The Effect of Natural Resource Pipelines on the Level of Democracy, Regime Stability, and Development

A NEW TYPE OF RESOURCE CURSE? THE EFFECT OF NATURAL RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY, REGIME STABILITY, AND DEVELOPMENT

RUCHAN KAYA

A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA

2014

To my beloved Family

ACKNOWLEDGMENTS

I am sincerely thankful for the supervision and inspiration I have received from my adviser and mentor Michael Bernhard. His demonstration of great scholarship and mentorship as well as provision of funding, encouragement, and motivation have been vital from very early stages to until finishing my dissertation. I am also grateful to my committee members: Benjamin Smith, Bryon Moraski, and Conor O’Dwyer framed my perspective in understanding Comparative Politics through their exemplary scholarship and taught me to ask the right questions in developing my research. Badredine Arfi helped me go through the early stages of the Ph.D. and trained me to use a range of methodological tools. Ingrid Kleespies always offered a contrasting perspective and shaped my language skills. I thank Larry Dodd for always offering an ear for my research questions.

A great number of institutions provided monetary and logistical support for this dissertation. I am thankful to be one of the recipients of the Alumni Graduate Fellowship at the University of Florida as well as the financial support from the Department of

Political Science in the years after. Charles Vincent and Heidi Cole McLaughlin

Scholarship made the last stages of the dissertation writing process much easier.

ICPSR and IQRM Scholarships made it possible to acquire further methodological skills while blending with a more diverse research environment. I am particularly grateful to the people at the Tbilisi State University, Georgian Foundation for Strategic and

International Studies, Ministry of Youth and Sport Affairs of Georgia, and Energy

Studies Department at World Experience for Georgia for providing me their invaluable input about Georgia’s energy perspective. I would also like to thank Center for Islamic

Studies (ISAM) in Istanbul for providing me a venue to finish writing my dissertation.

I also thank my department staff Sue Lawless-Yanchisin, Debbie Wallen, and Pat

Root for completing endless number of tasks along the years. I am grateful to have friends like Ekrem Karakoc, Emrah Sahin, Betul Gokkir, and Manu Samnotra who have been my avid supporters through the Ph.D. and provided insightful input for my research making graduate school a better experience overall.

I am thankful for all the emotional support I received from my families in Balikesir,

Izmit, and Istanbul. Without my mom, dad, and sister’s confidence in me I would not be the person I am today. Finally, even with all the professional assistance from several individuals and institutions, it would not have been possible for me to go through this

Ph.D. without my wife, Burcu Kanyilmaz Kaya. She shared all the financial and emotional discomforts with me all these years as well as bestowing her endless love and backing.

TABLE OF CONTENTS

page

ACKNOWLEDGMENTS ...... 4

LIST OF TABLES ...... 9

LIST OF FIGURES ...... 11

ABSTRACT ...... 15

CHAPTER

1 INTRODUCTION ...... 17

History of Transit Pipelines and their Legal Framework ...... 19 Locating Transit Pipelines within Comparative Politics Literature ...... 21 Diffusion of Regimes through Pipelines ...... 30 A Note on the Differences between Oil and Natural Gas ...... 31 Structure of the Dissertation ...... 36

2 THEORIZING RESOURCE TRANSIT: THE EFFECT OF NATURAL RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY, REGIME STABILITY, AND DEVELOPMENT IN BELARUS AND GEORGIA ...... 41

Introduction ...... 41 Framing the Hypotheses on Democracy, Regime Stability, and Development ...... 46 Choosing Belarus and Georgia in Assessing the Impact of Resource Pipelines on Transit Countries ...... 51 Pipelines in Belarus and Georgia ...... 52 Brief Regime and Development Trajectories of Belarus and Georgia ...... 55 Evaluating the Hypotheses ...... 60 Resource Transit and Levels of Democracy ...... 60 Belarus ...... 66 Georgia ...... 71 Regime Stability in Belarus and Georgia ...... 75 Georgia ...... 79 Belarus ...... 86 Economic Development...... 92 Belarus ...... 93 Georgia ...... 98 Human Development ...... 103 Georgia ...... 104 Belarus ...... 107 Summary ...... 109

3 DESCRIPTIVE STATISTICS: INTRODUCING THE DATA SET ...... 118

What is a Resource Transit Country? ...... 118 Domestic, Cross-Border, International, and Transit Pipelines ...... 122 Global Statistics of Pipelines and Transit Countries: The Sample ...... 124 Pipeline Length and Transit Capacities...... 131 Dependent Variables ...... 137 Comparing Oil and Natural Gas Transit Countries with High Resource Income Countries, and the Rest of the World ...... 140

4 THE EFFECT OF RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY AND POLITICAL STABILITY ...... 158

The Logic of Choosing the Main Independent Variables ...... 159 The Level of Democracy ...... 163 Control Variables ...... 163 Methods...... 165 Results ...... 167 Robustness Checks ...... 174 Models with the Polity Data ...... 176 Regime Stability ...... 181 Control Variables ...... 182 Methods...... 183 Results ...... 185 Robustness Checks for Outliers and Influential Cases ...... 190 Conclusion and Further Research ...... 195

5 TRANSIT PIPELINES, ECONOMIC GROWTH, AND INFANT MORTALITY RATES ...... 208

Economic Growth ...... 208 Control Variables ...... 209 Methods...... 211 Results ...... 211 Provision of Health Services ...... 222 Control Variables ...... 222 Methods...... 224 Results ...... 225 Conclusions and Further Research ...... 230

6 CONCLUSION: SUMMARY OF FINDINGS AND FURTHER RESEARCH ...... 240

Summary of Findings ...... 240 Regime Outcome Variables ...... 240 Development Outcome Variables ...... 242 The Distinction between Natural Gas and Oil Pipelines ...... 244 Further Research ...... 245

LIST OF REFERENCES ...... 250

BIOGRAPHICAL SKETCH ...... 267

LIST OF TABLES

Table page

1-1 Natural gas prices across the world ($ / Million BTU) ...... 40

2-1 Transit pipelines in Belarus and Georgia ...... 114

2-2 Average FH scores in BELARUS before/after the YAMAL pipeline ...... 114

2-3 Average FH Scores in Georgia before/after the BTC Pipeline ...... 114

2-4 Average political stability and absence of violence levels in Georgia ...... 115

2-5 Average SFI Scores in Georgia before/after the BTC Pipeline ...... 115

2-6 Average military spending in GEORGIA before/after the BTC pipeline ...... 115

2-7 Average SFI scores in BELARUS before/after the YAMAL pipeline ...... 115

2-8 Average political stability and absence of violence levels in Belarus before/after the YAMAL pipeline ...... 116

2-9. Average military spending in BELARUS before/after the YAMAL pipeline ...... 116

2-10 Georgia's trade balance with Russia, Turkey, and Azerbaijan ...... 116

3-1 Basic terms ...... 154

3-2 Natural gas and oil pipelines in supplier, user, and transit countries ...... 155

3-3 Natural gas and oil transit countries in the world (2010) ...... 155

3-4 Regional breakdown of transit countries ...... 156

3-5 Natural gas and oil pipelines in transit countries...... 156

3-6 High resource income countries, oil and natural gas transit countries, and the rest of the world (1990-2009)...... 157

4-1 Countries with highest ratio of natural gas and oil transit capacity per GDP (2009) ...... 199

4-2 Transit pipelines and the level of democracy: dependent variable is aggregated Freedom House scores ...... 200

4-3 Transit pipelines and the level of democracy: robustness checks for influential cases ...... 202

4-4 The expected effect of transit pipelines ...... 203

4-5 Transit pipelines and the level of democracy: dependent variable is Polity scores ...... 204

4-6 Transit pipelines and regime stability ...... 205

4-7 Percent change in odds of regime failure for a SD increase in the IV ...... 206

4-8 Transit pipelines and regime failure: robustness checks ...... 207

5-1 Transit pipelines and economic growth ...... 234

5-2 Transit pipelines and economic growth ...... 236

5-3 Transit pipelines and infant mortality rates ...... 237

5-4 Expected effect of pipelines (percent change in infant mortality rates) ...... 238

5-5 Transit pipelines and infant mortality rates ...... 239

6-1 Evaluation of the hypotheses...... 249

LIST OF FIGURES

Figure page

1-1 The relationship between natural gas pipelines and the level of democracy ...... 39

1-2 Natural gas prices across the world (1984-2012) ...... 39

1-3 Two stage research design: model building SNA and model testing LNA ...... 40

2-1 Economic growth in Belarus and Georgia: 1991-2010 ...... 112

2-2 Life expectancy at birth in Belarus and Georgia: 1990-2009 ...... 112

2-3 Infant mortality rate in Belarus and Georgia ...... 113

2-4 Net FDI inflows and unemployment rates in Georgia ...... 113

3-1 Number of countries with international pipelines ...... 147

3-2 Number of transit countries ...... 147

3-3 Transit countries over the years. A) Number of natural gas transit countries. B) Number of oil transit countries...... 148

3-4 Average number of pipelines in the world per country ...... 149

3-5 Natural gas transit capacities by the number of pipelines (2010) ...... 149

3-6 Oil transit capacities by the number of pipelines (2010) ...... 150

3-7 Average democracy scores over the years. A) Combined Freedom House scores. B) Combined Polity scores...... 151

3-8 Average economic indicators over the years. A) Economic growth. B) Per capita GDP. C) Per capita GNI (ppp) ...... 152

3-9 Average human development indices over the years. A) Life expectancy B) Infant mortality rates ...... 153

4-1 Diffusion effect through natural gas pipelines with 95% CI (with FH scores) .... 197

4-2 Diffusion effect through natural gas pipelines with 95% CI (with Polity scores) 197

5-1 Effect of natural gas transit pipelines on economic growth with 95% confidence intervals ...... 232

5-2 Effect of natural gas transit pipelines on economic growth with 95% confidence intervals ...... 232

LIST OF ABBREVIATIONS

AKP Justice and Development Party b/d barrels per day bcm billion cubic meters bcm/y billion cubic meters per year

BOTAS Petroleum Pipeline Corporation

BP British Petroleum

BTC Baku-Tbilisi-Ceyhan Pipeline

BTE Baku-Tbilisi-Erzurum Pipeline

BTSCS Binary Time-Series Cross-Sectional

BTU British Thermal Units

CI Confidence Interval

CIS Commonwealth of Independent States

CL Civil Liberties

EBRD European Bank for Reconstruction and Development

ECT Energy Charter Treaty

EITI Extractive Industries Transparency Initiative

EWEC East-West Energy Corridor

FDI Foreign Direct Investment

FH Freedom House

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GFSIS Georgian Foundation for Strategic and International Studies

GNI Gross National Income

GEM Enrico Mattei Gasline

HDI Human Development Index

IEA International Energy Agency

IFC International Finance Corporation

IMF International Monetary Foundation

INOGATE International Oil and Gas Transportation to Europe

IPC Iraqi Petroleum Company

IPI Iran-Pakistan-India Pipeline

ISAM Center for Islamic Studies

LDC Least Developed Countries

LDV Lagged Dependent Variable

LLDC Landlocked Developing Countries

LNA Large-N Analysis

LNG Liquefied Natural Gas

MBI Myanmar-Bangladesh-India Pipeline

MFA Ministry of Foreign Affairs

OED Operations Evaluation Department

OLS Ordinary Least Squares

OPEC Organization for Petroleum Exporting Countries

OSCE Organization for Economic Cooperation and Development

PCSE Panel Corrected Standard Errors ppp purchasing power parity

PR Political Rights

SCGP South Caucasus Gas Pipeline

SD Standard Deviation

SFI State Fragility Index

SIPRI Stockholm International Peace Research Institute

SNA Small-N Analysis

SPSE South European Pipeline

TANAP Trans Anatolian Natural Gas Pipeline

TAPI Turkmenistan-Afghanistan-Pakistan-India Pipeline tcm thousand cubic meters

TRACECA Transport Corridor Europe-Caucasus-Asia

TSCS Time-Series Cross-Sectional

UN United Nations

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Program

WB World Bank

WGI Worldwide Governance Indicators

WITS World Integrated Solutions

WREP Western Route Early Pipeline

WWF World Wildlife Foundation

Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy

A NEW TYPE OF RESOURCE CURSE? THE EFFECT OF NATURAL RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY, REGIME STABILITY, AND DEVELOPMENT

Ruchan Kaya

December 2014

Chair: Michael Bernhard Major: Political Science

The introduction of a hydrocarbon pipeline system into a region comes with a series of economic, social, and political changes, not to mention having international and environmental repercussions. As a product of huge investments, long negotiations, and strategic relationships, resource pipelines affect countries which they pass through.

Through a nested analysis, this research employs case studies on Belarus and Georgia, followed with a series of statistical large-N analyses to measure the effect of pipelines on the level of democracy and regime stability as well as economic and human development in transit countries. In doing so, I create an original cross-national data set that covers all international oil and natural gas pipelines and countries from 1990 to

2010.

The findings suggest that natural gas transit countries promote authoritarianism in more autocratic regions whereas the promotion of democracy remains limited in regions which have a high concentration of democracies already. I also find that especially in lower per capita income states, natural gas pipelines make transit countries more stable. Among the richer countries, the probability of regime failure is

already pretty low; therefore the positive effect of the pipelines is negligible. Finally, while transit pipelines improve human development there are contradictory findings on their relationship with economic development.

CHAPTER 1 INTRODUCTION

The installation of hydrocarbon pipeline system in a given region has socioeconomic and both domestic and international political implications. Resource pipelines entail a combination of huge investments, long term negotiations, and strategic alliances, and make complex contributions to the countries that they pass through. The ways in which the pipelines affect the countries in which they are based is potentially of great significance and yet, has received surprisingly limited attention even by the existing literature on the “resource curse.”

Hydrocarbon pipelines assure a safe, steady, and longer term energy trade by interconnecting the economies of supplier and user parties. The lucrative business connections, the high fixed costs, the contingency of monopoly, monopsony1, and interdependency between the involved parties pose daunting challenges to the pipeline countries.2 Simultaneously, as well, the hydrocarbon pipelines may lead the participating countries to higher levels of cooperation largely because the establishment demands ongoing political and economic commitments (Ericson 2009, 37; Balmaceda

1998). The pipelines not only connect the involved countries economically; through their physical presence, they also establish a multiplicity of inflexible structural networks between these countries. As far as the cross-border pipelines are concerned, however, the resources that are sold by the country of origin are not necessarily consumed by the

1 The studies of landlocked developing countries (LLDCs) include problems of monopsony. The World Bank estimates these countries lose 30 percent of their GDP to trade transaction costs (World Bank 2012). 2 For instance, Belarus started to take part in natural gas transfer to Western Europe through the Yamal- Europe pipeline. Before that, 95 percent of the Russian energy was transferred through Ukrainian territory therefore giving Ukraine bigger leverage in its negotiations with Russia. That was mainly a monopoly situation for Ukraine until the Belarusian transit route was introduced (Balmaceda 1998, 267-9).

pipeline country. Typically, a transit country facilitates the transportation to other end users, and reaps benefits from its intermediary role. In fact, most transit countries are able to exert political and economic leverage upon the supplier and user parties while charging considerable transit fees and guaranteeing affordable rates for their energy needs. These countries also secure jobs related to the pipeline system and the steady stream of foreign direct investment (Bahgat 2006).

In this dissertation, I thus explore the implications of the political and economic advantages enjoyed by transit countries using four major dependent variables.

Specifically, I examine how substantial transit fees and subsidized resource prices affect economic (1) and human (2) development. I also examine the political repercussions of the economic connections that the existence of a pipeline brings, such as regime stability (3) and the level of democracy (4). Through a multi-method approach that employs case studies and statistical research, the determinants of these four dependent variables are reevaluated within the context of transit pipelines. In order to evaluate these dependent variables, the first substantive chapter of the dissertation introduces a total number of six hypotheses. These hypotheses are tested both through case studies and regressions. The conclusion is dedicated to the evaluation of the empirical findings within the substantive chapters.

The results of the case studies and regression analyses show that natural resource pipelines conditionally promote authoritarianism or democratization based on the level of democratization of the transit country’s region. The results are consistent with multiple level of democracy indicators like aggregated Freedom House (FH) scores for civil liberties and political rights and Polity IV’s revised and combined polity score

(polity2). Furthermore, the case studies and regressions show that natural gas pipelines also increase the stability of a transit country. Using Geddes et al.’s (2014) indicator on regime failures in democracies and autocracies, especially in poorer countries, natural gas pipelines decrease the probability of a regime failure.

With regard to development outcomes, the case studies evaluate multiple dimensions of economic and human development. However, the regressions focus on only two indicators, economic growth and infant mortality rates. The findings on the economies of transit pipelines are more puzzling compared to the findings on human development. Although there is case support for promotion of economic growth among the transit countries, the statistical evidence contradicts this finding and shows that transit countries grow slower, controlling for other factors. However, both case evidence and statistical findings show improvement in human development in transit countries.

History of Transit Pipelines and their Legal Framework

The first ever transit pipeline was an oil pipeline in Kirkuk, Iraq, aimed at increasing exports from the region. The pipeline was completed in 1934 and was built to carry Iraqi oil to the Mediterranean Sea for export to world markets (Stevens 2009, 8).

Pressured by its British business partners, the Iraqi Petroleum Company (IPC) built the pipeline which delivered oil to Tripoli and Haifa (the Haifa connection was closed down after the creation of Israel). The pipeline suffered many transit disruptions due to changing oil prices over the years, leading to Lebanese and Syrian objections over the transit fees. This led Iraq to start looking for alternative routes through Saudi Arabia and

Turkey. Eventually, this search for stability led to the building of the Kirkuk-Ceyhan oil pipeline between Iraq and Turkey. The pipeline is 965km long in total and, at its peak, had a 1.65M b/d transit capacity. This pipeline, along with the BTC, made Turkey one of

the world’s major oil transit countries. Still, the lack of the international governance of pipelines led to multiple instances of transit fee re-negotiations between the parties

(Kandiyoti 2012). On the other hand, within Europe, the first international pipeline was built thanks to natural gas explorations in the Groningen field in Netherlands. The country started building natural gas pipelines to export its product, paving the way for the establishment of the first inter-state pipeline Europe in 1950s (IEA 2009).

The legal framework for regulating pipelines has been shaped and reshaped over the years. Article five of General Agreement on Tariffs and Trade’s (GATT) specifies international transit rules while article seven of Energy Charter Treaty (ECT) of 1998 further sets out energy transit rules (Energy Charter Secretariat 2012, 10). Despite the existing framework, countries can also make specific tariff conditions for determining the final compensation for transit. Furthermore, article 20 of the Energy Charter Treaty compels the participating countries to disclose the terms of an energy agreement, including the transit fees (Energy Charter Secretariat 2012, 64). Yet, the research shows that in many cases neither the governments nor the companies disclose the transit fees received or the conditions for natural gas or oil transit (Billmeier et al. 2004).

For instance, a recent report on hydrocarbon transit countries like Bulgaria, Georgia,

Turkey, and Ukraine concludes that obtaining specific transit fee information3 from the governments of all these countries is very hard (Energy Revenue Institute 2012, 40).

