in my view, that’s a big deal for the long term, but I’m not sure if the summit itself will have much impact.

Thank you.

FEINSTEIN: Thank you.

Steve Simon will tell us the ways in which the summit will have no impact on the Iran issue.

STEVEN SIMON: That’s my intention. Yes.

Iran is the plaything of the EU and the U.S., not necessarily the G-8, but the subject will undoubtedly come up.

If the administration has any single objective, it will be to get the participants to stay focused on a single objective—to keep their eye on the ball, and that ball is suspension of enrichment or a moratorium on enrichment. And I flag this because there are noises emerging from Germany, for example, that perhaps at the end of the day, some concession will need to be made to limited enrichment on Iranian soil, perhaps holding the Iranians to their 164 centrifuge count. These ideas for the moment are half-baked, or maybe they’ve just been put in the pan and just put in the oven. But nevertheless, they’re out there, and they pose a threat, as it were, to the P-3 objective currently of suspended or—suspended enrichment or a moratorium on enrichment.

Now, to make the case, the U.S. side in this session will showcase what Washington has done to show how reasonable it’s been thus far in dealing with the Iran problem. So, for example, they will point to Secretary Rice’s May 31 st press conference, to the offer that was allegedly made—we don’t know much about it—to Iran that concentrates very narrowly on the enrichment issue and doesn’t get into other problematic issues certainly in the U.S.-Iranian relationship. This is an offer that the secretary characterized in her press conference as distinctly not a grand bargain, but something, again, much more narrowly focused.

And by highlighting this kind of an offer, the administration hopes to show particularly its European allies that it’s walking the extra mile, showing the human face of the otherwise terrifying Bush administration. I use that phrase in a jocular way, of course.

They will also point to an agreement that the United States has already conceded to, to a two-resolution process, a two-stage process if this issue does go to the Security Council under Chapter 7. That is to say, there would be a referral to the Security Council but then a second decision on whether or not sanctions would be employed.

Now, to some extent, with regard to the Europeans particularly, the U.S. is pushing on a bit of an open door. The Europeans don’t like the idea of a rapidly advancing Iranian missile program putting them within range of attack at some point in the future, and the Europeans are also quite concerned about the integrity of the nonproliferation regime.

The U.S., of course, is concerned about a different kind of regime, namely the Iranian one, but nevertheless there is something of a convergence there, which has been fostered by Ahmadinejad’s statements about the Holocaust and about wiping Israel off the map and so forth, having big jamborees celebrating a prospective world without Zionism, and so forth. So the main objective will be to get support for this objective of suspended enrichment and lay the groundwork for more of a sympathetic approach to a U.S. push for sanctions at some later date when that becomes necessary.

Now, the Russians are going to be a big focus here because of—well, because of Russia’s pivotal role on this issue in the P-5. So if it does go to New York or even getting to New York will require Russian cooperation, and right now I think it would be fair to say—I’d defer on this to my Russia expert colleagues—I think it would be fair to say that the Russians are not terribly happy about the prospect of a nuclear Iran either.

But, you know, I would add two caveats to that judgment. The one is that they see themselves as taking kind of a longer view about Iran, and they therefore see Iran as being a much more status quo oriented power than the United States sees Iran at this point. The U.S. has a view of Iran as something more of a revisionist power at the moment, especially with Ahmadinejad as president. So the Russians are a bit more relaxed.

And secondly, the Russians tend to say—deployed in other conversations the phrase that this is—riffing, of course, on U.N. Security Council language—that actually Iran is not a threat to international peace and security, but a threat to American peace and security. So they’re therefore less eager to go the sanctions route.

Now, from an American perspective, sanctions are important for a couple of reasons. Obviously, they would have an effect, possibly, on Iran’s program, but in political terms, from the administration’s view, right now the hard-liners are getting away with their current approach because it’s been cost-free. And as a corollary, as long as Ahmadinejad is on the winning side or is perceived to be on the winning side, then Khamenei, the broker so to speak, is not going to be eager to challenge him or sanction a challenge to him.

So from this perspective, the credible threat of Security Council-blessed sanctions has the potential not only to affect the Iranian program from Washington’s viewpoint, but also to affect the configuration of Iranian domestic politics. So for the U.S. there’s a lot at stake here.

Now, raising costs, from an American perspective, is a good route to go because they see Iran as being economically quite vulnerable right now, despite the sudden tsunami of oil revenues that have resulted from increasing prices.

Now, as far as outcomes are concerned from the G-8 meeting, there won’t be. There might be a statement to the effect that the participants remain concerned about Iranian intentions and invited Iran to do what is necessary to allay the concerns of the international community and among those things would be to respond to rather quickly and favorably to the offer that’s now on the table, that Solana has previewed with the Iranian leadership.

As a practical matter though, there won’t be a big effect. I hope, Lee, that that’s okay with you. Iran will continue to equivocate, Russia will equivocate, and deadlines will continue to slip.

On Iraq, not much to say really. I would think the administration’s expectations are quite low. There are only two countries, apart from the U.K., within the G-8 that have presence in Iraq— Italy and Japan. Both are going to be withdrawing their forces shortly.

There may be some noodling about an international contact like the one that exists with respect to Afghanistan, which would require Iraq to meet certain broad goals in order to get aid. What aid is forthcoming is another story. Appropriations for this purpose in the United States are drying up. Congress has clearly signaled that the kitchen is closed on that, so nothing dramatic, I think, in store on that score.

And there will be a generalized wish for G-8 support for what the current Iraqi leader, Nouri al-Maliki, is trying to do in terms of a reform agenda. It’s a very ambitious reform agenda. And at that level, it has a certain reality, but it seems disconnected for the moment to events actually occurring on the ground in Iraq, so not clear what practical support could be offered by the G-8 on that score.

FEINSTEIN: Thank you.

Let me just make a few brief comments and then open it up to all of your questions.

There’s a history of G-8 meetings being significant on the issue of non-proliferation. And after the Indian and Pakistani nuclear tests, the G-7 and Russia met and posed long-lasting and ineffective sanctions on both India and Pakistan. There was at the beginning of this Bush administration a transatlantic agreement to secure funds and hope Russia was securing its nuclear weapons and material.

I think it’s safe to say that the goal of the G-8 participants this time around is that this meeting not be a significant meeting on non-proliferation, but that the goal is that it ought to affirm work that’s taking place elsewhere.

But, you know, Steve Sestanovich says there are many moving parts in advance of this summit, so it may turn out to be the case that some scrambling may be necessary and some negotiations in the immediate run-up to the meeting and actually at the meeting, depending on events. Steve Simon mentioned and talked in detail about Iran. Here is a mid-month deadline for Iran to respond to the EU-3 offer, and the Iranians—it’s unclear what the nature of the Iranian response will be.

The G-8, I think, and the United States would clearly prefer that the G-8 not have to come up with a new policy at the meeting and would very much rather have the G-8 meeting simply be a restatement of existing statements that the leaders have agreed to.

In particular, I think they’ll want to stay away from the question of sanctions, because that is where there very well maybe is daylight between the Europeans and the Americans, which so far have managed to remain quite resolute on this subject together, but where the Russians are clearly outliers.

The second issue which is clearly in motion right now is North Korea. And here what happens at the G-8 will largely be a function of what happens first in New York and what kind of resolution is agreed. And the G-8 is simply likely, if there is an agreement that comes out of the Security Council, just to reaffirm what that statement is.

Obviously, Beijing’s absence from the G-8 discussions is notable in this context, and Japan’s presence is equally notable.

North Korea has the ability to affect what the agenda is at the G-8. I think it’s unlikely for technical reasons, but it is not inconceivable, and the South Koreans are reporting that there is some possibility that there is an eighth launch or the second launch of a Taepo Dong II. And obviously, if that did take place in advance or during the St. Petersburg meeting, that would keep many Foreign Service officers awake late into the evening.

And there’s also a relationship between and interaction between these two issues, which I think will be manifested in the G-8 meeting. And the question is whether it’s a race to the bottom or not. And here, I think, Japan’s presence at the meeting and whatever ends up happening in New York on North Korea and how Pyongyang responds will be significant.