Although the report says that such behavior cannot be a part of countries aspiring to be

3 A Global Witness study on oil, natural gas, and mining industries in Angola, Congo (Brazzaville), Equatorial Guinea, Kazakhstan, and Nauru also point out the problems in these countries due to a lack of transparency in the energy sector (2004). The report concludes that promoting transparency will also help to alleviate poverty.

part of the European family, transparency in transit conditions is even lacking among some EU member states.

Despite such practices there are also efforts to improve transparency of extractive industries around the world, such as the formation of Extractive Industries

Transparency Initiative (EITI) forum by former British Prime Minister Tony Blair. The forum brings governments, companies, and NGOs together in order to promote the transparency of extractive industry transactions and payments. Beyond developing standards for taxes and other payments from companies to governments, the EITI also publishes an annual report on countries’ level of openness in their extractive industries

(2014). Such initiatives and presence of ECT are essential for preventing potential commercial and political disputes between the participating countries as well as establishing transparency within the energy sector.

Such transparency issues in the energy sector also put limitations on scholarly research on the subject. Since it is not possible to acquire yearly time-series data on the amount of transit fees, subsidies, and the exact volume of gas or oil that passes through a particular transit country, other proxy measures are used as main independent variables in the statistical section. These are a transit country dummy, total transit pipeline length, number of transit pipelines, and transit capacity. For every proxy variable oil and natural gas transit are coded separately.

Locating Transit Pipelines within Comparative Politics Literature

Although there is no theoretical framework to locate the transit income, energy subsidies and their effect on the level of democracy, regime stability, economic and human development, based on the subject matter (pipelines) and the type of income they generate, there are a few approaches in the existing literature may hold some

promise. First, it is possible to refer to the academic works on oil and natural gas pipelines although existing studies do not necessarily focus on the dependent variables of this dissertation. Another way to situate this research is to review the works on natural resource income and nontax revenues in general.

The studies on pipelines usually focus on transit problems and security issues surrounding pipeline politics (Demir 2012; Stern 2002; 2006; Stevens 2000; 2009), game theoretical decision making processes on pipeline routes and potential outcomes

(Hirschhausen et al. 2005; Hubert and Ikonnikova 2011; Ikonnikova 2008), economic benefits (Bahgat 2002; Hirschhausen et al. 2005), and strategic and geopolitical relevance of the pipelines (Bahgat 2005; Bilgin 2009; Demir 2012; Gurses 2011) for the countries involved. Along with topical approaches, there is also an abundance of regional and country level case studies which evaluate the effects of pipelines locally.

Still there are no global-level evaluations. The scholarly works include case studies on prominent transit countries like Ukraine (Balmaceda 1998), Belarus (Balmaceda 2006),

Georgia, and Turkey (Yilmaz 2012) or regions like Northern Africa (Bahgat 2012; Hayes

2004), Central Asia (Chow and Hendrix 2010) and South Caucasus (Kochadze 2006;

Sovacool 2011).

In a Chatham House report Stevens posits that pipelines lead to potential interstate conflicts, therefore possible undermining of regimes (2009). As a result of these disputes, the flow of pipelines is interrupted, hurting all stakeholders in the process. Stevens sees lack of an overarching jurisdiction for international pipelines as a major issue that leads to pipeline disagreements. For instance, conflicts emerge out of pipelines when the balance between the transit country and the supplier shifts towards

the former or when the price of the product carried changes significantly. In such cases, the transit country might get greedy for more income threatening to cut off the flow of the product. This is what happened to the Iraqi supply of oil through Syria and Lebanon in 1970s when the price of oil has increased globally, leading to the closure of the line in

1982. However, if the transit country is dependent on FDI inflow, transit fees, and the transit product for domestic consumption, then there is a higher likelihood for stability of the pipeline route (ibid). Furthermore, embedding the transit countries in the global economy, increasing the transit countries’ dependence on natural gas and oil, the formation of international jurisdiction bodies for solving potential transit problems, and further interdependence among the partners should decrease the possibility of disagreements and supply disruptions (Demir 2012; Stevens 2009). Indeed, following the end of the Cold War era nuclear deterrence that prevented major violent conflicts and confrontations, the formation of common interests and mutual benefits for all players through establishing pipelines is believed to increase security and bring economic prosperity (Bahgat 2002; 2005; Demir 2012). The construction of win-win situations through energy trade has been an essential opportunity for all partners

(Bahgat 2005). Therefore, creation of interdependencies through pipelines may indeed stabilize the participating countries in the long term.

Although the literature on pipelines explores the security implications of this trade or report on the negotiation of pipeline construction, the dependent variables of this study (development, democracy, and stability) have not received due consideration. On the other hand, the resource wealth literature explores its effects on development and democracy, but no scholarly work has investigated how being a resource transit country

fits in the existing literature. In investigating the similarities and differences between such countries, this dissertation attempts to evaluate current theories of resource dependence, and sees if they fit in two prominent cases of resource transit (Georgia and Belarus), and attempt to develop a global theory of the effect of transit pipelines about core topics of interest to comparative politics.

Transit income and energy subsidies are similar to income from natural resources in a few ways. Both kinds of revenues are gained from oil and natural gas trade. While the latter is a product of within country extraction, the former is a transaction cost4 that benefits the transit country. Furthermore, both income types do not create wide arrays jobs while generating a constant flow of revenues. The research for this project shows that for three to five years, the transit country usually experiences a short-term decline in unemployment levels due to building the pipeline at the time of establishment. However, after that, the direct effect on employment is small since pipeline maintenance is not labor intensive. The literature on foreign aid is also potentially relevant. Morrison (2007; 2009) finds parallels between resource income and foreign aid. Similar to foreign aid, transit revenues and subsidies are also externally obtained. Left at the discretion of the governments, both types of income are not domestically but externally generated. Therefore, despite the gap in the literature on transit countries, previous work on natural resource wealth and foreign aid might provide a useful framework to better understand transit revenues and subsidies.

In order to understand the possible mechanisms by which transit revenues and subsidies affect the outcomes of interest, it is useful to survey the natural resource and

4 This transaction cost is usually negotiated between the supplier country, extracting firm, and the pipeline firm.

foreign aid literature. Despite a plethora of studies on how hydrocarbon wealth shapes development and regimes (Karl 1997; Ross 2001; Smith 2004; Herb 2005; Morrison

2007; Dunning 2008; Luong and Weinthal 2010) the question of whether being a transit country has similar effects has been ignored and the influence of resource transit remains to be addressed. Within the literature on resource wealth, there are numerous studies on the effect of resource abundance on the level of democracy, regime stability, and development which can help forming initial theoretical expectations on the mechanisms by which resource pipelines can affect such outcomes. Ross argues strongly for a negative relationship between resource wealth and equality, social peace, development, and democracy (2001; 2008). Inequality traps, produced by mineral wealth dependence, lead to violent conflicts and therefore drive away foreign direct investment in an unstable investment environment (Ross 2008). Still, according to Ross, violent conflict is not the inevitable outcome in all cases. There are contingent factors such as the place of extraction (center vs. periphery), democratic institutions, and ethnic and linguistic diversity that affect inequality (ibid, 193-4). Thus, resource wealth can bring inequality and conflict unless its effect is mitigated by institutional and geographical conditions, which function as structural constraints.

Ross lays out three other authoritarian effects of natural resource wealth (2001).

He calls them the rentier, repression, and modernization effects. The rentier effect decreases pressures for economic redistribution and the accountability of leaders to their citizens. The repression effect endows leaders with resources to repress the citizenry5. Finally, the modernization effect leads to a reduction in levels of education

5 For more on the repression effect, see DeMeritt and Young’s work on natural resources and their effect on violations of personal integrity rights (2013).

and industrialization. Ross’ findings on oil led other scholars to examine the effect of oil in a range of settings (Herb 2005; Fish 2005; Morrison 2007). Utilizing a newer dataset, different methods, and theoretical explanation, Herb does not find a consistent and statistically significant relationship between rentierism and democracy (2005). Fish, on the other hand, identifies other causal mechanisms that explain how natural resource production undermines democracy through his thorough case study (2005). In his book on the failure of the democratization process in Russia, he posits that the Russian case performs differently in terms of how hydrocarbon production affects regime type. The

Russian example exhibits rather different patterns from Ross. It is highly industrialized and has a high literacy rate, nor does it rely on resource income for domestic repression. However, he finds that resource abundance contributes to increased corruption in Russia and this indirectly led to the failure of democratization efforts. More specifically, severe corruption problems and the persistence of economic statism, predicated on state ownership of resources pushed Russia toward authoritarianism

(ibid: 138).

In contradiction of Ross, Karl, in her account of Venezuela, initially argues that the natural resources can have a democratizing influence. There, both the preferences of the elite and a conducive international environment favored democracy and petroleum revenues allowed Venezuela to modernize in the 1960s, creating an urban society with a substantial bourgeoisie (1987: 67). In subsequent research, she points out the negative effects of oil booms on state capacity, leaving affected countries in political crisis (Karl 1997).

In an original line of research that relies on a more conditional analysis, Smith questions straightforward, unidirectional theories on resource curse and develops a contextual theoretical account to explain the relationship between oil, regime survival, and regime stability (2004; 2007). Initially, he finds a significant relationship between oil wealth and regime durability within a probabilistic, large-N framework, despite the existence of some outliers (2004). Later, in attempting to explain both unstable oil rich states and the ones that survive for long periods, he examines the outliers and develops a conditional understanding of oil wealth. In this contextual framework, the influence of resource income changes in various settings depending on when development occurs, the strength of opposition, and access to rents by opposition groups (2007).

Accordingly, these conditions affect choice of the leaders to invest in state building activities or to form rentier relationships. When the leaders opt to invest in building stronger institutions instead of focusing on establishing rentier ties, those states tend to survive longer than the ones with intense rentierism. Making a similarly institutional explanation, Wantchekon also develops an argument where weak institutions and lack of transparency promote authoritarianism in resource producing countries (2002).

Following Smith with a similar, contextual theoretical structure, Thad Dunning focuses on investigating the conditions under which resource abundance promotes democratization. He points out how various scholars focus on only the authoritarian effects of natural resources. For Dunning, such theories ignore outlier countries and they just assume that these nonconforming cases can democratize despite natural resources (2008). Dunning rejects such an idea and asserts that the effect of the rents due to resource production should be regarded as conditional. Using Venezuela as a

heuristic case study, Dunning develops a theory on how natural resources can actually democratize a country. He argues that if a country is resource abundant, but not resource dependent, rents produced may actually encourage democratization (ibid, 11).

Beyond resource abundance, he also considers the distribution of wealth among the business elite. If there is material inequality that divides the business elite and therefore diverging political and economic interests among them, resource rents may promote democratization. Otherwise, resource rents will continue to promote authoritarianism. In developing his theory, Dunning does not reject the previous literature on authoritarian effect of resource abundance, but explains the democratic outliers in those studies. For a country to democratize, it has to have other sorts of production, so as not to be too much dependent on resource income.

Smith and Dunning are not the only scholars to question the assumptions of the early resource wealth theorists. Recently Luong and Weinthal dismiss the view that all resource producing countries share the same ownership structure of their natural resources. In questioning this supposition from an institutional perspective, they point out the fact that not all natural resources are state owned, and not all natural resource producing countries have weak institutions (2010). Though they do not only focus only on regime type, but also on the economic development of these countries. Focusing on five Central Asian post-Soviet republics, the authors conclude that the variation in the ownership structure of oil actually matters and the curse does not stem from the mere existence of oil but rather from the pattern of ownership. In a similarly institutional approach, Amundsen calls out for a distinction between the kinds of institutions built in explaining the variation on economic and political development in resource abundant

countries (2014). In his study on the political and economic institutions of Angola, he concludes that only extractive institutions have flourished in the country while redistributive ones based on revenue and political power-sharing failed to thrive. The findings of the research also support Smith’s argument on the timing of critical junctures and oil booms in a country’s late development. Democratic and transparent institutions were not established in Angola before late development due to oil and this is one of the main reasons for emergence of resource curse in Angola.

A final set of conditional explanations on oil’s non-monolithic effect are proposed in the area of regime stability, based on the characteristics of leadership (Colgan 2014) and the role of elites in democratic states (Gurses 2011). Colgan examines whether the leadership in oil producing countries are revolutionary or conventional. Focusing on the effect of oil, political leadership, and domestic politics on instigation of international conflicts, Colgan finds that states with oil income and a revolutionary leader are 249 percent more likely to prompt an international conflict compared to countries without a revolutionary leader and petrodollars (ibid, 201). Therefore, he points out at the relevance of domestic politics in bringing a conditional character to the effect oil. Finally, focusing only on stability of democracies, Gurses finds that natural resources stabilize democracies through easing redistribution fears of the elites in a country (2011).

Looking at both oil rich and mineral rich countries, he challenges the general resource curse argument. Building on Smith’s and Dunning’s conditional explanations, Gurses maintains that –along with elite support-- natural resources can promote the survival of democracies6 under certain circumstances.

6 Taking Gurses’s claim a step further, Kevin Morrison suggests a robust relationship between all types of nontax revenues and regime stability (2009). He finds that both in autocracies and democracies,

Diffusion of Regimes through Pipelines

By pairing the study of natural resources with that of regime outcomes, this dissertation develops a new theory of regime diffusion through natural resource pipelines. In their exceptional work, Bunce and Wolchik define diffusion as “a process wherein new ideas, institutions, policies, models or repertoires of behavior spread geographically from a core site to other sites, whether within a given state (as when the movement of new policies invented in one political subunit spreads to other subunits within a federal polity) or across states” (2006, 285). Although they only focus on cases of electoral democratization across the post-communist space, diffusion can also be in form of authoritarian learning or a negative demonstration effect (Silitski 2010, 88).

Previously Przeworski et al. (2000) found that democracies are more likely to survive if they are in more democratic regions or if there is a global wave of democratization. Brinks and Coppedge (2006), on the other hand, focus on neighbor emulation of neighbors and find a diffusion effect in the world from 1972 to 1996.

Neither study, however, tests for particular channels of diffusion.

Diffusion of regimes can be a product of dependence. Within the field of pipeline politics, some view the pipelines as physical evidence of that dependence (Balmaceda

1998). For instance, the relationship between the transit country, Ukraine, and the supplier, Russia, has been one of the prominent cases where Ukraine is dependent on

Russian subsidized natural gas and transit fees until the mid-2000s. Although Russia is also reliant on Ukrainian oil and natural gas transit to reach Western European markets, the existence of alternative ways to transport natural gas to the West (i.e. Nord Stream regardless of the type of nontax revenue (resource income or foreign aid), the revenues promote further stability. Furthermore, in an earlier study, he also reached the conclusion that aid decreases chances of democratization and the result does not change even under the best institutional arrangements (2007).

Pipeline and Yamal Pipeline) and disproportionate size of the two economies work against Ukraine’s favor in this case. In order to escape from Russian dependence, the country attempted to diversify its sources of energy as well as exploring for natural gas in the Black Sea in the 1990s (ibid, 258). In Balmaceda’s view, such pipeline linkages create reliance on Russia. In a more nuanced view Newnham (2011) posits that Russia uses pipelines and its petro-power in a carrot and stick policy to influence former Soviet

Union republics and satellites. Price incentives or punishments through gas cut-offs and steep price increases allows Russia to influence developments within such countries

(ibid, 138-40). Putin’s Russia has made extensive use of this strategy.

Based on this theoretical premise, Figure 1-1 summarizes the relationship between introduction of a natural gas transit pipeline and the level of democracy. Based on the idea of diffusion of regimes through pipelines the figure depicts how pipelines might promote democratization or authoritarianism depending on the level of democracy within the region of the transit country. In Chapter 3, following the regressions, there will be further discussion on the idea of democratic and authoritarian diffusion through pipelines. As the regressions will show in that section, while natural gas pipelines strongly promote authoritarianism in more autocratic regions, promotion of democracy in more democratic regions is rather limited.

A Note on the Differences between Oil and Natural Gas

Before moving onto the structure of the dissertation a few distinctions surrounding the politics and economics of natural gas and oil should be noted. So far, the literature on resource politics treats all hydrocarbon income the same way. A recent article criticizes such treatments of conflating oil, natural gas, liquefied natural gas

(LNG) and points out the fundamental differences between various kinds of petroleum

products (Hancock and Vivoda 2014, 212). Indeed, there are several differences between natural gas and oil extraction, trade, politics, economics, and pricing. Thus, apart from the possible effects of hydrocarbon wealth on the participating countries, the contrasts between oil and natural gas should be addressed. The fundamental differences on extraction, production, and treatment of coal and oil as well as their economic and political implications have been discussed in the literature (Mitchell

2009). However, the distinctions between natural gas and oil are generally overlooked and lump together in theories of natural resource politics. However, there are very specific differences between the economies of natural gas and oil as well. Compared to oil products, it is very costly to transport natural gas and there are not easy alternatives.

As Jensen (1994) notes, when liquefaction, re-gasification, and tanker costs are included, transportation of gas is at least seven7 times more costly compared to oil transportation, making it impossible to form an international natural gas market with a single international market price.

For oil, establishing an international resource pipeline is only one of the alternative forms of transportation and one with relatively high fixed costs compared to -

-, other than shipment via sea, railroads, or on land.8 Indeed, the majority of global oil trade takes place using marine tankers, not pipelines, allowing for flexibility of delivery paths, amounts, qualities, and distances (Energy Charter Secretariat 2012, 9). In the case of pipeline transportation, this flexibility disappears since the consumer agrees to buy a certain amount every year for a period of agreed time after the installation of the

7 Jenson further notes that transporting natural gas in a tanker would be twenty times more costly than transporting oil through tankers (1994). 8 According to Energy Charter Secretariat 75 percent of the delivery cost for oil is fixed (2012, 16).

pipeline.9 Still, in the cases of landlocked countries, an oil pipeline might still be the best economic option to import10 or export11 oil. However, for natural gas, a resource pipeline is the cheapest means of transport once the fixed cost of establishing the pipeline is realized. Indeed establishing pipelines can be very expensive; yet once they are built, the cost of transport is moderate compared to other modes of transportation.

The downside is that the alternative means to transport natural gas have high costs and require special equipment in exporting and importing ports transfer. For instance, shipment via sea as LNG is less cost-effective for natural gas compared to oil.12 Still, the international LNG market has also been growing over the past few years. Despite the fact that transporting natural gas via ships is costly and troublesome due to the need for with LNG storage tanks (Jensen 2003) and necessity to convert liquid back to gas at the destination, the amount of internationally shipped LNG has been increasing. Despite the higher cost, when a transit pipeline is not possible due to financial or political reasons, LNG becomes an option. Improvements in LNG technology have the potential to bring regional natural gas prices closer to each other through on a truly international market.