And just to take a step back for a moment, I think the Iranian issue, in a certain way, benefits from the missile launches in Pyongyang, in the sense that the North Koreans are not presently offered a better deal than the Iranians, a far worse deal, and they won’t be offered as good a deal as the Iranians. And this is good if the goal is to create some incentives for the Iranians to engage in this process.

The presence of the Japanese and their insistence and their interest in sanctions—and there is some reporting from New York now that they are trying to keep sanctions in the Security Council resolution—will also have some bearing on how the Iranian issue develops if it continues to develop in the G-8 context.

With that, and it being 1:25, we have at least a half-hour for your questions. So the floor is open. And George, you’re first.

QUESTIONER (George Condon): Two questions, if I can. One, you talked about Iraq, but how does the continued prosecution of the war in Iraq affect the president’s leadership at the summit? Is he viewed as weakened or unpopular by the other leaders, and how does that play out?

And secondly, you mentioned the Cheney speech. Could you elaborate on that? Was that a wise move by the U.S.? How has it reverberated? How has it affected relations?

FEINSTEIN: Steve, do you want to take the first crack at the second question?

SESTANOVICH: Well, it’s had the effect that I’ve mentioned, which is to add a more contentious tone to relations. But has it spilled over into other issues? One question that was raised at the time of the speech was whether Russian policies would become less cooperative on matters like the handling of diplomacy with Iran, now perhaps diplomacy with North Korea. I don’t see the evidence of that. I think it has produced some kind of nasty rhetoric from Russian leaders, but the effort has been pretty strong on both sides to maintain a kind of working approach to security issues that both sides see as important to wall off from other issues of disagreement.

SIMON: On that question I’d say, look, the president’s counterparts at this meeting are perfectly capable of judging what the president’s vulnerabilities are at this point, both domestically and in foreign policy terms, but there’s an important countervailing factor, which is in this case a desire to continue to repair the damage that was caused in the run-up to the Iraq war. The Europeans do not want to see a perpetual state of crisis in the relationship with the United States. The Iran issue is a good one, at least for the time being, around which to join forces with the United States and give the president some of the support that he might otherwise find lacking.

FEINSTEIN: Okay. And on Steve’s—the question that Steve Sestanovich addressed, I would say that if you’re Vladimir Putin, you have to be pretty pleased with the direction that the democracy issue has taken in the run-up to the G-8. It’s clearly—as Steve said, it’s clearly not a center stage issue. And everybody has cleared their throat in advance of the G-8 meeting to focus on what the Russians would say are the important issues.

Yes, sir.

QUESTIONER: Nikolai Zimin, Russian newspaper Itogi. Mr. Sestanovich, half of the participants of G-8 are in a sense lame ducks. How—will this fact somehow have an impact on context and content of this meeting?

SESTANOVICH: Don’t they all expect to be there next year,—(laughter)—and don’t most of them expect to be there in 2008?

The election cycles often make many of the G-8 leaders lame ducks in some way, but you know, that’s supposed to give them a sense of the importance of their legacies and their statesman-like responsibilities. I doubt that it’s affecting the interaction with them very much. One question that would probably be on the minds of many of the leaders, however, is whether their host is a lame duck.

QUESTIONER: (Richard Keil) Five years ago, the president looked into the eyes of that potential lame duck and said he could see his soul. And we all know what’s happened since then. What are the reasons that the U.S. has not gotten more from Russia in terms of its negotiations in reference to North Korea and Iran?

SESTANOVICH: I’m sure President Bush would like to have those words back. On North Korea, the administration long ago decided that China was its key partner for resolving the issue, and on Iran, you’d probably get an argument from the administration. At least some people would say that Russian policy, although never the same as American policy or European policy, has been more constructive than they expected five years ago and converging with the policy of the U.S. and the EU. It converges but never quite gets there, and the issue very soon is going to be whether you’ve got the major powers sending different signals to Iran about what will follow if Iran gives a negative answer to the P-5 plus one offer.