9 This requirement for long term commitments is mainly due to the high fixed costs of establishing a pipeline. Unless the user country makes a long term (usually at least 15 to 20 years) assurance to buy it, the supplier country and the extracting company might not agree to finance the project. Depending on the capacity and the length, the estimated cost of a pipeline project varies from $2 billion to $10 billion (Stern 2002, 10). 10 Macedonia is an example of a landlocked importer that supplies its domestic needs via pipeline. The country imports oil through a pipeline through Greece. 11 Landlocked Chad exports its oil to the world markets through a pipeline that passes through Cameroon to whom it pays considerable transit fees. 12 Belarus attempted to import Venezuelan oil in late 2010 to break Russian energy monopoly. This demonstrates the differences between oil and natural gas trade for both suppliers and users. Natural gas trade between Belarus and Venezuela would not be feasible due to cost.

Through such differences in price flexibilities, natural gas and oil pipelines should have varying repercussions on the transit countries that they pass through. For instance, Stevens (2009: 12) predicts that gas pipes should have less disputes compared to oil pipes since the participating countries need better coordination to begin with. However, in the mid- and late-2000s we see the opposite. Especially in carrying

Russian natural gas to European markets, Russia experienced difficulties with Belarus and Ukraine. With the increasing dependence of Western Europe on Russian gas, major international disputes rose from gas transit. Stevens suggests that this is mainly because of the relative inflexibility of moving natural gas to market.

Furthermore, there is a single world market and price for oil, whereas for natural gas prices vary for individual buyers. Figure 1-2 on natural gas prices (in US$ per million BTU) across the world shows the variation in six different markets. Based on business sources BP annually reports the average prices for the Japanese, UK,

German, American, Canadian, and OECD markets since 1984 (2013). Since the 2000s, the price gap between the markets has increased. Table 1-2 on natural gas markets across the World shows the exact prices in these six regional markets in 2000, 2005, and 2010. Despite large price swings over the course of the years, the price in the US increased merely by 16 cents in ten years and decreased 6 cents in Canada (with a price of $4.39 and $3.69 respectively), in Germany and the UK, prices increased almost threefold. For both pairs, the price differences between the markets diminish due to the greater portability of supplies and increased fluidity within the region thanks to pipeline connections. Therefore the American and Canadian market prices and UK and German prices remain closer due to geographic proximity of the pairs of countries and pipeline

connections between them. Still, the effect of the increasing supply of natural gas in

North America drives the price there down compared to the other four. In contrast there is a single world market for oil. Again, BP reports world crude oil prices per barrel going as back as 1861 (2013). Unlike natural gas, there is a single global crude oil market.

Furthermore, another difference is that it is easier and less costly to store oil.

Natural gas is hard to store especially for the user country. The difficulty of building cheap storage tie the importer to the supplier in a constant manner and make it dependent on stable flow of natural gas from the supplier. This is why in the natural gas pipeline crises sparked by Ukraine and Belarus, the European consumer countries needed to resolve the issue as soon as possible. Many of them are dependent on

Russian natural gas for more than 90 percent of their energy needs.

One final complication about pipelines is that is necessary to secure their physical integrity when they pass through areas that are subject to armed conflict.

Pipelines are easy terrorist targets. Although the Belarusian gas crises were non- violent, this is not true in all cases. For instance, the pipeline from Egypt that supplies

Israel and Jordan with natural gas was bombed three times in July 2011 (Afify and

Fahim 2011; Stack 2011).13. This was the fifth attack since the toppling of Hosni

Mubarak and by July 2012, there were a total of 15 attacks on the pipeline (Mohamed and Werr 2012). The Egyptian government has never controlled the Sinai completely and the Bedouins and other groups have consistently interrupted the flow (Bahgat 2012,

507). Since there is ongoing instability in the region, the security of the pipeline remains in question even when countries can fix the physical problems immediately. Although

13 This pipeline is crucial for both countries. Israel receives 40 percent of its gas from Egypt whereas Jordan relies on Egyptian gas for up to 80 percent of its electricity production.

the conflict between Georgia and Russia in 2008 did not interrupt the oil and gas flow through the country, the same concerns about the pipeline security can be applied to

Georgia. It has raised concerns in Turkey and Armenia.

Because of differences in the extraction, trade, and the market structure for oil and natural gas, the economic effects and political repercussions should not be the same for all pipeline countries. Because of these differences, this study looks at the impact oil and natural gas transit separately.

Structure of the Dissertation

This dissertation seeks to theorize the effects of natural resource transit pipelines and situate itself within comparative politics literature. Chapter one examines the theories of the resource curse and nontax revenues as potentially applicable frameworks to study the politics of pipelines. In order to examine the effect of being a resource transit country, I combine small-N case studies (SNA) with large-N statistical analyses (LNA). Such nested analysis aims to specify the causal mechanisms identified underlying any statistical findings (Lieberman 2005). The dissertation roughly follows

Lieberman’s step-by-step methodological guide to theoretical robustness, using two distinct methodologies. Figure 1-3 summarizes my two step framework using case studies and regression analyses. It starts with two heuristic case studies, where, from a political and economic perspective, natural resource transit has been an important issue domestically and regionally. Making historical evaluations of Georgia and Belarus since independence, Chapter 1 generates a set of hypotheses and preliminary evaluations.

The case studies rely on historical tracing and the examination of four dependent variables: level of democracy, regime stability, economic, and human development. The

findings of the first chapter are heuristic. They help me to formulate not to reject or confirm the hypotheses.

The next part of the dissertation examines a global sample of transit countries to see if their characteristics conform to the preliminary theory developed on the cases of

Georgia and Belarus. This serves as a preliminary check of the external validity of the theory. In doing so the second chapter introduces the basic concepts used in the study, e.g. what is meant by a resource transit country and a transit pipeline. After conceptualization of the main terms, it presents a summary statistical overview of an original data set that codes all international pipelines in the world between 1990 and

2010. I report basic statistics about the main independent variables and introduce the indicators for the four dependent variables used in the regression analyses. Chapters 3 and 4 present the results of my regression analysis. Chapter 3 reports my results on the level of democracy and examines how pipelines and regional democracy levels affect democracy levels in transit countries.

The chapter concludes with an analysis of the effect of pipelines on regime stability. It also looks at how the impact of pipelines on the probability of regime failure changes across different levels of development. These tests evaluate the competing hypotheses in the pipeline literature on the relationship between pipelines and stability.

Despite the vulnerability of pipelines to violent attacks and transit disputes (Stevens

2000; 2009), they have also been seen as promoting regional security and interdependence (Demir 2012). This global test on regime stability represents a step forward in this debate.

Chapter 4 presents my results on development. It first examines economic growth, investigating if pipelines have an effect on rates of growth generally and at different levels of income. It concludes by assessing if pipelines affect human development outcomes, using infant mortality rates as the dependent variable. This evaluation examines whether transit countries benefit from better health care provision.

The dissertation concludes with a final evaluation of the main hypotheses of the research and points out discrepancies between the initial hypotheses framed by the case studies and the results of the regression analyses. It ends with a discussion of whether it is possible to establish both internal and external validity through case studies and regression models as well as assessing the advantages of Lieberman’s nested analysis approach combining SNA and LNA.

Figure 1-1. The relationship between natural gas pipelines and the level of democracy

Price per(USD million BTU)

1985 1990 1995 2000 2005 2010 YEAR

Japan Germany UK US Canada OECD

Figure 1-2. Natural gas prices across the world (1984-2012)

Figure 1-3. Two stage research design: model building SNA and model testing LNA

Table 1-1. Natural gas prices across the world ($ / Million BTU)

2000 2005 2010

Japan $4.72 $6.05 $10.91 Germany $2.89 $5.88 $8.01 United Kingdom $2.71 $7.38 $6.56 United States $4.23 $8.79 $4.39 Canada $3.75 $7.25 $3.69 OECD $4.83 $8.74 $13.47

Source: British Petroleum. 2013. Statistical Review of World Energy June 2013, Available at http://www.bp.com/content/dam/bp/pdf/statistical- review/statistical_review_of_world_energy_2013.pdf. Accessed at January 2014

CHAPTER 2 THEORIZING RESOURCE TRANSIT: THE EFFECT OF NATURAL RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY, REGIME STABILITY, AND DEVELOPMENT IN BELARUS AND GEORGIA

Introduction

This section of the dissertation fleshes out the mechanisms, by which transit fees, as well as oil and natural gas subsidies, operate in resource transit countries.

Thus far, the literature on ‘resource curse’ or nontax revenues has not addressed the issues of resource transit countries and their transit income. Since there are no empirical or theoretical works on the subject, this chapter also brings forward hypotheses regarding the peculiarities of transit countries. Therefore, focusing on two well-known resource transit cases, Belarus and Georgia, the chapter endeavors to answer, or at least set a design to explain, several related questions on possible causal mechanisms:

How does the introduction of a pipeline system affect a country’s economic development? Does it diversify import-export ties, using income from these sources as a tool to eradicate poverty, inequality, and increase human capital? Further, how does a pipeline affect the characteristics of a regime? Do the economic effects of the pipeline system spill over into the political realm? Do pipelines create economic ties other than resource trade or do they have inescapable political ramifications? In the end, is the introduction of a pipeline system purely advantageous for a country or does it also have economic and political drawbacks?

There are no existing theories covering resource pipelines. However, resource curse and nontax revenue literatures can be a plausible way to start. After evaluating the existing theories in the contexts of Belarus and Georgia, I find that resource transit

identity and additional income through transit fees boost the economic development of both Belarus and Georgia, although there is stronger evidence in the case of Belarus.

As to regime type diffusion, resource pipelines have promoted slight democratization in

Georgia, whereas it led to stabilization of the already authoritarian regime in Belarus.

Here, the EU and the US had more of an effect on Georgia, while Belarus is strongly influenced by its natural gas and oil supplier, Russia, especially after Putin extended the country’s grip over the former Soviet Republics. Pipeline trade has improved the stability of both regimes generally. Both suppliers and users prefer stable energy trade partners, and therefore these parties attempt to keep the countries stable while promoting regimes similar to their own when given the chance. On a related note, resource transit income enabled the Georgian government to invest in the police force of the state in the 2000s, although this is not the case in more secure route of Belarus, where the regime is very popular based on the polls (Hutcheson and Korosteleva 2006) and there is little opposition. Finally, resource transit had made both Belarus and

Georgia more effective countries, promoting stability of their governments.

In terms of economic and human development, both Belarus and Georgia experienced higher levels of growth following the introduction of transit pipelines.

Having experienced serious economic crises following independence, both countries enjoyed economic growth in the 2000s. With regard to human development, Belarus was already one of the better performers among the post-Soviet countries, while

Georgia received support in this area from the firms operating pipelines and international banks.

Still, these initial evaluations are preliminary, and this chapter is a theory building piece that evaluates the previous literature on natural resources and examines the applicability in the context of Belarus and Georgia. From such assessments of preliminary theoretical implications through the case studies, initial plausible hypotheses are generated and tested at the country-level. Following this section, the second chapter of the dissertation defines the main independent and dependent variables used in later tests, as well as reporting descriptive global statistics on those variables. After laying out the methodological specifications of each statistical analysis, the following chapter examines the effect of resource transit on levels of democracy, stability, and development on a global scale. Since the inferences in this chapter are based on case studies of only two countries, the statistical analyses provide external validity for the preliminary theoretical formation and causal mechanisms through using large-N analysis on resource transit countries.

In this section, two prominent resource transit countries, Belarus and Georgia, are studied in detail to understand the importance of their respective oil and natural gas pipelines and how they use the transit income acquired through such pipelines. In order to measure the concept of resource transit country, the dimensions and the potential indicators of these dimensions should be explained. For a careful account of such countries, a theoretical framework and empirical investigation should consider at least three dimensions: transit, production and consumption of resources. In order to effectively define resource “transit” through a transit country, (1) measuring the transit fees received from the exporters and importers and (2) energy subsidies (which are received as additional quantities of oil or natural gas from the supplier) should be taken

into consideration. These two measures principally represent the economic benefits for the transit countries.1

Other than the fees and subsidies, other important dimensions for resource transit are the levels of resource production and consumption. If a transit country is also producing significant amounts of the resource that is being transferred, it should be harder for the exporter countries to exert pressure for lower fees and subsidies and vice versa. For the former, Russia can be an example while countries like Ukraine, Belarus, and Georgia could qualify for the latter. For instance, Russia is a transit country for

Central Asian resource-producing countries. However, unlike the cases examined in this section, Belarus and Georgia, Russia was already the biggest oil producer in the world in 2010, producing 10.3 million barrels of oil per day; more than 12 percent of the world’s supply of oil. In addition, Russia also produces 589 billion cubic meters (bcm) of natural gas annually, comprising 18.4 percent of the world’s natural gas supply. Such a high level of natural resource production gives Russia the ability to dominate and direct the natural gas market in Eurasia as well as controlling part of the world energy market.

Finally, the size of the economy2 is also a factor in evaluating the impact of resource transit income on a transit country. According to 2010 data from the World Bank,

Georgia has a GDP of $11.6 billion while Belarus claims around $55.2 billion. Both are transit countries for two natural gas transit pipelines, additionally, two oil pipelines pass through Georgia and one passes through Belarus. Again, one of the largest transit

1 Other than the direct economic aspect of pipelines, they also matter in terms of the prestige and strategic importance they provide for the participating countries, as well as bringing an improved economic climate and security for FDI inflow.

2 For a discussion of the importance of the size of the economy -along with other factors- for economic linkage, see Newnham’s work on Russian linkage with Post-Soviet republics (2011).

countries in the world, Russia, has a GDP of $1.5 trillion, with a far higher number of natural gas (10) and oil (6) transit pipelines. Looking at the different figures in these countries, one would expect the effect of transit to be more significant in a smaller national economy. Therefore, it is essential to account for the size of the economy while hypothesizing about the effects of natural resource pipelines on transit countries.

As mentioned earlier, in addition to the dimensions above, it is also important to note that transporting natural gas is a much more difficult and costly task than the transportation of oil. For this reason, it is easier for major producers like Russia to control natural gas markets through establishing monopolies. There are already few suppliers in the European natural gas market, and Russia has successfully built a monopoly on many occasions over post-Soviet Union user-countries such as Ukraine3,

Belarus, and Moldova, as well as some West European customers. However, for all its influence in affecting oil prices and in the international oil market, Russia can only modify its own supply of oil, which could still be counterbalanced by other oil producing countries (e.g. OPEC or others). Therefore, the transportation of natural gas has different political and economic implications within participating countries. This is why I regard oil and natural gas as separate hydrocarbon resource wealth types, unlike the current literature of resource politics (more on this below). Since the two types of products have different patterns of trade and prices, they should also have distinct effects on transit countries.

3 To increase the political and economic pressure on the west-leaning Ukrainian government in 2014, Russian Gazprom inflated Ukraine’s gas bills from $2 billion to $22billion in early May (Erlanger 2014). The company has also threatened to cut the gas supply to the Ukrainian market unless the debt is fully paid and unless Ukraine makes a prepayment for its future gas needs. As of now, Ukraine looks for other pipeline connections to buy its gas, bypassing Russia (Kmec 2014).

It is essential to account for a number of factors when evaluating the effect of different types of energy on transit countries. First, given that a country serves as a transit point for traded natural gas or oil, any transit fees it receives from the producer, consumer, or the operating company (depending on the legal contract) should be considered. Although this is a vital first step, energy subsidies by the producer country should also be taken into account, since some transit countries pay lower prices for product they use domestically. Second, in addition to the direct and indirect transit income, the natural resource production of a transit country also matters, since it affects the leverage available in negotiating with importer and exporter countries for transit fees and subsidies. And finally, oil and natural gas4 should be regarded as two different products where pipeline trade is concerned. Accounting for the factors mentioned above, potential indicators for the concept of transit country should be the guiding measures in examining whether transit countries differ from their non-transit counterparts in their levels of democracy, government stability, and development trajectories.

Framing the Hypotheses on Democracy, Regime Stability, and Development

Given the absence of strong theory on the mechanisms of transit pipelines, the somewhat related literatures on nontax revenue and the ‘resource curse’ can provide a starting point. This section adopts existing theories of resource politics to the resource transit context. It does so by evaluating such frameworks through case studies of

Belarus and Georgia, therefore helping to frame potential hypotheses to be tested by

4 Although this dissertation is concerned only with pipeline trade, natural gas traded through pipelines and liquefied natural gas (LNG) should have different political and economic functions. Therefore, as one recent article proposes, such petroleum products need to be disaggregated when their impact is evaluated (Hancock and Vivoda 2014).

statistical analysis. Although Belarus and Georgia are major resource transit countries, I do not claim to completely test the theories of resource wealth directly in this section; rather the aim of this theory building portion is to improve those initial hypotheses in order to theorize the relationship between resource transit countries and democracy, regime stability, and development. In the end, it is also important to apply the existing resource politics theories to the resource transit country cases, in the form of hypotheses. If the existing theories sufficiently explain resource transit countries’ regime and development outcomes, we do not need to amend the existing theories.

One aspect of the ‘resource curse’ is rentierism and its impact on the level of democracy. Statistical works do not find a conclusive association between hydrocarbon fuels and democracy (Ross 2001; Herb 2005; Morrison 2007) and more recently, scholars have started to propose conditional explanations. In terms of oil’s negative impact, Ross (2001) mentions how Jordan, Syria, and Egypt receive high transit fees based on their locations at the Suez Canal or via pipelines in their territory, as part of their rentier identities (329).5 The hypothesized relationship assumes that rentier states tend to extract fewer taxes from the population, so there should be less pressure from the poor for redistribution. Therefore, such smaller distributive pressures should lead to the relaxation of demands for democratization. This leads to the first hypothesis;

H1: Higher transit fees and subsidized energy imports should encourage authoritarianism.

The next argument is on the diffusion of regimes (or the neighborhood effects) where average level of democratization in neighboring states has a role on the level of democracy in a country (Gasiorowski 1995; Herb 2005; Kopstein and Reilly 2000).

5 More recently he also gives credit to conditional explanations in the literature (Ross 2012).

Resource pipelines increase economic and political relations between the participating countries; therefore they can act as a catalyst in regime diffusion. Combined with the effect of resource pipelines on the level of democracy, this leads to two competing hypotheses. Hypothesis 2a is based on the role of the supplier country, whereas hypothesis 2b is based on the role of the user country:

H2a: Higher transit fees and subsidized energy imports should increase the diffusion effect of the supplier countries, therefore leading to a convergence of the regime type of the transit country and of the supplier country.

H2b: Higher transit fees and subsidized energy imports should increase the diffusion effect of the user countries, leading to a convergence of the regime type of the transit country and of the user country.

Still, many resource transit countries are not highly dependent on transit income or energy subsidies from the supplier countries, despite the benefits they receive from such nontax revenues. Unlike income from hydrocarbon resource production, the economies of the transit countries are often not dependent on one industry or service.

For Dunning, the existence of an elite class in other economic and industrial areas outside of the oil industry is a prerequisite for democracy in resource rich countries.

Thus, following Dunning, we might expect a similar outcome in resource transit countries. Since transit income would not be the sole source of foreign currency inflow in any transit country, these nations might also be more prone to democratization, since they should have industries unrelated to the transit income, subsidies, and oil subsidiary exports (2008). We arrive at the third hypothesis:

H3: Transit fees and subsidized energy imports should encourage democratization as long as these are not the dominant sources of foreign revenue into a transit country.

Thus far, within scholarly research on pipelines, there are only brief comments mentioning how pipelines can become a source of stability. One of these mentions that establishing pipeline networks in South Asia among India, Pakistan, Bangladesh, and other countries might bring stability to the region (Nathan et al. 2013). Supplier and user countries do not benefit from internal conflicts within the transit country, since a conflict might lead to disruption of the energy transit agreements.6 These reasons should encourage more stability and increased security. Pipelines also serve as tools of regional integration. There are also reports and findings on how the Baku-Tbilisi-Ceyhan

(BTC) and the Baku-Tbilisi-Erzurum7 (BTE) pipelines buttressed the stabilization of

Georgia through their mere existence in the region (Chang et al. 2013; Revenue Watch

Institute 2012). In essence, these findings provide evidence that the pipelines are of strategic importance for all participating countries. Therefore, the stability of the transit country is in the best interests of both the supplier and user countries. However, these arguments are not tested through case studies or statistical examination. This leads to the fourth hypothesis of the research:

H4: Higher transit fees and subsidized energy imports should improve the stability of a country.

The examples of Aceh (Indonesia) and the South Sudanese secessionist movement (Sudan) demonstrate that in countries with substantial mineral wealth, violent

6 The explosions of Iraqi pipelines after the American invasion in 2003 and over ten explosions on the Egypt-Israel-Jordan pipeline, after the fall of Muobarak, demonstrate how internal conflicts in resource rich countries are destructive for both supplier and user countries. The Middle East already has a long history of pipeline flow disruptions due to economic and political reasons (Stevens 2000). Therefore, the recently established pipeline systems and newly proposed contracts usually consider the stability and peacefulness of the participating countries as well as the relations between them. The Baku-Tbilisi- Ceyhan pipeline is one example where the cheapest option, Armenia (instead of Georgia), was excluded from the project due to the fact that Armenia and Azerbaijan had had a recent conflict.

7 The pipeline is also called the South Caucasus Gas Pipeline (SCGP) in some sources.

conflict might emerge, leading to the flight of Foreign Direct Investment (FDI) from the country as well as further economic problems (Ross 2008).8 On the contrary, regional integration projects like the BTC and BTE pipelines are found to promote further economic growth9 for the participating countries (Chang et al. 2013). Using a sample of

South Caucasian countries, Chang et al. (2013) find that higher energy exports and globalization foster economic growth. Stiglitz (2004) also posits that further regional and global integration promotes more stable economic growth. Thus, I expect the following in resource transit countries:

H5: Higher transit fees and subsidized energy imports should increase the credibility and perceived economic security of a country therefore encouraging better levels of economic growth.

Finally, countries with transit pipelines might also receive international backing for additional projects for their populations, and firms operating the pipelines might engage in social responsibility projects. In such situations, we should expect higher participation by the pipeline companies in larger pipelines and higher transit capacities to invest more in human development projects. This leads to the final hypothesis:

H6: Transit fees and subsidized energy imports should promote higher levels of human development in transit countries.

Following hypothesis formation, the next section explains the logic behind choosing Belarus and Georgia as the case studies of resource transit’s impact on levels of democracy, stability, and development. It begins by reiterating the methodological framework, and is followed by the significance of these two countries as transit points

8 The South Sudanese secessionist movement eventually led to the independence of South Sudan in 2011, providing further support on the relationship between mineral wealth and secessionist movements.

9 Alexeev and Conrad (2009) also claim that resource producers may also include growth winners based on an institutional argument. See Brunnschweiler (2008), Brunnschweiler and Bulte (2008), Mehlum et al. (2006) for further objections to the ‘resource curse’ among resource producers.

for natural gas and oil pipeline trade. Finally, it justifies the logic of case selection through showing the variation on the main dependent variables of the dissertation. After the logic of case selection, the hypotheses on the level of democracy, regime stability, economic, and human development will be evaluated under separate sections.

Choosing Belarus and Georgia in Assessing the Impact of Resource Pipelines on Transit Countries

The case studies for examining the effects of natural resource transit are a part of model building Small-N Analysis (SNA) as developed by Lieberman (2005). The case selection process for SNAs is crucial, since those cases will direct the rest of the research through informing the models in model testing Large-N Analysis (LNA). The cases of Belarus and Georgia form a heuristic, theory informing SNA, in order to build a theory on resource transit and its repercussions on a series of economic and political outcomes (Lijphart 1971). Since theoretical explanations have not been widely explored in the area of pipelines and transit countries, these initial cases work to enlighten us on how being a transit country affects a country’s social well being, economic development, regime type, and stability. Such model building SNAs of Belarus and Georgia form a preliminary theoretical model and help to find ways of effectively operationalizing the concept of transit country for the statistical section. The oil and natural gas global economy is far from transparent, and in many cases, the governments and companies that own the pipelines fail to provide reliable and complete information regarding transit fees and additional contractual obligations of the each participating country and company (Billmeier et al. 2004; Energy Charter Secretariat 2012; Global Witness 2004;

Open Society n.d.; Revenue Watch Institute 2012). Within the report of the Energy

Charter Secretariat, the country experts report that governments of transit countries fail

even to report the annual transit volumes for oil and natural gas (2012). Therefore, the case studies of Belarus and Georgia serve an additional purpose other than providing deeper knowledge on characteristics of transit countries: providing additional ways to measure the effect of transit pipelines.

Finally, the casework on Belarus and Georgia sets the stage for preliminary and tentative test of the initial hypotheses on how being a transit country for natural resources affects a country in various perspectives. By effectuating a multi-method strategy of combining SNA and LNA, this dissertation aims to increase the internal and external validity of the possible causal mechanisms that will be identified from the case studies and a global sample in the upcoming sections (Lieberman 2005). Doing so takes advantage of employing a multi-method approach’s strengths. Therefore, the cases of Belarus and Georgia will direct the rest of the chapter in attempting to provide a framework on the characteristics and peculiarities of natural resource pipelines from economic, social, and political viewpoints.

Pipelines in Belarus and Georgia

Belarus and Georgia are two of the more prominent nations providing resource transit to Europe and have varying developmental and political trajectories. Before exploring variations in their stability, levels of democracy, and development, this section will introduce the transit pipelines in both countries. By the year 2010, Belarus had three transit pipelines: two natural gas pipelines and one oil pipeline that cross the country to satisfy the European energy needs. Georgia, on the other hand, has four transit pipelines: two for oil and two for natural gas.

Since its independence, Georgia has been making oil and natural gas deals in the region (Chivers 2006) and functioning as a transit country for Azeri and Russian

natural gas and oil through four pipelines. Initially, Georgia was only transporting

Russian natural gas to Armenia. Although it was a domestic pipeline for the Soviet

Union, it became a transit pipeline with the independence of Georgia and Armenia, along with the rest of the former Soviet Union republics. The Georgian section of the pipeline is around 160 km long. The pipeline has a capacity of 5 bcm/y, but only about

2.6 bcm/y passes through Georgia, while Georgia is contracted to receive 2.25 bcm/y.

Georgia also receives its transit fees as in-kind payments by receiving 10 percent of the natural gas being transported to Armenia without making any cash payment (Peuch

2005; n.a. 2006). In late 1998, the first oil transit pipeline, Western Route Early Pipeline

(WREP), was commissioned, carrying oil from Baku, Azerbaijan to the Supsa Port in

Georgia for export to the world markets. The portion of the pipeline that lies within

Georgia is around 351 km long. The Open Society in Georgia Foundation reports that it currently has a transit capacity of 115 thousand b/d with the potential to increase up to

250 thousand b/d (n.d., 15) and Georgia receives around 19 cents per barrel in transit fees (Margvelashvili 2013). These two pipelines have been rather minor projects compared to the greater regional projects that have been completed with the participation of Azerbaijan and Turkey. These projects are also a significant part of the

“East-West Energy Corridor” plan supported by the EU and the US for Georgia’s integration to the West (Murinson 2008; Onis and Yilmaz 2009; Petersen 2007). These pipelines are the BTC oil pipeline and the BTE gas pipeline. Commissioned in 2006, the

BTC transports Caspian oil resources for the world market as well as responding to

Georgian and Turkish demand. Both the BTC and BTE are 248 km long within Georgia

(BTC is 1760 km long and BTE is 916 km long in total). BTC has a transit capacity of 1

million b/d10 and with such transit capacity, is one of the largest oil pipelines in the world. Georgia receives 12-14 cents per barrel as part of its transit fee (Margvelashvili

2013). The BTE, on the other hand, transports natural gas for Turkish consumption, and here Georgia plays the role of the transit country for natural gas transport. The pipeline is owned by a consortium (with the biggest stakeholders being Statoil and BP) and it was established in 2006 with a transit capacity of 30 bcm/y. Georgia receives 5 percent of the transit gas as transit fees directly from Statoil, as well as paying a discounted price for additional natural gas purchased. Currently there are a total of four transit pipelines operating in Georgia: two natural gas and two oil pipelines. The basic characteristics of these pipelines, along with the ones passing through Belarus, are summarized in Table 2-1 below.

Compared to its transit competitor in the region, Ukraine, Belarus is a latecomer to natural gas transportation in Eurasia although it is a shorter and more effective transit option to export natural gas to Western European countries. Belarus has historically been a transit country for oil as part of the Druzhba Pipeline, transporting Russian oil during the Cold War. Commissioned in the 1960s, the Druzhba Pipeline is one of the largest pipelines in the world. Although the pipeline has a capacity of 1.2 million b/d,

Belarus transits 720 thousand b/d, as the pipeline divides into two branches, with one branch extending south through Ukraine, as Balmaceda 2006 reports (26). The pipeline is roughly around 521 km long in Belarus. Currently, Belarus transports almost 50 percent of all Russian oil and is an essential transit partner. Although natural gas transit started before the Cold War through the Northern Lights Pipeline, the more profitable

10 Sverre Svening, a researcher at the Astrup Fearnley group, reports that the pipeline can easily transport up to 1.5 million b/d and there are already plans to expand the capacity to up to 2 million b/d (2007).

and sensational natural gas project that crosses Belarus is the Yamal Pipeline

(Pourchot 2008). Both pipelines run alongside each other. However, other than aiming to exploit the Yamal fields, the Yamal Pipeline project was also a part of the plans in the

1990s to decrease the transit reliance on Ukraine and supply the Polish and German markets. The Northern Lights Pipeline is more than 7,000 km long in total and as part of the Torzhok-Minsk-Ivatsevichy, Kobrin-Brest-Warsaw, and Ivatsevichy-Kobrin-Dolina branches, the section within Belarus is around 450km long (Korchemkin 2006).

Currently, with the establishment of the Yamal Pipeline for Russian natural gas, Belarus’ share of transit is 22.3 percent, while 68.6 percent passes through Ukraine. Within

Belarus, the Yamal Pipeline has a transit capacity of 33 bcm/y while the Northern Lights

Pipeline has a transit capacity of 25 bcm/y (Victor and Victor 2006, 143). As part of being a transit country for Russian gas, Belarus has been receiving highly subsidized

Russian natural gas. For example, it paid $165 per thousand cubic meters (tcm) while the European countries paid around $400 for the same natural gas in 2012 dollars

(Kramer 2011).

Brief Regime and Development Trajectories of Belarus and Georgia

Since its independence from the Soviet Union and the dissolution of the Supreme

Soviet in the country, and under the authoritarian leader Alyaksandr Lukashenka,

Belarus has never achieved an electoral democracy status based on Freedom House’s

(FH) criteria. Similar to FH, Diamond’s six-fold typology of regimes (2002) also qualifies the country as a competitive authoritarian regime at best.11 Belarus has held regular

11 He describes these classifications as liberal democracy, electoral democracy, ambiguous, competitive authoritarian, hegemonic competitive authoritarian and politically closed authoritarian regimes (Diamond 2002, 31).

parliamentary and presidential elections since 1994. However, none of those elections have been verified as free and fair by any international election watch organization.

Lukashenka has never lost any of these elections and has never received less than 75 percent of the vote (Kaya and Bernhard 2013). Furthermore, the power of the president has been systematically increased through constitutional changes at the expense of the parliament since Lukashenka assumed power in 1994 (Frye 1997). Through such constitutional changes and harassment of the opposition, media, and NGOs,

Lukashenka was able to consolidate his rule in the late 1990s, therefore developing a stable regime (Bunce and Wolchik 2011, 201-6).

Georgia, on the other hand, was the first post-Soviet republic to experience a color revolution and overthrow a dictator. Its regime trajectory shows more variation over time as the country experienced power struggles, revolutions, and leadership changes through its short history. FH regards Georgia as a partly free country since

1992. However, according to Diamond’s qualifications, Georgia is an ambiguous regime, considered slightly more democratic than Belarus, as judged at the end of 2001

(Diamond 2002, 31). This suggests that Georgia is relatively less repressive with regard to civil liberties and political rights in comparison to Belarus. Indeed, there have always been much less repressive governments in Georgia compared to Belarus. In 1992, the first president of the country, Zviad Gamsakhurdia, was toppled by a coup and Edward

Shevardnadze was elected first as the speaker of the parliament and then the leader of

Georgia. Then, in 2003, through the Rose Revolution, Mikhail Saakashvili overthrew the

Shevardnadze government with the assistance of Serbian revolution graduates (Bunce and Wolchik 2006a, 12). Following suspicions after the parliamentary elections, the

opposition, led by Saakashvili, rejected the election results and protests ensued. The police did not have enough resources to contain the protesters and Shevardnadze resigned, fearing bloodshed. Eventually he was replaced by Saakashvili.

Finally, recent developments in Georgian politics also suggest that the political scene is relatively less repressive as compared with Belarus. The Georgian Dream

Party, under Bidzina Ivanishvili, won the 2012 parliamentary elections (Fairbanks and

Gugushvili 2013) and, contrary to the public’s fear of electoral fraud and stealing of the election, Saakashvili respected the process and outcome. Saakashvili, a Western admirer who longed for Western confirmation during his nine-year domination over

Georgian politics (Waal 2013), did not confront the opposition leader and Georgia’s richest person, Ivanishvili, as he took the Prime Minister’s office after the October 2012 elections (Barry 2012). When replaced by the new president, Giorgi Margvelashvili,

Saakashvili, once the most powerful person in the country, said that “Georgia had made huge strides toward becoming an established democracy” under his presidency and left his post without any clashes (Herszenhorn 2013). Consequently, Georgia has been more democratic12 compared to Belarus; although the latter has been much more stable, if more authoritarian.

Although Georgia has a higher level of democracy, in terms of economic and social development, Belarus has outperformed Georgia since independence. In the period from independence through 2010, Belarus has grown, on average, 3.3 percent per year, while Georgia’s economy contracted by 0.5 percent per year on average. As

12 Although compared to Belarus, Georgia has always been more democratic, Belarus is not a good comparison point for measuring democracy in a country. Indeed, despite a peaceful transition of power, the Ivanishvili government initiated a series of political arrests of famous political and military figures in Georgia (Fairbanks and Gugushvili 2013, 125).

Figure 2-1 demonstrates, especially in the early 1990s, the Georgian economy contracted as much as much as 45 percent per year, while Belarus experienced a lower level of economic crisis. Still, both have become transit countries and they have had similar positive economic development trajectories in the 2000s. Georgia, however, experienced an economic contraction in 2009 following its armed conflict with Russia in

2008. Overall, the 2000s have been better for both countries as compared with the first few years after their independence. And this is despite their economic and political as well as –Georgia’s- military conflict with Russia in the 2000s.It is important to note that such conflicts with Russia have not been specific to Belarus and Georgia, since all post-

Soviet republics have experienced problems with Putin’s Russia (Pourchot 2008). There were gas and oil price hikes (up to four times of the initial prices in some cases), political disagreements (both with Belarus and Georgia), and a military conflict (with

Georgia in 2008). However, despite all these challenges both countries faced positive economic development paths.

Historically, Belarus has a good record of human development among the

Commonwealth of Independent States (CIS). As Ioffe (2004) points out, by 2001, according to United Nations’ (UN) Human Development Index (HDI), Belarus was ahead of all CIS countries, being 53rd on the list, while the next CIS country, Russia, was 55th (91). It is also the only country experiencing a net positive migration13 among the Post-Soviet states, showing that it performs better than other Post-Soviet countries with its stability and infrastructure (ibid, 92-3). In the last decade, the country developed even further and is currently 50th (UNDP 2013), still the most developed CIS country

13 By the year 2000, the top three countries with incoming migrants are from Russia, Kazakhstan, and Ukraine (Ioffe 2004).

and close to high income country levels (Ioffe and Yarashevic 2013). Meanwhile,

Georgia is 72nd on the HDI list.

Although Georgia also experienced improvements in its human development in the last decade, like many other Post-Communist countries Georgia experienced troubles when making the transition to a market economy from a centralized state economy. In the 1990s, when the healthcare sector was commercialized and the state supported healthcare system was decentralized, citizens experienced access issues

(Skarbinski et al. 2002). Combined with increasing unemployment and institutional failures, Georgian citizens experienced problems accessing basic healthcare services

(Collins 2003). Even through the early 2000s the country failed to solve the difficulties that resulted from the 1994 national health care reform.

Figure 2-2 and Figure 2-3 cover the descriptive data on human development of the two countries based on infant mortality and life expectancy, using World Bank data.

Georgia shows a steady improvement in terms of life expectancy whereas there is a downward trend in the 1990s in Belarus. Despite the fact that Belarus is not a great performer with its life expectancy levels, again, it performs better than Russia since the mid 1980s14 (Ioffe 2004). Belarus bounces back in the 2000s and Georgia also continues to improve. Unlike the life expectancy statistics, on infant mortality rates

Belarus performs better than Georgia since independence. Although Georgia illustrates constant improvement in terms of infant mortality rates, the rate is still higher than in

Belarus, which has a rate of fewer than 5 deaths out of 1,000 live births by 2008. This is largely due to public immunization campaigns to decrease maternal and infant mortality

14 As Ioeffe (2004) reports, Belarus surpassed Russia with its life expectancy levels in 1985-6 with 71.1 years to 69.3 years (114).

rates in Belarus (Richardson et al. 2013). While Belarus had 16.2 deaths out of 1,000 live births in 1981, it continually improved in the 80s, 90s, and 2000s, showing the improving quality of maternal services in the country.

This section provided a first glance at the two countries’ level of democracy, stability, and basic human and economic development levels. The next section will evaluate the initial hypotheses on development and regime variables at the country level through process tracing and narratives as well as coming up with potential indicators in gauging the effect of becoming a transit country. By the end of the chapter, there will be a set of preliminary theories to be tested at the global level.

Evaluating the Hypotheses

Having explored the oil and natural gas transit pipelines in Belarus and Georgia, as well as their developmental and regime trajectories, this section examines the possible effects of being a transit country on human and economic development as well as levels of democracy and stability in Belarus and Georgia. The evaluations are preliminary, as the same hypotheses will be tested in the upcoming chapters through

LNAs on an original data set that includes oil and natural gas transit pipelines at a global level.