QUESTIONER: Markus Ziener, German newspaper Handelsblatt. Do you have any indication that after the summit there’s going to be some kind of increased pressure on the NGOs in Russia? There’s even kind of a crackdown.

SESTANOVICH: This is feared by many Russian NGO leaders. The—there’s no special information from President Putin on his intentions. I guess I’d put the question somewhat differently. How much worse does the Russian pressure on other independent organizations of all kinds—political parties, media, NGOs—have to be before we say that they are not—they don’t respect the principles of—in a pluralist society. We’re probably going to be disappointed if we’re—I mean, you reporters will be disappointed if you’re expecting some, you know, kristallnacht of—that probably translates—sorry—of, you know, of harsh round-ups of NGO leaders. But if you’re expecting a continued pressure on NGOs, you’ll see it.

MR FEINSTEIN: Yes?

QUESTIONER: Louise Branson at USA Today. I was wondering if you could address how relevant you think the G-8 is? I mean, the whole idea with its—that democracies and bringing Russia on board would make—and they’ve kind of sidelined that issue, as you so well put out, and we have talked about how interesting it is that Japan is now there on the sidelines. Energy is the main focus, yet Russia doesn’t have OPEC’s ability to kind of really control energy markets in the major consumers, China and India. So should it become a bigger forum? Is it relevant anymore?

VICTOR: There’s been a lot written about whether, you know, the G-8 is an anachronism.

It seems to me that the real question is, how does the G-8 evolve to become an institution that has more countries engaged with it? And I think that we’re seeing the beginnings of that with the now permanent plus five. And we’ll see over time that the plus five will eventually become permanent members in some way or another.

I think we may be setting our expectations too high, though, because you can’t anticipate a year in advance or two years in advance what will be on the agenda. What you can anticipate is that there are many issues that require leaders to get together to talk about them, to forge deals. Often those deals will fall apart, and especially if we’re at a point of deadlock, which is the situation for most of what turn out to be the hot issues for this year, but that some forum like this is an important forum.

Let me just say, on the particular energy issue, you had mentioned OPEC. I think it is the case now that a very large reason for high oil prices and high energy prices generally, because a lot of energy takes its cue off oil, has to do with domestic policies where the people at the G-8 events do in fact have more control over those outcomes, but they don’t—they’re not going to gain leverage on them by talking to each other at the G-8.

For example, oil prices now are quite possibly $10 to $15 a barrel higher than they would be otherwise, because of this transition to ultra-clean fuels and in particular the problems surrounding—I don’t want to get into the details—but surrounding MTBE and the role and the role of ethanol and substituting for MTBE. That’s a huge problem. That’s largely an issue of domestic policy in the United States and, to some degree, Europe. It’s not that the president doesn’t have any control over these outcomes, but he’s just not going to gain that leverage by going to the G-8 meeting.

FEINSTEIN: I would just say, on this question, there’s a legitimacy question that you’re talking about. And the legitimacy is both are the major players around the table and then what is the nature of societies you have at this meeting. And that—what it shaped—looked like it was shaping up to be the main issue in advance of this meeting. And it just turns out, as Steve and others have said, to no longer be the key issue.

But you know, originally this was the major industrialized democracies, right? And now we call it the major industrialized democracies and Russia. (Laughter.)

So this has, I think, inevitably a negative impact on the legitimacy of this group to set the international agenda. And that is my second point, which is, that is the utility of a group like this, which is really to dictate or to set an agenda. And you can set an agenda on first order issues. If you want to call it nonproliferation, I think that that has been done to a certain extent in the past successfully, both by this—under this administration less than previously, but not in recent years. And it can also work on—if you want to call it second-tier issues—and I think Tony Blair did a good job dealing with that on the range of humanitarian subjects.

And actually I just came back from a trip to the U.K., and every day in The Independent it’s the ad by Oxfam, which repeated one element of the Blair proposals agreed by the G-8, and it urged the G-8 members to stick to them this year.

So there is a real potential for legitimate governments to lead, set an agenda, lead by example. But that, I think, is hampered by the changed nature of Russia, and also atrophy will have an effect as well.