Resource Transit and Levels of Democracy

One of the many hypothesized correlates of the level of democracy in a country is the democracy levels of its neighbors or, at a more general level, its region. Many scholars have delved into explaining the regional diffusion of regimes. Huntington

(1991) talks about regional waves of rising democracies or autocracies15 in different

15 Although diffusion of democracy is largely debated within the literature, diffusion is not always positive or in favor of further democratization. Diffusion of communism through the Soviet Union to other countries

decades while Boix (2011) considers the impact of great powers on smaller countries in the interwar period. Weyland (2010), on the other hand, focuses more on mechanisms of interaction through explaining the relationship between the external and domestic actors in European democratization. Statistically, regional regime patterns, neighbors, and diffusion matter when it comes to the level of democracy, as scholars tested

(Gasiorowski 1995; Herb 2005). However, the processes and mechanisms by which neighboring countries converge to a certain level of democracy or authoritarianism remain understudied. Yet Huntington’s idea of waves of democracies (1991), the diffusion theory by Kopstein and Reilly (2000), and Levitsky and Way’s theory of linkage politics (2010) are a few examples for explaining how diffusion of regimes occur across borders. While examining democratization in post-communist countries, Kopstein and

Reilly test the diffusion effect using the distance between the capital cities of the countries and the West. They conclude that the location of a country matters even more than domestic policies when the regime type is concerned (2000). While good policies might be supported by democracy promoters in the region, like the EU, poor policies can also be mitigated by the same actors (ibid, 24). Through the same reasoning, countries in the same region tend to have similar regime types since there is an assumed diffusion between the neighbors. This diffusion can be cultural, social, political and economic. This, in part, is similar to Levitsky and Way and their theory of linkage and leverage (2010). Looking at the role of international actors in semi-authoritarian settings, they measure the effect of linkage with the EU and the US, or with Russia.

in Eastern Europe and elsewhere, as well as instances of contemporary global authoritarian learning (banning social media or mimicking repressive reactions during the Arab Spring) can be examples of negative diffusion, or, in other words, the diffusion of authoritarianism.

Then, they evaluate the leverage that those countries have on the receiving end.

However, their theory is less geographically oriented and more focused on international actors and the organizational capabilities of the incumbent regimes.

Considering theories of regime diffusion, a similar effect is in play for the resource transit countries: diffusion of regimes through pipelines. Instead of making an assumption of a cultural or historical tie between the countries, the idea of diffusion of regimes is based on the relationships generated by the resource transit connection: diffusion of regimes through pipelines. Focusing on the interactions of transit countries with their supplier and user counterparts, this section evaluates the hypothesis of the diffusion effect occurring in the cases of Belarus and Georgia. If such diffusion (or snowballing, demonstration etc.) effect is in play for the countries in the same region, resource transit through pipelines should have a part in determining the level of democracy in those countries. Given the hypothesis, based on the volume of trade, size of the supplier (or user) country, the introduction of a new transit pipeline, the identity of being a transit country, increased resource transit, and further interactions this trade brings with a democratic or an authoritarian regime, should affect the level of democracy in a transit country. There are two possible mechanisms for such an impact.

First, pipelines not only provide economic benefits to participating countries and secure, constant energy trade, but they also bring the participating countries closer to each other. The second mechanism is more specific to natural gas pipelines and their characteristics. Since such pipelines are practically the only economically viable way to import and export natural gas for the supplier and user countries, both participating parties have a stake in the regime of the transit country. Depending on the size and

influence of the supplier and the user country, one or the other might have a bigger impact on the transit country. Therefore, such natural gas pipelines function as a mechanism to ameliorate the interaction between the pipeline’s participating countries.

Although this section explains the impact of pipelines through regime diffusion, there can be two approaches to explain it theoretically. One could argue that all neighbors interact the same way and therefore every neighbor should have a uniform impact on the country in question. This would be a simplistic approach and might have benefits in a statistical research. However, it would also omit a lot of variation on the main explanatory variables, since some neighbors interact more than others. Therefore, some neighbors or regional partners should have a higher impact on the country in question compared to other partners and neighbors. For instance, Georgia borders

Russia, Turkey, Azerbaijan, and Armenia. It has natural gas or oil transit connections with all of those countries. However, the number of pipelines shared with its neighbors, their transit capacity, and income derived from each pipeline vary. Because of the natural gas pipeline shared with Russia and Armenia before the fall of Soviet Union, the two countries are Georgia’s oldest transit partners, while Turkey is the latest transit partner of Georgia. However, Turkey also has the highest amount of natural gas and oil trade. Similarly, Belarus has borders with Latvia, Lithuania, Poland, Russia, and

Ukraine. Again, it does not interact in the same way with its Baltic neighbors as it does with Russia and Ukraine, where there are better connections.

To illustrate varying interaction levels between neighbors and regional partners,

Georgia has more economic and political connections with Turkey and Azerbaijan, which are also the two major user and supplier countries, respectively. For natural gas

and oil transit, compared to the enmity it experiences with Russia16, which is also a supplier country mainly for the Armenian market, Georgia has much better relations with its three other neighbors. For Georgia, there are two reasons for increased interactions with Turkey and Azerbaijan as well as its strategic partners in the region, the EU and the US. First, the establishment of the BTC and BTE pipelines in the region has strengthened the bonds between the participating countries. Indeed, Bunce and Wolchik

(2006a) count those pipelines in Georgia as a reason for favorable treatment by the

United States and increased interest on the country (13). Second, the Rose Revolution in 2003 and election of President Mikheil Saakashvili realigned the country towards the

West and its allies in the region.

On the other hand, Belarus has historically closer affiliations with Russia and

Ukraine compared to its other neighbors: Poland, Lithuania and Latvia. Belarus imports mainly raw oil and oil products from Russia, while selling the natural gas, refined oil, and crude oil to other markets. The Ministry of Foreign Affairs (MFA) of Belarus reports that

35 percent of the trade volume of the country is with Russia (n.a. 2012). While the

European Union countries (including neighbors Poland, Lithuania, and Latvia), which constitute 38 percent of the trade volume through energy trade, Russia still is the biggest single trade partner for Belarus. This is partly due to Lukeashenka’s positive view towards Russia before he was able to establish his iron fisted rule, especially during the dissolution of Soviet Union and in early 1990s. He was the only member of parliament who voted against independence from the Soviet Union and when he

16 The enmity received from Russia has not been limited to the war in 2008. Russia continually supported local groups for separation, remained in bases in the occupied territories of Georgia, imposed import bans on Georgian wine and mineral water (Russia exports constituted 90 percent of the exported products in those sectors), and charged the highest price for natural gas among the post-Soviet republics, along with Ukraine (Silitski 2010).

became President, he pushed for further close ties with Russia. He frequently used electoral power while bulking up his control over the state and society. Silitski (2005) notes that in a 1995 referendum Lukashenka included a proposal to make Russian a second official language of Belarus and to replace the national symbols with Soviet ones (86). Shortly thereafter, in 1997, he initiated the process to unite Belarus with

Russia and signed an agreement to this end (Balmaceda 2006, 5), though this process stalled in later years.

Below, I show that, for both Belarus and Georgia, natural resource pipelines serve as major economic bridges to their local regions, and sometimes with their strategic partners in the region, leading to diffusion of regimes through pipelines, especially in the case of Belarus. These pipelines form network hubs. Inevitably, the economic volume created with the establishment of a resource pipeline leads to improved political, social, and military interactions among the participating countries (i.e. the Russia-Ukraine agreement on the presence of Russian warships at the Sevastopol port in exchange for energy deals). Such a change in the relations of neighbors brings support for the second type of diffusion theory where some neighbors and regional partners interact more than the others. When the effect of the pipelines on levels of democracy is compared in the cases of Belarus and Georgia, there is the involvement of both supplier and user countries as well as global partners. For Belarus, the most important partner is Russia, thus the Russian effect is much stronger as compared to its

Western and Central European user countries. Levitsky and Way (2010) call this

Russia’s “black knight” status over Belarus when comparing the leverage of the West and Russia over Belarus (185). Whereas in Georgia, the biggest trade partners are

Azerbaijan, Turkey, and the other important promoter of the BTS, BTE and especially

BTC pipelines, the United States (Tayfur and Goymen 2002). Although Georgia also has a smaller pipeline between Russia and Armenia, which brought transit fees and financial assistance in the past, the military encounters and animosity between Georgia and Russia almost neutralize the effect of Russia on Georgia and push the country further towards its Western partners (Levitsky and Way 2010).

Belarus

After winning presidential elections in Belarus for the first time in 1994,

Lukashenka fought to increase his executive power as well as intensify ties with Russia.

Before his presidency, in 1991, he supported the idea of a Belarus-Russia union over independence17 (Silitski 2005, 85-6). However, after becoming the president he opted to hold the power in his hands domestically while relying on Russian support externally. In the 1990s, Lukashenko even managed to establish a more authoritarian regime compared to a relatively democratic Russia under Boris Yeltsin. Towards the end of the

1990s, the establishment of the natural gas leg of the Yamal Pipeline became one of the most important tools for Lukashenka. Although there was already natural gas and oil transit through Belarus, the Yamal project has been one of the critical milestones of increased Russian-Belarusian connection. For Russia, the pipeline project meant an expansion of the market18, opening the Yamal fields for natural gas exports, an even

17 Even when the talks of establishing a union between Russia and Belarus were still going on, the idea of a union was a farfetched idea for both sides. Marples (1999) was one of the first to call out the discrepancies between the ideas of two regimes forming a union, even when they formally signed an Act of Union in 1997.

18 Although the European market buys 65 percent of its total energy needs from Gazprom (Dempsey 2012) and Europe remains largely dependent on Russian natural gas, there are still prospects of growing competition in a market where Russia is the most dominant supplier. First, the northern African market is growing with additional pipelines from Libya and Algeria (Hayes 2004) towards southern European

bigger and more profitable Gazprom, and a more secure natural gas trade by bypassing

Ukraine. In dealing with Belarus, through furthering energy trade over the Belarus route,

Russia subsidized the Belarusian economy through lower prices19 for natural gas and oil, transit fees, and barter agreements, as well as overlooking the re-export of imported energy (Balmaceda 2006; Silitski 2010).

With the extra spoils coming from natural gas transit deals, Lukashenka was able to stabilize the economy and the regime while many other post-Soviet republics experienced serious economic crises and downfall. Indeed, after the establishment of the Yamal pipeline and the increasing of his constitutional presidential powers with the

November 1996 referendum, by the end of the millennium Lukashenka had established his harsh rule in Belarus. He did this while still keeping at least 75 percent of the domestic economy under state control, therefore leaving Belarus largely unchanged in terms of its economic system, even 20 years after independence from the Soviet Union

(Balmaceda 2006, 4). Before during the crucial 2006 presidential elections Belarus

countries including Italy, Slovenia, Spain, and Portugal (Perner and Seeliger 2004). Currently, Algeria accounts for 10 percent of total European demand and with its expected 1,500 bcm reserves the country is projected to continue the increase of its exports to the European market (Gilardoni 2008). Second, the Central Asian republics (Azerbaijan, Kazakhstan, and Turkmenistan) are exploring ways to bypass Gazprom- owned Russian pipelines in order to export their own natural gas to the European market. In doing so, those countries have been evaluating projects like the NABUCCO (Dempsey 2011), which later died, and TANAP (Socor 2012; 2014) pipeline projects through Georgia and Turkey towards the Central and Southeastern European markets. Third, European countries increasingly invest in exploring their natural gas fields through hydraulic fracturing despite environmentalist controversies around such methods (Eddy and Reed 2014). Finally, with rising global LNG trade, the regional markets of oil will not be necessarily suffering from price discrepancies as much as they do now. Currently, the price of natural gas is much lower in North America compared to other regions of the world. Therefore, further investments in LNG trade and increasing natural gas exports towards the European market might become a problem for the current dominant partner, Russia.

19 Up until the mid-2000s, among the Commonwealth of Independent States (CIS), Belarus paid the lowest price for using Russian natural gas, close to the Russian domestic consumer prices for gas (Silitski 2010, 346). For example, in 2006, Belarus paid $47/tcm for natural gas while Russia demanded $230/tcm from Ukraine which elected a pro-Western government at the time (Vinocur 2006).

enjoyed additional monetary help from Russia in the form of lower oil and gas prices until the election in order to fund Lukashenka’s campaign (Silitski 2010, 347).

Table 2-2 below shows how the average scores from Freedom House civil liberties (CL) and political rights (PR) evolved in Belarus after the opening of the lucrative and historical Yamal natural gas pipeline. These two indicators capture the level of democracy from various social and political aspects. For easier interpretation, the scales are reversed. Higher scores indicate better protection of CL and PR. On both scales, Belarus loses at least one point on average after the introduction of the Yamal pipeline. The PR score on average decreases from 3 down to a mean of 1.36 in the decade following the establishment of the pipeline. Similarly, the mean CL score reduces to 2 from an average of 3.25.

This deterioration in the level of democracy in Belarus represents the institutionalization of hegemonic authoritarianism under Lukashenka’s rule, making the country one of the most authoritarian countries in the world, in the same league with

Turkmenistan, Chad, and Syria. Such authoritarian deterioration is consistent with the first hypothesis, wherein pipelines promote authoritarianism.

On the other hand, for hypothesis 2a, there is support only in terms of the stabilization of authoritarianism in Belarus. Since Russia became relatively more authoritarian under Vladimir Putin, when Belarus was already a stable authoritarian regime under Lukashenka, it is harder to entertain the idea of authoritarian regime diffusion through pipelines in Belarus. Yet, it is fair to say that, with Russia’ help, the local governments of post-Soviet republics were encouraged and started to develop preemptive authoritarianism through a counterrevolutionary agenda (Silitsi 2010). This

has been especially evident in the years following 2003 Orange Revolution which Silitski calls authoritarian convergence. Such preemptive actions have been taken against the press, international election observers, opposition parties and leaders, and NGOs that promote democratization (342-3). Through its geographic proximity and increased monetary assistance, Russia promoted authoritarian regime convergence in Belarus.

After establishing uncontested rule in 2000s, the regime could also resist pressures from Russia when necessary. In the transition from Yeltsin to Putin,

Lukashenka developed different ideas about the unification of the two countries. Initially in the 1990s, the Belarusian elite, even Lukashenka himself, promoted Russian language and culture, as well as the idea of re-unification after the collapse of the Soviet

Union. However, when the two leaders met in August 2002, Lukashenka strictly rejected the idea of unification with Russia and from then on started drifting further away from the idea while promoting Belarusian state ideology and nationalism rather than accepting Russian political influence (Drakokhrust 2012). This struggle for political independence includes Lukashenka’s resistance against Gazprom’s attempts to increase the initially favorable price of gas in 2002 when he refused to sell the shares of

Beltransgaz20. He further responded by imposing added taxes on the Druzhba oil pipeline transit in 2007 when Russia tried to pressure the Belarus government (Stevens

2009).

To this day, Belarus still remains an authoritarian country, despite bordering the

European Union. Even though there were political clashes, Lukashenka could always

20 In more than a few cases, Russia has been indirectly using Gazprom and Transneft as levers against the post-Soviet republics of Eastern Europe. Although the Russian government is not directly involved in disputes between these companies and their respective countries, the companies and the Russian government do not contradict each other in most cases (Hedenskog and Larsson 2007).

rely on Russian support for his survival in the region (Bunce and Wolchik 2011; Levitsky and Way 2010; Silitski 2005). However, overreliance on Russian energy rents may also become a problem for Belarus unless it finds alternative income opportunities for the future. Being too dependent on low energy prices poses a risk for Belarus (Balmaceda

2006, 12). Without actually being a resource abundant country, Belarus functions like a resource dependent economy and continued Russian support essentially keeps a normally unsustainable economy afloat. This poses a serious long term risk for the

Belarusian economy, as the country is dependent on a resource trade it does not produce. Also, as the troubled relations between Russia and Belarus in 2006 and 2007 show, Russia may not continue to pay the economic price of assisting Belarus indefinitely (Jarabik 2009; Silitski 2010, 349). As Morrison (2007; 2009) shows in his research, with statistical evidence and theoretically through formal modeling, international aid functions just as oil rents when it comes to giving dictators the necessary revenues to stay in power. Such income keeps an otherwise failed economy suspended.

Similar to international aid and resource rents, in Belarus, the rents derived from transit fees, subsidies, and the opportunity of re-exporting oil products that are purchased at a lower price strengthen the hand of the dictator, Lukashenka. However, this is not necessarily because such income creates specific mechanisms that are prone to the promotion of further authoritarianism. Rather, the level of democracy in the supplier country is what is essential in this case. This is the point at which the findings on Belarus diverge from the research on ‘resource curse’ and international aid. For instance, Morrison (2007) says that even in cases where international aid is diverted

from the dictators’ hands directly to the citizens’, such resources would still diminish chances of democratization. However, in the case of the Belarus-Russia partnership, the identity of the partner matters, as Russian support decreases the Western leverage over Belarus and the external actor has a particular impact on the level of democracy of the recipient. Therefore, unlike other Eastern European countries where EU assistance and leverage have been successful and paid off in the long term, the Western leverage on Belarus is almost nonexistent due to continued Russian commitment.

Georgia

In the Georgian case, measuring the effect is more difficult for two reasons. First, the relative size of the pertinent neighbors is not as disproportional as the Belarus-

Russia relationship and second, the levels of democracy of Georgia’s neighbors are not as disproportionate. As mentioned before, because of the historical animosities and conflicts regarding South Ossetia and Abkhazia between Russia and Georgia, the supplier effect of Russia is very limited on Georgia’s level of democracy. Even in the

1990s, when Russia was regarded more democratic than Georgia, it never promoted democratization abroad. Therefore, the relevant neighbors for Georgia are Armenia,

Azerbaijan, and Turkey. In addition to those three countries, the EU and the United

States are two other regional partners for Georgia through their interests in the East-

West Energy Corridor (EWEC) for natural gas and their investments in the BTC oil pipelines. The main intent of the EWEC is to bypass Russia and Iran, therefore safely transporting Central Asian energy sources to the international markets. The project promotes the building of natural gas and oil pipelines as well as railroads and other transportation networks. For such strategic projects that require western political and

financial backing, the European Union and the United States have been solid partners of Georgia.

Among the relevant neighbors, Armenia and Azerbaijan have been the more autocratic neighbors,21 especially after the 2003 Rose Revolution in Georgia. However, unlike the relationship between Belarus and Russia, neither of these two countries have a stake in Georgia becoming more authoritarian or democratic over time. Instead, their interests lay in the stability of the country in order to have a reliable flow of oil and natural gas. The constant flow of natural gas is essential for Armenia since it is dependent on Russian natural gas for its energy needs, although the country started receiving imports from Iran22 in the late 2000s. In Azerbaijan, the Aliev family has also been interested more in the stability of Georgia for the safe transit of Azeri oil products, rather than the promotion of authoritarianism or democracy in the region. Only Turkey has been a more democratic neighbor since independence. Indeed, it has been the

Turks, and especially the Americans and Europeans, that have been more influential the politics of Georgia. Even at the time of the agreement to build the BTC and BTE pipelines in 1999, the US government was more important than the direct supplier

(Azerbaijan) and user (Turkey) countries for strategic purposes (Onis and Yilmaz 2009;

Tayfur and Goymen 2002). Although the participating countries lacked political will and capabilities, the US government pushed for the project to make the world and regional markets accessible to Azeri oil and gas. Furthermore, the Rose Revolution in 2003 was

21 Indeed, Diamond’s classification of regimes as well as Freedom House and Polity projects count Georgia as more democratic compared to Armenia and Azerbaijan, especially since the late 1990s.

22 The pipeline from Iran to Armenia was commissioned in 2006 with 1.1 bcm/y capacity, much lower than the Russian pipeline with 5 bcm/y capacity that crosses Georgia. At the time of the negotiations for the capacity of the new Iranian pipeline, Russia pressured both sides for a lower capacity in order to keep Armenia as a dependent buyer (Socor 2007).

supported by the Western Governments and even inspired other revolutions in the region such as the Orange Revolution (Bunce and Wolchik 2006b). Saakashvili received clear support from the EU and the US, which demonstrates their continued interest in Georgian politics at the time of negotiations for the BTC and BTE as well as during the aftermath. Despite Russian disquiet about such Western support, the US continued to provide political support for Georgia. Although the United States did not intervene in the conflict between Georgia and Russia in 2008 when Abkhazia and South

Ossetia sought independence, the US continued to train the Georgian military as well as renew its interest in the security of the East-West Energy Corridor. Similarly, the development of the INOGATE23 (International Oil and Gas Transportation to Europe) and TRACECA (Transport Corridor Europe-Caucasus-Asia) projects by the European

Union demonstrates the importance of the South Caucasus in realizing European energy security. Financed by the EU, INOGATE was commissioned in 1996 to promote cooperation among the Black Sea and Caspian Sea littoral countries as well as maintain energy security for Europe. The programme includes specific references to securing energy transit across Eurasia. TRACECA, on the other hand, does not concentrate merely on energy transportation. Formed in 1993, the program develops projects for improving infrastructure for transportation among the participating countries in Eastern

Europe, Central Asia, and the Caucasus. Supported by both Murman Margvelashvili

(2013), a leading NGO leader in Tbilisi on South Caucasus Energy strategies, and

Kakha Gogolashvili (2013), the director of the Centre of EU Studies at the Georgian

23 Under three regions (Eastern Europe, Caucasus, and Central Asia), the INOGATE Programme summarizes their objectives under four headings as uniting the energy markets under EU principles, improving energy security in export, import, transit, supporting sustainable, renewable, and efficient energy development, and attracting investments in regional energy projects (INOGATE n.d.).

Foundation for Strategic and International Studies (GFSIS), INOGATE and TRACECA have been essential in helping Georgia harmonize its energy rules and legislations with its regional partners. Through such international agreements and programs, the EU joins the United States in becoming an essential regional partner for Georgia.

Although Turkey, too, has been a supportive neighbor of Georgia, its interests have been more economic than political. Particularly after the Justice and Development

Party (AKP) government took power in 2002, both countries worked on improving the relations through a joint airport project in Batumi (by the Turkish border) and building the

Baku-Tbilisi-Kars railway project that ties Azerbaijan, Georgia, and Turkey through yet another joint international venture. However, even Turkey’s interest in Georgia’s democracy has been minimal, with the main influence coming from the EU and the US government. However, this regional interest in Georgia did not turn into further democratization of the country over the years. Although the regime that was established after the 2003 Rose Revolution experienced a peaceful transition of power, Georgian citizens have not necessarily enjoyed more democracy over the last ten years. As

Fairbanks and Gugushvili (2013) note, the Ivanishvili government did not refrain from arresting previous government officials like Saakashvili back in 2003 (Papava 2005).

Trust among the citizens is rather low and the NGOs are still dependent on the West politically and monetarily.

The low level of improvements in the level of democracy in Georgia is also visible when its FH scores are examined. Indeed, looking at Table 2-3, the average FH democracy indicators for Georgia improve only slightly after the establishment of the most important pipeline, the BTC, in 2004. For both the CL and PR aspects of

democracy, the country demonstrates relative improvements compared to the years before the introduction of the main pipelines. Specifically, when pre-2004 and post-2004 values are compared, the average PR score rises to 4.37 from a point of 4, whereas the

CL scores increases more than a point, to a mean of 4.62 from 3.64. These democracy indicators suggest that CL and PR somewhat improved in Georgia, yet are still short of achieving the Western standards of democratization. Still, the political process behind the establishment of the BTC and BTE pipelines and the electoral revolution show the effect of the user countries and the regional partners on Georgia and are congruent with

H2b, instead of H2a, which prioritizes the suppliers over the users as well as the third hypothesis, the promotion of democracy through pipelines.

In various ways and on different levels, for both Belarus and Georgia, linkage with the supplier and user counterparts through the establishment of the pipelines mattered, affecting the level of democracy of the country. For Belarus, the supplier has always been an essential partner, whereas for Georgia the strategic regional partners and users mattered more. Therefore, neither H2a nor H2b is fully confirmed through two case studies. We do not know whether the user or the supplier should have more effect on the transit country’s level of democracy but we do know that the resource trade through pipelines has an impact. For both countries, the economic relations with the suppliers, the users, and the regional partners, as well as the politics of resource pipelines, have shaped domestic politics.

Regime Stability in Belarus and Georgia

For some countries, the political repercussions of an economic relationship can become vital for the survival of their regimes. In this section of the chapter, evidence shows that the introduction of transit pipelines allowed both Belarus and Georgia to

benefit from further political stability over the years. In Georgia, stability of the regime was achieved through establishing a transit identity for energy resources as well as goods and services for the Western markets. In doing so, the direct economic benefits and the indirect political influence through international partners and stakeholders have promoted stability in the country. However, in Belarus, stability was achieved through

Russian assistance and the Lukashenka administration’s tight grip over the economy and political scene. Russian support has chiefly been through transit fees, energy subsidies, and the allowing of the re-export of oil products, which allowed the

Lukashenka government to establish an authoritarian rule in Belarus. For both countries, historical narratives are supplemented by changes in the international indices of regime stability, effectiveness, efficiency, and capacity before and after the establishment of the major pipelines.

There are a few ways in which a pipeline can function to stabilize a government.

As mentioned in previous sections, the countries participating in the pipeline projects, supranational organizations, and multinational stakeholders have an interest in the political and economic stability of the transit countries. Such stability assures the safe passage of oil or natural gas, a constant energy supply for the user countries, and a regular, problem- free cash flow for the supplier. Other than the inherent interest in stabilizing the pipeline route, these investors engaging in any political disputes with the transit countries could also mean the additional economic burden of ransom type24

24 This term was used by one of the major analysts on natural gas during a personal interaction, criticizing the predatory behavior of transit countries. Although this may have been the case in certain instances in the past, especially in Eastern Europe, the developing international law framework regarding transit oil is being generated at the expense of the sovereignty of transit countries and in favor of multinational corporations. In most cases, the legal framework was already pretty weak within participating countries in the South Caucasus and Eastern Europe (Waters 2004). Taking advantage of such weaknesses, during the BTC negotiations, international law firms wrote an international treaty that upends national

transit fees. The possible negative repercussions of having a political problem may deter an antagonist. As Omonbude (2013) discusses in his book on the bargaining procedures and negotiations of transit fees and the role of transit countries in such procedures, a transit country would not seek to take advantage of further transit fees when the economic and political environment is positive and there is mutual dependence among the participating countries (52). Finally, direct income through transit fees, energy subsidies, and foreign direct investment through multinational stakeholders can provide additional support for the regime, indirectly stabilizing it.

Before moving on to case evidence, a final note about the direction of causality: one might wonder whether pipelines make transit countries more stable, or whether they are installed in more stable countries and regions to begin with. The historical evidence suggests that international pipelines are not usually built along the safest and shortest routes. As the history of pipeline transport conflicts in the Middle East and the vulnerability of them to terrorist attacks (Stevens 2000; 2009) demonstrate, a pipeline can be introduced in any region as long as it is strategically and financially feasible.

Although stability and security should be the first concern, the reality does not bear this out. In theory, investors should prefer to build a pipeline on the safest and shortest route possible. However, in reality there are other concerns, such as economic issues and international politics. Usually there are numerous stakeholders, from governments to multinational energy companies, which make the final decision about the route of the sovereignty, equating the principle of the freedom of transit of Petroleum with human rights which has ramifications for local communities on the path of the pipeline (Reyes 2006, 1-2). While the agreement between the BTC company, which is comprised of 11 international oil companies, and the participating countries can be canceled by the company, the countries’ cancellation would have legal consequences, requiring them to abide the rules at all costs (Carrol 2012, 296). Indeed, whenever villagers from Georgia took a complaint to local courts or EBRD’s Independent Resource Mechanism the results were always in favor of the companies (Kochadze 2006, 70-71).

pipeline. In many cases, the decision-makers consider not only the political stability factor but also the economic and strategic balance points for the route of the pipeline

(Bahgat 2006). For instance, monetarily, a natural gas pipeline from Iran through Turkey to European energy markets would look economically and financially feasible.

However, EU requires Iran to solve its uranium enrichment issues and to have better relations with the international community (Piebalgs 2008) while the United States and the United Nations extend sanctions on Iran (Bilgin 2009; Olcott 2006), making the possibility of realizing these pipelines miniscule. Similarly, the BTC oil and the BTE natural gas pipelines could easily be built at lower cost if they passed through Armenia instead of Georgia. However, the Azeri-Armenian conflict makes such a route impossible. The more costly, yet politically problem free Georgian route was ultimately selected. Indeed, as the case evidence in this chapter suggests, once a pipeline is introduced, it makes the region it is established in more stable over time, as long as the participating countries continue to agree on the political and economic terms of trade.

Considering the stabilizing impact, there have been suggestions that proposed

Iran–Pakistan–India (IPI), Myanmar–Bangladesh–India (MBI), and Turkmenistan–

Afghanistan–Pakistan–India (TAPI) pipeline projects might bring peace and political stability to South Asia through establishing mutual economic interests and interdependence (Nathan et al. 2013, 154). Indeed, such natural gas pipelines could create interdependencies in more than a few dimensions besides pure economic gain.

One past plan included ideas on how India’s natural gas could be a source of electricity for Pakistan’s domestic needs, as well as economic punishments in the case of natural gas flow disruptions (Pachauri 2001).

Georgia

Both Belarus and Georgia experienced extended political stability when major pipeline projects have been commissioned, by bringing economic and political spoils for their regimes. Since independence, the Georgian state faced domestic separatist challenges as well as enmity from Russia. In addition to these domestic and international threats to the state, it also lived through a crisis of identity and an economic crisis which lasted through the 1990s. Although many Post-Communist countries went through political turmoil and economic crises, Georgia’s economic catastrophe was one of the worst of the 90s, even among the newly independent post-

Soviet countries. Industrial output in Georgia fell drastically and export levels declined by 90 percent. As a result of the devastating effect of independence, the country suffered a contraction in its GDP of over 20 percent in the first three years of its independence. Along with these economic issues, political leadership changed hands at least three times before Saakashvili took power after the Rose Revolution. Neither the initial leader and first President Zviad Gamsakhurdia, nor Edward Shevardnadze, a

Western favorite due to his service as Foreign Minister in the former Soviet Union under

Gorbachev (Dzhindzhikhashviili 2014), lasted through the economic and political problems the country experienced in the decade following independence.

When the country gained its independence after the dissolution of the Soviet

Union, it was also seeking a new regional identity. In search of ways to pose as a strategic asset for Western democracies, the establishment of pipeline contracts and increased interactions because of the contract talks helped to establish a new transit identity for Georgia. After the introduction of the three additional major energy pipelines, the Georgian state became a well recognized country by the EU and the US. Ismayilov

(2012) for instance, sees the establishment of natural gas and oil transit through

Georgia as an essential milestone in developing Western strategic interest in Georgia (

223). For LeVine (2007), the only way to “make Georgia interesting to the West” was to transfer Caspian energy for the multinational oil sector where the Georgian state eventually secured the establishment of the pipelines. Quoting a senior European Bank for Reconstruction and Development (EBRD) official, Carrol (2012) notes that the BTC pipeline made Georgia visible on the map as well as helped it to get attention from the

West (297). And finally, Georgian officials believe that such mega projects help Georgia receive more FDI from international investors as well as securing the country’s strategic position vis-à-vis Russia (Sovacool 2011, 48). Although Russia opposed the introduction of the pipeline for the same reasons and wanted to keep Georgia within its sphere of influence, the pipeline was ultimately built after decade-long political support from the US.

Other than the Western observers and stakeholders, both Shevardnadze and

Saakashvili saw these international pipelines as a source of stability for Georgia, since the nation already lacked the proper economic and political institutions for building a stable and wealthy country following independence. Showing a political willingness for the transit identity, just three days after Shevardnadze’s resignation in 2003, the successor President Saakashvili noted how critical and indispensible the Caspian pipeline contracts were for Georgia (Baran 2005; Katik 2003). Such remarks from the new leader of the country in 2003, in the heat of the Rose Revolution, shows just how strategically important the BTC and BTE pipeline projects would be for the Georgian state. Indeed, these two pipelines helped Georgia to thrive economically while bringing

political stability at the same time. Following the establishment of the pipelines, the government also initiated a process for the tax-free transit of foreign goods and services in order to further develop Georgia’s transit function.

There are two mechanisms for establishing political stability through pipelines.

The first is through the direct economic benefit that leads to political stabilization, and the second is through the political influence of the international stakeholders, multinational companies involved, and user countries have on the transit country. From the economic perspective, a recent Revenue Watch Institute (2012) report points out how the introduction of the oil and natural gas pipelines, BTC and BTE, in Georgia brought sustainable growth to the Georgian economy (ibid, 16). In a country which had experienced regime failures and economic crises in the 1990s, constant economic growth is easier said than done. Such international pipelines and Western interests ensured Georgian regime stability and strengthened its economy. The economic growth of this transit country is not only beneficial for the national government but also for the international stakeholders of the pipeline. For example, BP and other international partners invested more than $5 billion in Georgia (ibid, 14). Clearly, when international stakeholders and other investors have an interest in the stability of a country and the region, it is also easier for the transit country to achieve the goal of stability, since sustainable economic growth and political stability are beneficial for their business partners. As Cornell et al. (2005) point out, a stable transit partner would also mean stable energy prices for the buyers and stable transit fees for the stakeholders.

Therefore, making Georgia a serious partner in building the East-West Energy Corridor between Central Asian producers and Western consumers buttresses the Georgian

government and stabilizes it in the long run. Adding to the strategic value of a country through pipelines brings tangible political benefits for the regime. Because of the lucrative energy deals and high fixed costs of pipelines, once a transit channel is established, all user and supplier countries should be invested in the stability of the transit countries.

One specific historical mechanism that contributed to stabilization in Georgia is the initiation of regional cooperation projects like INOGATE and TRACECA. The collapse of the Soviet Union brought attention from the West through governmental and nongovernmental organizations (Levitsky and Way 2010, 185). As Gogolashvili (2013) points out, such cooperative projects served to stabilize Georgia while securing the transportation of resources, goods, and services to Western markets. Under INOGATE principles, an interconnector natural gas pipeline connecting Turkey, Greece, and Italy was proposed. The agreement was signed in March 2001. Thus far, only the connection between Turkey and Greece has been built. Commissioned in November 2007, the capacity of the 296 km long pipeline is currently around 11.5 bcm/y (BOTAS). Larger projects like TANAP or NABUCCO, to supply Caspian natural gas to European markets through Georgia and Turkey, are also part of INOGATE and TRACECA principles

(Janusz 2007).

Indeed, as Papava (2005) notes, prior to the establishment of the BTC and BTE pipelines, Georgia suffered from state incapacity, high levels of corruption, and failed institutions, making the country a unfavorable place in which to invest. However, particularly after the Rose Revolution, the Georgian government started a campaign against corruption and bribery, in which numerous arrests were made in an effort to

reduce fraud (ibid, 94) and also took steps to improve the business environment in

Georgia. Indeed, the introduction of BTC/BTE pipelines brought additional investments for increasing the level of security (Winrow 2007) as well as bringing additional foreign direct investment (Ismailov and Papava 2008). In his term as President, Saakashvili worked on making the easy registration of businesses possible, decreased taxes, improved the efficiency of the tax collection system, enhanced tourism, and further opened the country for FDI (Gogolashvili 2013).

Both the government and international actors worked on building up the strategic transit identity development for Georgia which in turn promoted the stability and effectiveness of the government. Still, it is worth noting that the promotion of cooperation and integration among the regional partners stayed mostly in the areas of energy trade and the transportation of goods. Joint security agreements and/or military support for Georgia has never been extensive, even during the 2008 conflict with

Russia. Although there was guarded Western support, the government was more stable in the 2000s despite going through a war with Russia and experiencing two major regime failures: in 1992 (when Gamsakhurdia was overthrown by Shevardnadze), and in 2003 (when Saakashvili triumphed following the Rose Revolution). Following those crises, the country progressed and has successfully seen the transition of power from

Saakashvili to Ivanishvili following the 2012 elections. In an unstable region with ill-fated governments, Georgia made slight improvements in establishing a stable and effective central power structure.

Besides these historical narratives on Georgia, international indicators on stability, governance, and effectiveness have also shown improvements in the last ten

years. In addition to observing the regime failures and volatility, another way to measure the improvements in political stability in Georgia is to look at the changes in the indicators of the Worldwide Governance Indicators (WGI) project. Collected by Kaufman et al. (2013), the WGI project gathers governance data for 215 countries beginning in

1996 on six dimensions25 of governance. The political stability and absence of violence indicator manifests the probability that a government will be destabilized by terrorism or other violent means as well as through other unconstitutional methods. Table 2-4 demonstrates the change in the average estimates before and after the BTC/BTE pipeline projects in Georgia. The estimate varies from -2.5 (weak governance for political stability) to 2.5 (strong governance) and percentile rank denotes its rank among all countries in the world. Based on these expert views on Georgia, over the years, the country slightly improves its political stability by increasing its average score from -1.34 to -0.77, around ten percent progress. Compared with other countries in the world,

Georgia ranked in the 7th percentile in 1996, while by 2012 it was ranked at the 25th percentile.

Another way to measure the political benefits Georgia enjoyed after the establishment of its major transit pipelines is to look at the institutionalization of the government and how its effectiveness and legitimacy change before and after the introduction of pipelines. To do so, Table 2-5 reports state fragility index (SFI) values for

Georgia, (Center for Systemic Peace 2012). The SFI is comprised of four dimensions of state legitimacy and effectiveness measures, ranging from 0 (no fragility) to 25 (extreme fragility). Based on average SFI scores, after the BTC pipeline’s introduction to the

25 These dimensions are (1) voice and accountability, (2) political stability and absence of violence, (3) government effectiveness, (4) regulatory quality, (5) rule of law, and (6) control of corruption.

region, Georgia’s average SFI fell by almost 3.5 points, decreasing from 11.2 to 7.75, showing improvements, particularly in the effectiveness of the state.