Yes, ma’am?

QUESTIONER: Thank you. Sonia Schott with Radio Valera, Venezuela. Beside the top issues, I would like to know: Do you expect that the Venezuelan issue will become part of the talks between President Putin and President Bush?

FEINSTEIN: The question is about the Venezuelan issue. I can think of at least two Venezuelan issues, but the Venezuelan issue of whether that will be an issue between Bush and Putin.

QUESTIONER: Well—

FEINSTEIN: Is that correct?

QUESTIONER: Yeah.

FEINSTEIN: Who would like to address that?

QUESTIONER: Well, there are a lot of issues between Venezuela and Russia, considering that President Chavez is going to visit Moscow in the next coming days.

QUESTIONER: Yes. And also security and defense armament and, well, energy issues, too.

Victor: Well, let me just say, on the energy front, there are a lot of nascent investments by Russian companies in Venezuela. Most of them don’t make any economic sense, as far as I can tell, but they are part of this broader political relationship.

I would be extremely surprised if there was anything that could be said or done at the G-8 that would have any impact on that whatsoever.

FEINSTEIN: Do you want to add anything to that?

SESTANOVICH: I think it would—there’s probably a long list of issues ahead of Venezuela that are—will be discussed by Bush and Putin or maybe only touched on before they turn to Venezuela.

On the other hand, both presidents have a kind of interest in their near abroad, and if they wanted to get into a nasty discussion of those questions, I suppose it’s possible that, you know, one president might complain about Chavez and the other might complain about Saaskashvili.

QUESTIONER: So as not to expect any agreement in any—

SESTANOVICH: Oh, certainly not to expect any agreement. I didn’t realize you were asking that question. (Laughter.)

FEINSTEIN: Yes?

QUESTIONER: Yes, hello. Alec Russell from the Daily Telegraph of London. Forgive me, I was a little bit late, so you may have addressed some of this in your earlier remarks, but I wonder if you could just assess the state of Bush and Putin’s relationship. How would you describe their relationship?

Now—and also, if you could say what, if anything, Bush has gained—or America has gained from President Bush’s sort of attempts, desire to get close to Vladimir Putin.

FEINSTEIN: Okay. The question is about the relationship between Bush and Putin, and how one might assess it and what the United States may have gained by President Bush’s attempt at one point to get personally closer to the Russian president.

SESTANOVICH: Well, I’ve always been rather skeptical of this idea that they’re really friends. You know, they’re political leaders, and if they consider it convenient to seem like friends, fine, and if they don’t consider it convenient, also fine.

So the real issue is, what do they—do they get much these days from pretending to be a lot more friendly than they really are? And I would say less than they used to.

The political advantages for each of them domestically are less in pretending that they’re best friends forever. Are there some advantages still in perpetuating the idea that this is a practical relationship that enables them to work on big security questions and make some progress that serves each side’s national interests?

I think they’re both—I believe the answer to that is yes. And I think they would bring as evidence—you know, Iran, North Korea. You know, when they want to present this relationship as one that’s relevant to problem solving, they—you know, they’ll emphasize the effective working relationship. That’s a little different from saying it’s really a good personal relationship.

QUESTIONER: But beyond—just as a follow-up—but is there anything beyond presentation that America could claim has been achieved or the administration could claim has been achieved by the purported outreach to Putin?

SESTANOVICH: I haven’t heard that claim made so strongly of late. I think there’s a kind of recognition that when both of them were new presidents, there was, you know, a kind of novelty in suggesting that this was a really good personal relationship. They don’t need that anymore.

MR. : I guess we shouldn’t believe it until he takes him to Graceland? (Laughter.)

FEINSTEIN: Yes, sir?

QUESTIONER: Thank you. Nick Benton with the Falls Church News Press. You mentioned a cause for high oil prices having to do with domestic policies of different countries, but I wonder if there’s actually going to be a debate about the cause of high oil prices itself, or concern about whether or not we might have actually somehow peaked out on our ability to extract oil and that this is a long-term problem that’s going to create a crisis.

VICTOR: Well, there won’t be a debate about that at the G-8 summit. The language in the—I saw a draft on the statement on global energy security, whatever that means, that has all the right language in it and so on. That debate has happened and they have a moderate statement about this.

There is a debate going on about whether we’ve, you know, peaked in our capacity and so on, and that debate is almost completely uninformed by facts. (Laughter.) But that’s separate from the G-8 process. That’s just kind cruising along on its own.

FEINSTEIN: Okay, we have Jonathan.

QUESTIONER: Hi. Jonathan Beale, BBC. I just wondered, on Iran, are you suggesting that they will—I mean, the president’s always suggested that, you know, weeks, not months. And we’d have gone past a month then, wouldn’t we, by the time of the G-8? I mean, how damaging is it for the president if there is—well, there won’t be, as you suggest, a consensus Could that meeting be the opportunity, for example, for Europe and America to make up their minds about going ahead with sanctions, some kind of sanctions, some kind of punitive measures? Because if you’ve got Bush there with Putin not agreeing, it’s going to make America look weak, isn’t it?

 

SIMON: I don’t see this meeting as being a watershed of the kind that you’re describing.

 

SESTANOVICH: I thought Lee had an interesting answer for you on this question, if I could just restate it in a way that I hope you will agree with. For the G-8, and for the United States, in particular, to have no answer from Iran before the meeting has the downside of making them look ineffective, but it has the upside of perpetuating their unity. If Iran responds before the G-8, it has the upside of accelerating diplomacy and showing that it’s working, but it has the downside of obliging the members of the G-8 to decide whether or not they agree.

SIMON: I think it’s worth bearing in mind here that the most likely Iranian response is going to be a bit indeterminate, and it’s not going to be enough on the downside to justify, you know, some sudden move towards sanctions or something of that kind. And there won’t be enough on the up side to warrant a belief that, you know, we’ve entered the kingdom of God. And it’s just going to be somewhere in the middle, and the Iranians are very good at calibrating their responses in exactly that way.

FEINSTEIN: The administration will want and has tried to amp up the pressure on Iran, creating a sense that they have to respond by a certain time, but their most important objective is avoiding transatlantic disagreement. And so there will be—there is great danger in setting a deadline for a definitive response, and there will be a monumental effort made to avoid crisis.

Yes?

QUESTIONER: (Yanmei Xie, Pacifica Radio) Yes. Can you touch on the—on the Blair initiatives, is going to be any focus on these issues at all? And how much?

Feinstein: Well, David, you can talk about the energy side of this.

Victor: I was in South Africa last week, and there was a lot of attention to the continued implementation of things that were set up last year. And my impression is on the energy front, that a lot of progress has been made. There’s a lot of new money. There are a lot of new ideas and actual projects being implemented to improve access to electricity and to other forms of clean energy, and that the Blair initiative has actually had a significant effect on that continent.

Another part of what came out of Gleneagles was an endorsement for the Extractive Industries Transparency Initiative, EITI, which is an effort to improve the governance of countries that are rich in oil and gas resources; something that Russia might benefit from, but it’s not a target of that program. There has been a lot of progress with EITI, and while what we’ve seen so far has not been, you know, fully encouraging, Nigeria, for example, which is one of the hardest cases, they’ve now done a full initial accounting of where the money goes in Nigeria. You know, they lost a couple hundred million dollars along the way, which is inconvenient. But they’re in the process of setting up features to include transparency. Azerbaijan probably would have done that anyway because of—they were under pressure from other sources to do a better job managing their oil and gas—oil, initially—resources.

But I think there’s actually a lot—been a lot of progress on this front, and what we’ll see at this year’s summit is the waving of that flag and continued work.

FEINSTEIN: Okay. I still have a good list of people, which is growing, and so I will ask questioners and respondents to be concise.

QUESTIONER: (Miles Pomper) Two things. David, I wanted to follow up on your statement about the fuel cycle as one of the things to watch out for at the summit, and one of the things I understand is that the administration’s been seeking a Russian pledge to have dedicated contributions to an IAEA fuel reserve. Do you see any agreement on that?