Finally, changes in security investments highlight the main area of improvements in Georgia’s state capacity. The average amount of military spending is calculated using

SIPRI’s military expenditure database. The database reports military spending values

(and estimates in some cases) for 172 countries since 1988 (SIPRI 2013). As Table 2-6 demonstrates, average military spending after the BTC pipeline increased both in real

USD terms and in terms of its share of the GDP. Before 2004, on average, Georgia spent only 89 Million USD per year, and this figure rose dramatically to an average of

655 Million USD after 2004. The average share of the GDP also increased considerably after the BTC pipeline, from 1.1 percent to 5.2 percent. In the years following the Rose

Revolution, the regime under Saakashvili vigorously pursued the building up of its military capabilities and the repressive apparatus through funds made available mainly through resource transit services26.

In a region with wretched economies and ill-fated governments, Georgia experienced serious political instability and economic crises in the 1990s. Upon recognizing the chances of establishing additional transit pipelines in the region, the country invested politically in becoming a chief transit route for major pipelines in the region in search of an exit strategy out of long term political and economic problems.

Through EU’s INOGATE and TRACECA programs and the introduction of WREP, BTC,

26 Recently, new research questions the relationship between military aggression and resources, and concludes that revolutionary governments which are also endowed with natural resources are more prone to military aggression (Colgan 2011). Here, Georgia has a revolutionary Saakashvili government as well as an indirect resource endowment. Using Colgan’s approach towards the revolutionary governments and resources, which make a “toxic mix for international peace and security,” might explain the aggressive behavior of the Georgian government in 2008, prior to the conflict with Russia (ibid, 1672).

and BTE pipelines, Georgia made further strategically important economic and political alliances with international partners including the United States, the European Union, and its neighbors Azerbaijan and Turkey. In doing so, keeping the interest of Western governments and multinational companies has been vital for the Georgian economy, since such efforts did not receive a positive reception from the Russian side. Other than the military conflict in 2008 and the support of separatist movements in Georgia, Russia also imposed several economic sanctions on Georgian products and citizens. It cut the electricity lines to Georgia in 2006 (Newnham 2011, 141), bombed the pipeline

(although never admitted) that feeds Georgia and Armenia (Chivers 2006) in the same year. Also, the Georgian wine and mineral water sectors received import bans27 from

Russia, and eventually Russia banned all kinds of trade with Georgia as well as mail communication and transportation prior to the Russia-Georgia War of 2008 (Silitski

2010, 346). Despite this, the country has experienced relative stabilization in the last ten years, as well as economic growth. Although the country has been lacking talented politicians to establish a functioning democracy, it has experienced regime effectiveness and improvements in its institutions.

Belarus

A post-Soviet republic like Georgia, Belarus gained independence in 1991 under

Stanislav Shushkevic, who stayed in power until the 1994 presidential elections when he lost in the first round. In the second round, Shushkevic’s Prime Minister Vyacheslav

Kyebich and member of parliament and anti-corruption committee head Alyaksandr

27 This type of politically motivated bans on products is a common Russian tool for imposing influence over CIS countries. Although Russia has much better relations with Belarus, it has also imposed bans on Belarusian products, including a dairy product ban in 2009 as well as several oil and gas pricing conflicts in the 2000s (Drakokhrust 2012).

Lukashenka competed. In this round of the elections Lukashenka received 82 percent of the votes and became the second and most recent President of Belarus. Around the time of the elections the country was experiencing a serious economic crisis following the fall of communism. In addition to economic problems, Belarus was one of the last countries to establish the institution of presidency, which prevented the Shushkevic-

Kyebich duo from having enough state capacity to turn sufficient votes in their direction

(Silitski 2005, 87).

At the start of Lukashenka’s first term as President, Belarus lacked state capacity and a strong ruling party. Within such a political vacuum, the collapse of the

Soviet Union brought additional interest from Western governments and NGOs to

Belarus and other post-Soviet states. However, this interest was partly trumped by

Russia’s regional presence28 as Levitsky and Way (2010) point out (185). Especially since the Orange Revolution, Russia has moved to stabilize neighboring authoritarian regimes. With this foreign assistance, Lukashenka was able to enhance his security forces and the coercive capacity of the state, despite the pressures for democratization from the West.29 The regime has been much stronger since the 1996 referendum, which increased Lukashenka’s presidential powers and gave him the ability to disband the parliament (ibid). Right before the referendum, the parliament attempted to impeach

Lukashenka and one of the leaders of this movement, Zyanon Pozniak, had to flee to

28 For instance, Belarus joined the NATO Partnership for Peace Program in January 1995 while also signing a customs union agreement with Russia in the same month, and the two countries continued to solidify their relationship by signing an “Act of Union” (Marples 1999).

29 For more on state coercive capacity in Belarus and its evolution over the years after Lukashenka assumes power see Way and Levitsky (2006). The authors also compare how coercive capacity and opposition strength relate to each other, where the latter loses significance when it comes to regime change.

the United States after their failed attempt (Ash 2014, 6). A similar fate followed for the failed presidential candidates in the subsequent post-election protests. Along with the failure of the opposition, the popularity of Lukashenka improved among his supporters.

As independent surveys suggest, Lukashenka has been a powerful, trusted, and popular figure, in Belarus with little opposition (Hutcheson and Korosteleva 2006).

Therefore, even under fair conditions Lukashenka would probably have stayed in power, despite the elections having been fraudulent.30

Among the methods by which Russian aid flowed to Belarus were subsidized domestic energy prices, the re-export of oil products, and finally the establishment of the

Yamal pipeline in order to bypass Ukraine31. For instance, according to Balmaceda

(2006), the rents from these subsidies, transit fees, and the re-export of oil products kept Lukashenka in power, by keeping an otherwise inefficient domestic economy afloat and bringing additional cashflow to the regime. Indeed, the energy subsidies amount to

10 percent of GDP, as Belarus paid much lower prices for oil and natural gas.

Furthermore, the income from re-exporting Russian oil products amount to more than one third of Belarusian exports by the mid 2000s (ibid, 8-10). Other than economic growth and the rentier ties it created, Russian assistance also enabled Lukashenka to avoid economic decentralization and the privatization of the Belarusian economy. The

30 For more on Lukashenka’s popularity and its determinants, see Klymenko and Gherghina’s (2012) recent work where they explain the popularity of the Belarusian regime through Soviet legacies and current economic performance.

31 In later years, Russia had transit conflicts with both Belarus and Ukraine and decided to bypass these countries (especially Ukraine) through northern (Nordstream) and southern (South Stream) alternatives which transit through the Nord and Black Seas, respectively.

state still controls more than 75 percent32 of the economy (ibid) and there is no private enterprise that supports opposition groups (Levitsky and Way 2010, 200) which has resulted in anticapitalist-minded Lukashenka becoming the leading businessman in the country (Karol 2006). With such state control over the economy, the remaining capitalists have a choice: either comply with arbitrary regime rules or take their business elsewhere in the post-Communist world. Although such business leaders might not be happy with the political and economic situation in the country at times, they are always reluctant to meddle in politics and instead ask political activists to take control, without any open support (Janusbai 2012). This type of control over the society and economy become handy at times of political crises (presidential and parliamentary elections) or attempts at external influences on sovereignty (from the EU or Russia).

As Table 2-7 demonstrates, consistent with historical events, within Belarus, the average SFI score improves after the introduction of the Yamal pipeline. The SFI index of the country falls from 5.25 to 5. More specifically, the regime improved its effectiveness while losing some of its legitimacy. A similar index that measures the evolution of regime stability is WGI’s Political Stability and Absence of Violence indicator. Table 2-8 displays the differences over the years. The average estimate levels increased from 0.01 to 0.22, around a 5 percent improvement. In the same vein, compared to other countries in the global sample Belarus improved slightly from the

46th to 53rd percentile in terms of political stability. The country enjoys positive levels within the index except in the years 2010 (-0.13) and 2011 (-0.12), around the years of presidential elections and their aftermath.

32 For more discussion on privatization and opposition strength in Belarus and elsewhere, see Junisbai (2012).

During other such potentially critical junctures, the regime has been able to suppress the opposition more effectively and orchestrate election fraud consistently.

Still, because of street protests and Western condemnations of the Belarusian government’s behavior, it has also lost some legitimacy. Along with these political issues, Russia supported the Lukashenka regime politically and financially for a long time for the sake of maintaining energy route security and keeping Belarus loyal and stable (Balmaceda 2006, 17). Therefore, when Western governments condemned political killings by the regime or the harassment of the opposition leaders, Russian support neutralized the Western pressure and sanctions over Lukashenka’s rule

(Levitsky and Way 2010, 200).

Furthermore, military spending levels before and after the Yamal Pipeline demonstrates the evolution of the repressive mechanism under Lukashenka. As Table

2-9 shows, despite the fact that Belarus almost doubled its average military spending after the Yamal pipeline, raising it from 280 million to 526 million USD, the share of GDP decreased to 1.4 percent from 2 percent. This finding suggests that the first hypothesis is congruent with what we observe in Belarus, therefore providing positive support and encouragement for authoritarianism in Belarus.

The regime in Belarus indeed shows clear signs of repressive measures. The administration is highly dependent on its strong police force (militsiya). It is also notorious for political killings and disappearances of controversial figures, including the charismatic Election Commissioner Viktar Hanchar and former internal minister and opposition leader Jury Zacharanka (Silitski 2005, 88), the systematical beating of

presidential candidates (Aliaksandar Kazulin33 and others) during electoral campaigns

(Lenzi 2002; Markus 2010; Sannikov and Kuley 2006; Zhuchkov 2004), and the jailing of presidential candidates (Andrey Sannikov, Nikolai Statkevich, and Dmitriy Us) especially during the 2010 presidential elections (Ash 2014). Through these presidential elections, the opposition has not gotten any stronger. They neither have unity nor any financial backing from local oligarchs, unlike the opposition in Ukraine, Russia, or

Kyrgyzstan where privatization of the economy has helped opposition groups have the necessary financial resources.

Throughout the presidential and parliamentary electoral cycles, Lukashenka has kept increasing limits to the opposition by censure in media, denying registration, and political harassment (Levitsky and Way 2010, 205). For instance, right after the 2010 presidential elections, the police arrested hundreds of protestors while also injuring one of the nine presidential candidates, Vladimir Neklyayev34 (Halpin 2010). Furthermore, over the years Lukashenka has increased presidential powers (in 1996) and removed term limits (in 2004) through referenda. Finally, he was also able to weaken and disintegrate the opposition (Ash 2014). The number of presidential candidates kept increasing over the electoral cycles, making it easier to win the elections for

Lukashenka. These are clear signs of the strength and stabilization of the regime.

33 Interestingly, Kazulin was arrested and released at times based on the relationship between Russia, Belarus, and the European Union. For instance, when the EU and Belarus entered into a rapprochement period following the 2008 Russia-Georgia War, the regime released Kazulin as part of a deal with the EU, which eventually secured free travel for Lukashenka and other political elites as well as a $3.5 billion credit from the IMF (Drakokhrust 2012). That period roughly ended around the presidential elections in late 2010 when Lukashenka, expectedly, continued with his previous harassment of the opposition leaders and international observers.

34 The opposition presidential candidates are usually one time challengers. As Ash (2014) notes, there are no repeating anti-regime candidates over the elections as many of them are exiled, killed, or incarcerated by regime forces (2).

Therefore, the increase in military spending implies that the regime is repressive. It also shows that Lukashenka is now able to control the majority of Belarusian society while keeping focused on intimidating the main opposition leaders.

As a further repercussion of political stability in Belarus, Ioffe and Yarashevich

(2011) praise the consistent nature of the Lukashenka regime and point out that such political stability has also caused further social and economic development in the country. As compared with Ukraine, for example, Belarus has been much more stable and eventually more developed, as well as keeping its domestic economy free from privatization. Although there are many other factors explaining variations in socioeconomic development between the two countries, a lack of political leadership in one and consistent control in the other is seen as one of the determining factors. The next section discusses the extent of economic development, its relationship with pipelines and political stability to a larger extent.

Economic Development

In comparison to my arguments concerning the level of democracy and regime stability, the claim for the effect of pipelines on economic development is rather straightforward. In this section of the chapter, the casework discusses how transit income has been used in Belarus and Georgia, as well as how additional perks of pipeline trade has been distributed within the economy. Although there have not been overarching studies on the effect of transit gas (or oil) on economic development, one study gets close to theorizing the effect. Using a bias-corrected least square dummy variable model, recent research on Armenia, Azerbaijan, Georgia, Russia, and Turkey shows that energy exports, further globalization, and the formation of regional integration through pipeline transit routes together promote economic growth (Chang et

al. 2013). The authors find separate impacts of energy exports and globalization as well as an interaction effect at work in Southern Caucasus countries. The main mechanisms the authors cite in promoting stability of the economy among the participating countries are the BTC and BTE projects (ibid, 335). They discuss how these pipelines have increased regional integration and fostered globalization in the participating countries, hence promoting economic growth.

Belarus

In terms of subsidized Russian gas and oil prices, as well as transit fees, Belarus has profited vastly in several ways. The country not only received transit fees and cheap gas for domestic consumption but also re-exported some portion of those Russian imports and the refined products of oil for further profits. With lower energy costs, the state has been able to manufacture other goods cheaper, subsidize the domestic economy, and keep it buoyant, therefore promoting further economic development. In that regard, Kennedy (2007) calls the impact of subsidies and fees one of the essential factors behind the Belarusian development miracle in the early 2000s. Similar to

Kennedy, Balmaceda (2006) also calls the re-export of oil products and Russian assistance the main reasons that the Belarusian economy is still functioning, despite the fact that the economy is largely inefficient, while Clem (2011) agrees by saying that the success of the Belarusian economy is solely dependent on the Russian subsidies, creating a subsidy addiction for Belarus ( 795-6)35.

35 In calling the Belarusian economy a success story, Ioffe (2007) even goes as far as to say that the current authoritarian Lukashenka leadership has been one of the driving forces, with even the World Bank and the IMF acknowledging its efforts (68).

Through such continued economic benefits from transit pipelines, in the 2000s

Belarus averaged a 7.4 percent annual growth as compared to constant economic contraction, especially in its early years of independence. Until 1996, the economy contracted for four straight years and real recovery started in 1997 with an 11.4 percent growth rate. In terms of GDP, in 1995, it fell below $15 billion; in 2004, it went over $20 billion; and finally in 2008 the GDP went above $60 billion, showing great recovery following the early collapse of the economy36. As much as it has been beneficial for

Belarus, this sustainable economic growth has also been advantageous for Gazprom and the Russian government, as both parties have increased their oil profits37. By

2006, 98 percent of domestic gas usage was provided by Russian Gazprom, and indeed Belarus has always been extremely dependent on Russian support for its energy needs (Levitsky and Way 2010, 201). In total, domestic sources provide for only 16 percent of national energy input (Balmaceda 2006, 6), making Belarus one of the most import-dependent38 countries among the Former Soviet Union republics. Indeed,

Russia has been as responsible as Lukashenka for the sustained economic growth and political stability in Belarus. In short, the country not only profited from political support from Russia against US and EU leverage, but also enjoyed economic advantages which allowed Belarus to stem economic catastrophe in the 90s, leading to further

36 Even after the global financial crisis of 2008, the Belarusian economy did not register a negative growth level and grew 0.2 percent in 2009. Ioffe and Yarashevich (2011) compare the Belarusian economy with its post-Soviet neighbors Ukraine and Belarus, noting that the latter two registered -15.1 and -7.9 negative economic growth rates respectively.

37 Subsidizing the energy needs of its allies has been a common Russian strategy since the Soviet times as the USSR provided lower priced oil and natural gas for its republics and satellites (Newnham 2011).

38 By 2002 values, Moldova was the most import dependent country among the post-Soviet republics, importing more than 97 percent of its energy (Balmaceda 2006) and by 2010, the level of dependency was still around 94 percent (IEA n.d.).

development in 2000s. Levitsky and Way calculate Russian economic assistance to be around 15 percent of Belarus’ GDP (natural gas subsidies only), while Aslund estimates the total assistance to be around 20 percent (2009, 182) and Siarhej Karol (2006), a chartered financial analyst at AIG, calculates it to be around 30 percent of the GDP. The

Belarusian MFA, on the other hand, reports the annual transit income to be over 50 percent of the country’s yearly income (ibid; n.a. 2012).

Using Karol’s data, Russia was charging Belarus $47 for natural gas when the average market price was around $230, and charging $27 for oil when the world price was around $60 (2006). Based on these numbers, the savings add up to $6.6 billion in subsidies39. Apart from these subsidies, the country also earns direct cash income from the re-export of crude oil, as well as refined products. Belarus has one of the best and most modern refineries in the world and it has been quite profitable over the years as the country has become a large transit partner. Indeed, the import and indirect re-export of Russian oil products has been extremely rewarding, since Belarus buys both oil and natural gas at a discounted price, making the re-export of the same product or a refined oil product even more lucrative for its national economy (Balmaceda 2006). With an additional $1.3 billion income (2005 figures) from the re-export of refined Russian oil,

Belarus makes close to $8 billion from Russian assistance, or around 30 percent of

Belarusian GDP (Karol 2006).

Finally, in 2011, a new agreement worth $14 billion (25 percent of Belarusian

GDP) was signed between Belarus and Russia, further strengthening the relations

39 This indirect support has also increased over the years. For instance, in early 2000, Belarus was paying around $1 billion less for its energy needs in comparison to the European market price levels. The discrepancy of $1 billion in energy subsidies represented about 3% of Belarusian GDP, while these subsidies are a bigger part of the economy in the late 2000s.

between the two countries as well as further boosting the Belarusian economy (Kramer

2011). Through that deal, Belarus earned more than 20 percent of its GDP in one transaction, received a loan to build a nuclear power plant, but lost its pricing privilege for domestic natural gas. Russia, with a 50 percent stake in Beltransgaz, a Belarusian pipeline operator, acquired the company completely along with further customs benefits and integration for the two countries.40 After the previous crises in 2006 and 2009 that endangered not only the bilateral economic and political relationship between the two states but also the domestic energy needs of the Western European countries, the new agreement was significant in easing tensions. This agreement encourages further blending of the two countries as well as decreasing the uncertainty over transit ties in the region. In the long term, however, this deal could very well lead to Belarus paying higher prices for energy if the relationship between the two countries were to sour again. As mentioned in previous sections of this chapter, despite Belarus having benefited economically from transporting Russian energy to the West and competing to get a larger share of transit, relations between the two countries has never been easy.

For instance, the Belarusian government initially attempted to establish control over its domestic energy market. After fully consolidating his regime in the 1990s, Lukashenka tried to break Russian domination of oil in the domestic markets41. In addition to that,

40 Although Russia has been pushing for complete integration and eventual unification with Belarus, Lukashenka was able to manipulate public opinion in favor of his views on political issues. While more than 50 percent of Belarusians favored the union with Russia in 1993, since 2004, the percentage of people who oppose unification has never fallen below 50 percent (Drakokhrust 2012). By 2011, only 24 percent of Belarusians favored unification with Russia, showing that, after 20 years, the idea of Belarus- Russia union does not have the same amount of public support.