And both Lee and Steve—President Putin called for a new START agreement last month. Is that going to come up in the bilaterals with the presidents? And do you see any chance for progress on that?

VICTOR: On the first issue, I would think in a world where there’s a large amount of surplus fissile material that the ability of governments to agree to dedicate certain—dedicate supplies to something like a fuel bank, that that ability is much greater. And therefore, the odds of that happening are higher. It seems to me that we have the U.S. plan, the Global Nuclear Energy Partnership; we have IAEA plan; and we have also all these issues surrounding Iran happening simultaneously. And all three of them have to come together at some point.

And it seems that to some degree, all three of them are headed in the same direction, some kind of multilateral fuel cycle that probably initially will look—people will pretend that it’s a multilateral fuel cycle, but then with time this really could be a watershed event in the organization of the fuel cycle.

SESTANOVICH: Administration officials say there’s going to be some kind of, you know, mini-agreement related to nonproliferation, nuclear material security, undefined, could be along these lines. They haven’t disclosed it to me. Maybe they have to you. And as to, you know, START I, both bureaucracies are looking at this issue. They know it’s coming up. I don’t know of any plan to initiate formal talks on this.

FEINSTEIN: Yes, sir?

QUESTIONER: Yochi Dreazan from the Wall Street Journal. On the summit, I wonder if you could outline any specific areas that could be fault lines between the U.S. and Russia, either internally as far as Russia’s treatment of NGOs, the crackdown, or democratic initiatives, or externally, over Russia’s treatment of the Ukraine or Georgia.

SESTANOVICH: I do think that as the Iran issue develops, you have a significant risk that the U.S. and—the nuanced differences between Russia and the United States will become more pronounced because it will matter more exactly what answer is given to the Iranians and whether the Russians are part of a U.S.-EU consensus. So that’s probably, among the top-tier issues that we’ve looked at, the one that has the greatest potential now for highlighting Russian-American differences.

Among the issues that we’d probably in G-8 terms class—I mean for purposes of next weekend’s trip—class as bilateral, the one that has the most potential for Russian-American friction is Ukraine, in a number of different ways. The energy deal is going to have to be renegotiated. The issue of Ukraine in relationship to NATO has become quite contentious inside Ukraine, but it also is one that Russians have been talking about in very apocalyptic terms. As we get closer to the Riga summit in November, NATO will have to make some decision about what it—whether to take a step forward in its relations with Ukraine. That is going to be extremely strongly resisted by Russia.

FEINSTEIN: I’d like to take two questions together in an effort to get to as many people as possible. Yes, sir?

QUESTIONER: I’ll give you both of them. (Laughter.) David Lynch at USA Today. I wanted to ask about the Russian economy. There’s been quite a comeback since the ‘98 ruble crisis, at the same time, still very arbitrary environment where the state isn’t shy about rewarding friends and punishing enemies. How would you describe the model there, the strategy? Is it state capitalism? Is it a kleptocracy? Is it still a market economy?

And secondly, are the Russians now on a sustainable path of economic growth or are they just floating on oil?

QUESTIONER: Selena Penagini from Italian News Agency, ANSA. I would like to ask if Italian political environment could play a different role in G-8—(off mike).

SESTANOVICH: I’m not an economist, so I can’t give you a really good answer. State capitalism, yes, there’s more state control. Kleptocracy yes. There’s more stuff to steal and it’s being stolen by a lot of people.

QUESTIONER: And in that sense, it’s more democratic. (Laughter.)

SESTANOVICH: And are these two trends sustainable? You betcha. You’re going to see more of state control and more thievery.

QUESTIONER: So long as energy prices are high.

SESTANOVICH: Yes, I would think some of those trends—

QUESTIONER: Will there be less to steal when energy prices—

SESTANOVICH: You know, in other terms, the—you know, Russian macroeconomic indicators look great. But there is—you know, there’s a lot of anxiety about whether Russia is going—among professional economists about whether Russia’s going to squander its stabilization funds.

Yegor Gaidar said a few weeks ago, “Sure, we should spend the stabilization fund if/when oil prices collapse, we don’t intend to pay teachers, doctors, soldiers or anyone else. Be my guest,” he said. So there’s that kind of—there’s a very well-understood vulnerability to collapse in oil prices.

About Italy’s role in the G-8, I just don’t have a good answer for you.

FEINSTEIN: All right. I’m going to try to take two more questions, and then we’ll close.

Yes, sir.

QUESTIONER: Jonathan Rugman from ITN in London. As a journalist, I’m struggling to find a top line here, what we call a top line, and that’s probably a problem with all G-8 summits. (Laughter.) But just going back to this energy security theme, you said that there was—that the Russians were seeking a market for their gas in Europe and the U.S., and that Western energy companies were seeking to do deals in Russia. Is that in fact the top line here? Is it the most important thing that you think is going to be discussed? In other words, is the story of the G-8 a commercial one perhaps more than a diplomatic one?

FEINSTEIN: Okay. Let’s just get one other question.

QUESTIONER: Takashi Sakamoto, Yomiuri Shimbun. The Japanese public are furious about missile firings by North Koreans, and so the Japanese prime minister has to have a very tough attitude in the G-8 summit. And so I wondered, to what extent other leaders can share that kind of toughness against North Koreans. So—can they issue a very strong voice against North Koreans? Or the absence of China in that meeting could affect the outcome of the G-8 meeting regarding the North Korean issue?

FEINSTEIN: Okay. Let’s start with the energy question.

VICTOR: I think, for the Russians, the commercial context for developing these energy resources is the big issue because it’s the key to the economy. It’s key to everything that moves in Russia. So it necessarily will be a big part of their thinking about the summit.

And we’ve seen, for example, decisions about the Stockman gas deal have been moved to after the summit. Some of that’s maybe because of the summit. I think most of it’s because Gazprom’s trying to figure out how to organize the deal so they maximize their benefit to themselves. But that’s what’s going on in the summit, in some sense is a sideshow there.

One thing I’d like to emphasize though, which is, the gas business is a radically different business from the oil business, because in oil what you want to do is develop the resource, and then, it’s relatively easy to get it to market and the rest of the benefit follows. With gas, having the resource under the ground is not at all useful. You need to connect to the source with people who are willing to buy it usually over long time horizons.

And so the role of confidence of the investor in the gas business is dramatically higher than it is in the oil business. And so we see lots of countries that have horrible records of governance that are still huge oil producers. But we actually don’t see very many countries that sustain high levels of investment in gas because the role of gas is more capital intensive, usually, than oil, and the role of the industrial confidence is that much greater.

This is—and I’m not sure the Russians fully understand this—this is a major, major problem for Russia because they’re already facing an enormous investment crisis. Three out of the four major fields are already declining. They don’t have a strategy for filling in the shortfalls. It’s a very serious problem. And of course, this is something that looms large in Europe, and we tend to ignore it here because we’re not from Russia.

SESTANOVICH: Here’s a suggested top line for you. Compared to January, when it seemed as though the United States and the EU were united not only in wanting energy to be the top issue of the summit, as the Russians themselves do, but in getting certain kinds of adjustments in the way the Russians handled this issue. Compared to January, do you in fact have a united front between the United States and Europe on energy that produces better results with Russia or in fact worse. I mean, I think the answer is worse.

FEINSTEIN: I think your headline is that this is not a democracy summit—(laughter)—that Russia’s participation in the G-8 is not the dominant issue of the summit, as predicted even a few months ago, and that this is obviously an outcome welcomed by Moscow.

Now, the other question with respect to North Korea—and if any of my colleagues have further closing comments, I would encourage them to make them. I think the outcome of the deliberations in the Security Council will determine the potential of what can happen to the G-8. And the Russians, I think, would be very unlikely to want even in the absence of the Chinese to agree to a statement that goes beyond what was agreed in New York. The only thing that could change—the only person who can change that is Kim Jong Il.

Anybody else? Anybody else have comments?

MR. : We should get NASA to spread some foam on the missiles, and it would be guaranteed they won’t lift off. (Laughter.)

FEINSTEIN: Thank you all for attending and putting up with the acoustics in this room.

 

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