41 In order to do that, the country attempted to directly purchase Venezuelan oil. Here, it is important to note the difference between oil and natural gas trade. If this transaction had been a natural gas trade, a Belarus-Venezuela resource trade partnership would have been highly costly and economically unviable. Following this move from Belarus, Russia took a step back from its additional tariff charge for oil and

Putin and Lukashenka do not have the best personal relationship (Kramer 2013). Still, it had been difficult to disturb that hegemony through diversifying the domestic economy with other sellers. One potential option would be to use Ukraine as a transit partner. In order to do this, the country would have to use Ukrainian ports and the Odessa-Brody pipeline to import oil, and that would make Belarus dependent on Ukrainian transit

(Bohdan 2010).

Despite the occasional political problems, such high subsidies and other Russian assistance combined with political support paved the way for Belarusian regime stability as well as economic growth in the late 90s and early 2000s. Such findings provide credibility to the fifth hypothesis on the positive effect of transit income on economic development. Still, an economy kept afloat because of Russian subsidies and the re- export of oil products becomes highly dependent on oil and natural gas prices, making it a very risky strategy in the long run (Balmaceda 2006; Clem 2011; (Pranevičiūtė-

Neliupšienė and Maksimiuk 2012). Unlike a resource dependent country, Belarus does not own the original product it sells, neither does it have any control in pricing the final product. Therefore, the long term growth rates are completely dependent upon continued Russian assistance and high natural gas and oil prices. Such positive growth rates are not necessarily sustainable. Although the country experienced relative economic growth under Lukashenka, the Belarusian economy is still not a developed economy. The first signs for these potential economic problems appeared in 2011, when the country devalued its currency 56 percent following IMF criticisms on unsustainable wages in 2010 (Ioffe and Yarashevich 2011, 750-1).Yet when compared revoked those tariffs (Ioffe and Yarashevich 2013, 771). Within this specific context, these developments show that, unlike natural gas, Belarus is not dependent on Russia for oil.

to its other post-Soviet neighbor economies such as Moldova and Ukraine, Belarus performed much better in terms of its growth levels42.

Georgia

Compared to other prominent transit countries in the region such as Ukraine and

Belarus, Georgia has a small economy and lower amounts of natural gas and oil pass through it. However, both Saakashvili and his predecessor Shevardnadze viewed the establishment of transit pipelines, especially the BTC oil pipeline, as an indispensible element for economic independence and geostrategic identity building of the country

(Ismayilov 2012, 214). Indeed, the achieved energy security, as well as integration into

Western economies through the pipelines has played a major role in Georgian economic development, despite Russian economic sanctions and the war in 2008.

As mentioned briefly before, the Georgian economy contracted by as much as 45 percent in the early 1990s. That is why it also needed the economic benefits of resource transit contracts. The BTC pipeline contracts helped the country to get out of the long lasting post-independence economic crisis. Indeed, after the establishment of the 1999 agreement for the BTC pipeline, the Georgian economy averaged a 4.7 percent annual growth in the 2000s compared to an average of -9.2 percent contraction in the first nine years of the its independence (World Bank, 2010). In the mid 1990s, the GDP of

Georgia was around $2.7 billion; in 2004 it went over $5 billion and in 2007, it was over

$10 billion, demonstrating significant improvements. Especially in 2003, the country experienced its highest amount of growth; 11.1 percent. In the construction businesses, this rate was around 46 percent in only a six month period between January and June

42 See Ioffe and Yarashevich (2011) for a larger comparison of Belarusian socioeconomic development with respect to Ukraine and Russia.

(Tavzadze 2004, 99). Another expectation from the introduction of the BTC was a more secure investment environment for the participating countries (Kalicki 2001). As expected, the same rate (46 percent) of increase was achieved in investments in non- fiscal assets, mainly due to construction of the BTC pipeline alone (Tavzadze 2004, 99).

Ultimately, the direct effect of the new pipelines was easily observable in a tiny economy like Georgia’s.

Tavzadze evaluates the economic effect of pipelines on Georgia in two points; as direct and indirect effect (2004). The direct effect represents the transit fees and reduction in transportation costs of oil products; the indirect effect stands for the emergence of additional demand for new industries, the creation of jobs, the stimulation of the domestic economy and production of consumer goods, and in general a more lively domestic economy (ibid, 98-99). Although the indirect economic effect had been temporary, realized only during the construction of the pipelines, the direct effect and securing inflow of domestic energy needs are permanent. An example of the indirect effect is the unemployment rate, which Papava (2005) estimates as a 33 percent drop during the time the BTC pipeline was built (99-100). Indeed, in 1999, the World Bank estimates the unemployment rate in Georgia as around 13.8 percent. The rate floated between 10.8 and 12.6 percent between 2000 and 2004, eventually jumping back to

13.8 percent once again in 2005, when construction companies completed the pipeline and the first oil was pumped from the stations in Baku. Although the rate decreased gradually in the three years following, the economy was hurt badly in 2008 when the

Russia-Georgia war broke out. Therefore, it is important to account for two issues when estimating the effect of pipelines on economic development in Georgia. The first is to

differentiate between the direct and indirect effect of the pipelines and the second is to account for the effect of the conflict with Russia.43 Another example that demonstrates the neutralizing impact of the war on a stimulated Georgian economy is available by looking at the World Bank’s net FDI inflows (FDI/GDP). When the agreement for the

BTC was signed in 1999, the net FDI inflow rate was around 2.9 percent. In the following six years, between 2000 and 2005, it averaged 6.3 percent of the GDP and jumped to as much 18.5 percent in 2007. However, in the five years following the war, it averaged around 6.5 percent again, returning to the rates of the pipeline construction years. Figure 2-4 displays the variations in both net FDI inflows and unemployment rates over the years in question. In the figure, the negative effect of the war in 2008 is especially visible.

Indeed, general Russian animosity towards Georgia has been a serious problem for the Georgian economy mainly due to Russian sanctions on imports. Before the BTC pipeline was introduced, the Russians promised to retreat from the contested regions in the North of Georgia if the country would reject the proposal to build the BTC pipeline, as Carrol quotes from a personal interview (2012, 297). However, when the decision to build the pipeline was implemented and Georgia changed its course of direction to the

West, the trade balances shifted accordingly. Table 2-10 displays the change in the relations with the Russians over time as well as the indirect economic effect of the

BTC/BTE pipelines. While Russia was Georgia’s principal trade partner (for both imports and exports) in 1996, after the Russian economic sanctions on Georgia and

43 The negative effect of the Russian war shows up not only on macroeconomic indices of Georgia but also in its bilateral relationships in the region. Although Western countries increased their support for the government following the war, Russia put more pressure on Georgia through sanctions and its allies in the region.

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Georgia’s change of political direction, Russia no longer features in the top ten trade partners. On the contrary, Turkey and particularly Azerbaijan take a much larger share of trade over the years. Notably, the increasing share of Azerbaijan products in

Georgian imports after signing the 1999 agreement for building the BTC pipeline is notable for Georgia, as Azerbaijan essentially starts to account for Russia’s decline in share.

Other than the war and general Russian animosity, one final potential concern has been the possibility of observing the Dutch Disease in Georgia. First detected in the

Netherlands (hence the term) due to a high inflow of foreign currency after the discovery of natural gas in the country in the 1960s, Dutch Disease appears following a sharp increase in export of one or more types of raw materials in a country. The national currency became overvalued, which led to an increase in other export products’ prices, causing those products to lose competitiveness in international markets, eventually decreasing exports as well as increasing imports (due to falling price of import products). Russian experts have estimated such a negative effect may appear in

Georgia due to foreign currency inflow through transit fees, if the country earns the maximum possible profit out of its transit functions44 (Papava 2005, 92-93). Although there has been slight appreciation of the Georgian lari in the mid 2000s, full blown

Dutch Disease has not been detected in the country, so far. One way to observe Dutch

Disease is to look at total export and import prices as well as their ratio over the years.

44 In addition to the economic reasons, the Russians also had strategic interest in preventing the introduction of the BTC pipeline in the region. Therefore, promotion of a Dutch Disease threat for the Georgian economy would favor Russian interests. Building the pipeline would mean Georgia could change its course of direction to the West indeterminately, making the country visible on the map for the West, particularly the US.

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Using trade data from the United Nations Conference on Trade and Development45

(UNCTAD), Table 2-11 displays the export and import prices in Georgia from 1999 (the year of BTC/BTE pipeline agreements) to 2010. Until the year 2006, when the first oil reached the port of Ceyhan in Turkey, both export and import prices increased consistently, while the ratio fluctuated. The effect of Georgian lari revaluation shows itself in 2006, when there is a sharp decrease in the export to import ratio, though it starts to catch up in 2010.

Looking at the statistics for both Belarus and Georgia, transit fees and subsidies constitute a higher share of GDP in Belarus and thus potentially have a bigger impact on the country. Although the size of the Georgian economy ($11.6 billion GDP in 2010) is almost one fifth that of Belarus ($55.2 billion GDP in 2010), the direct economic impact of resource transit is still not as significant in Belarus. This is partly due to

Belarus’ re-export of Russian oil products as-is or after refining, as well as using

Russian natural gas at Russian domestic prices for many years after independence.

While both cases seem to support the fifth hypothesis for promotion of economic development through resource pipelines, the magnitude seems to be much more powerful and observable in Belarus than in Georgia.

One potential problem for both countries, especially Belarus, is likely fluctuations in international oil and regional natural gas prices. Despite the fact that transit fees and subsidies helped these countries thrive economically and secure their regimes, transit fees should not be perceived as a stable source of wealth for a number of economic and political reasons. Since Belarus benefits more than Georgia from the transit

45 The reason for using the UNCTAD data for export and import prices is the better availability of data as compared to the World Bank.

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pipelines, it also has a higher probability of being affected by an oil bust or bilateral issues with Russia. Finally, the political reasons for falling income include regional instabilities. For instance, due to unbalanced bilateral relations between Russia and its transit countries (Belarus and Ukraine46) for Western European gas needs, gas transit has been subject to interruption. Although there were no long term disruptions of gas delivery through Belarus, there were short term interruptions in 2004 and 2010 (Chyong et al. 2010, 2). These disruptions were largely because of personal disputes between

Lukashenka and Putin. Similar problems occurred while transporting Russian and

Central Asian gas through Ukraine, with even higher costs due to longer disruptions.

Therefore, it is not reasonable to rely only on transit fees and the additional advantages of pipelines while managing a national economy.

Human Development

The relationship between natural resource endowment and human development is usually negative. Scholars have been studying the possible effects of natural resources on different indices of human development. While Sovacool (2010) does not find a negative relationship within a subset of South East Asian countries (Brunei,

Indonesia, Malaysia, Myanmar, and Thailand), others (Bulte et al. 2005; Carmignani

2013) do find a direct, strong negative relationship. Among these, Bulte et al. (2005) develop an institutional framework to explain the deficiency in human development

46 Ukraine is another prominent transit country for the West. However, unlike Georgia, since independence, it received transit fee payments not in cash, but only in kind, as natural gas (Dodonov and Opitz 2001). The country uses these in kind payments to supply household energy demand (Ericson 2009, 34) and the rest of the imported natural gas from Russia goes to the power plants. However, in-kind transfer fees also create inefficiency, since domestic gas prices have been far below the regional market prices. The constant municipal pressure on national government officials for continued subsidized domestic gas prices in exchange for maintaining local political support also makes the inefficiency even worse. This creates a peculiar kind of a rentier relationship between the state and the citizens. In the end, the country could not maximize the potential benefit from the transit fees it received from Russia.

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indices, where countries with weaker institutions tend to fail the most. In a similar vein,

Alexeev and Conrad (2011) find that among developing countries, there is a negligible negative effect on school enrollment rates, life expectancy, and infant mortality rates.

Finally, through the intervening variable of inequality, Carmignani posits that natural resources exacerbate human development levels through promoting higher levels of inequality (2013). This is also in line with Ross’s finding about the significant relationship between oil and inequality (2006). Although pipeline income is not necessarily at the same level with resource dependence, it is still nontax revenue and the theories of

‘resource curse’ might help explain the outcome in Belarus and Georgia.

Georgia

Being one of the smallest and poorest post-Soviet countries, Georgia experienced challenges in human development areas after its independence. Going through one of the toughest post-Soviet economic crises, which coupled with political and regional instability, the country suffered through the 1990s with high unemployment and poverty. After the 2003 Rose Revolution, the Saakashvili government put an emphasis on development projects. Still, despite Saakashvili investing in reducing poverty and corruption during his term, many areas of human development lagged behind.

In improving the levels of human development in Georgia, the introduction of the

BTC/BTE pipelines has played a major role. Other than the direct and indirect monetary effects which turned into additional funds for education, health services, and environmental projects, possibly the biggest non-monetary contribution from the

BTC/BTE pipelines to Georgian social and environmental development has been the introduction of criteria from the EU and other international actors to the Georgian public

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agenda. Although a critic of the pipeline project in the region after a series of semi- structured interviews with locals, Sovacool (2011) also points to statements from the companies regarding reducing the levels of social and environmental problems in the region. As part of the pipeline deal, Georgia established a waste management system that complies with international standards, as well as the legal framework for pipeline environment regulation that complies with international standards.

Other than the environmental and legal issues, there is also the direct impact of the pipeline operating companies and international stakeholders. Comparing the poverty reduction programs in Armenia and Georgia, Papava (2004) evaluates the performance in two similar South Caucasia countries in order to evaluate the effect of BTC and BTE pipelines in Georgia (90). The main difference has been that the pipeline construction companies in Georgia sponsored poverty alleviation programs that built schools and medical facilities (ibid). Specifically, the operator of the BTC, BTE, and WREP pipelines,

British Petroleum (BP), has been funding social responsibility projects47 and local

NGOs. Overall, BTC was designed to be a net contributor to the environment and society instead of damaging it, which was also publicly promoted by the main stakeholders in order to guarantee public support for the pipeline (Baran 2005, 110).

Essentially the pipeline stakeholders envisioned an improved economy, a developed agricultural sector, better social infrastructure and human development levels, and a more organized society (Papava 2005, 87).

47 These projects include specific sub-programs like Community Investment Program (CIP), Improved Schools Program, Regional Development Initiative, BP Pledge, and the BTC Grant Agreement (Open Society n.d., 29). Among these, CIP was particularly notable in allocating $9 million for sustainable and agricultural development projects (Baran 2005).

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An NGO member at the Children and Youth National Center in Tbilisi, Irakli

Giorbelidze (2013), talks about how in the past, the country was unable to provide electricity twenty-four hours a day, and now with a positive relationship with Azerbaijan and Turkey people do not have to worry about such issues. Furthermore, specifically in the field of education, he praises the Saakashvili government for its investments in the areas of youth and sports education as well as creating a ministry for that purpose. The new government continued to build on the initial investments and now the youth center is able to arrange after-class activities for high school and university students, promoting the formation of student clubs and advisory councils. With an increased education budget, the construction of schools and new facilities was realized, as well as free higher education.

Although there are very positive views about the presence of the transit pipelines and their long term positive impact on the society, especially from a macroeconomic perspective, some locals are still concerned about the environmental repercussions as well as issues regarding land compensation48 for the passage of the pipeline (Carrol

2012; Marres and Rogers 2008; Sovacool 2011, 53). Visiting the town of Tabatskuri, in the mountains of Borjomi in Georgia, Carrol observed the environmental and economic problems experienced by the locals and criticizes the methods social neoliberalism uses to address the negative repercussions of international resource pipelines. After a brief period of delight because of short-term employment opportunities during the pipeline construction, the local people in the Tabatskuri village now claim that the promises

48 1800 households in Georgia were expected to see damages and the decision was to either lease or purchase the land with appropriate compensation. The maximum time of disruption to community life and livelihood was expected to be less than three years; with people eventually resuming their normal daily life (Blatchford 2005, 126). However, this has not been the case as Carrol (2012) and others report, even seven years after the completion of the pipeline.

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made by the government and international companies do not match their actions. These issues are acknowledged by the operating companies and also by major risk mitigators like the International Finance Corporation (IFC) (Carrol 2012, 293-5). However, another group of researchers (Assche et al. 2012) visited the same area, Borjomi, and interviewed local environmental groups; the World Wildlife Foundation (WWF), and other groups’ representatives, and found no serious environmental repercussions from the pipeline. Although they confirm the local governance issues regarding the pipeline route and the local parks, from their observations and interviews –even with groups and representatives that are critical of the Saakashvili government- they find no damage from the pipeline on water reserves or the ecology.

Finally, another view about the BTC/BTE pipeline and its negative environmental and social effects points to a lack of corporate social responsibility in areas where the companies harm the environment, displace the people on the pipeline route, and damage ecosystems despite initial rhetoric. In the end, macro indicators show signs of socioeconomic development in Georgia, and there is enough evidence to posit that the introduction of BTC/BTE pipelines promoted new international standards for the environment and society on the macro level and on the pipeline route. Despite the continued existence of narratives on implementation issues regarding land compensation, it is fair to say that overall the country enjoyed new socioeconomic standards due to the pipelines.

Belarus

Although there have been indirect effects of the pipelines on human development through the encouraging of economic growth in Belarus, the direct evidence of an influencing legal framework or social responsibility projects are absent in the Belarusian

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case. There are a few reasons for such a variation. The first is the difference between the stakeholders in both countries’ pipelines. The BTC/BTE pipelines include the involvement of international partners like the World Bank and the EBRD and these institutions –at least on paper- encouraged companies like BP and SOCAR to invest in the public while also taking environmental precautions. However, in the Belarusian case, there is not enough evidence to posit the same sort of understanding. Yet through promoting economic growth in both countries, the transit pipelines have direct and indirect economic effects on human development levels in Belarus and Georgia.

Free from any oligarchs, rich with oil and other natural resources, Belarus enjoys more equal socioeconomic development compared to Russia and Ukraine. While life expectancy has declined since independence and has been catching up with pre- independence levels in the second half of the 2000s, infant mortality rates have been improving since the establishment of the republic, putting Belarus at the level of developed economies. In fact, apart from Armenia, Belarus has been the only post-

Soviet country that did not have negative change in infant mortality rates (Fish 2001), and this happened despite the fact that Belarus is one of the countries affected by the

1986 Chernobyl disaster. Richardson et al. (2013) see the improvements in Belarusian health care, especially the decline in infant and maternal mortality rates, as exemplary along with improving economic conditions (105-6). Such positive developments in health care services put the Belarusian health care system among those of upper middle income developed countries (Ioffe and Yarashevich 2013, 765).

Belarus is still committed to the notions of providing universal health care to its entire population (Richardson et al. 2013). Universal health care also comes with

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additional benefits for the elderly, poor, and the disabled, demonstrating a system similar to Soviet era pensions. However, this system works better in the urban areas, while rural parts of the country lag behind. Education for all citizens is also free. Some see such extensive social welfare benefits in the areas of education and health care as the key reasons for regime stability in the last twenty years (Pranevičiūtė-Neliupšienė and Maksimiuk 2012). In 2011, the state spent 43 percent of its budget on the social sector, making it 12.5 percent (5 percent on education and 3.8 percent on health services) of the GDP (ibid, 119-20). Considering the fact that the regime controls 75 percent of the entire economy and this economy is largely subsidized by Russian assistance, it is fair to say that rentierism is in play in the provision of basic services to the population.

Summary

Ultimately, there is a need to explore the impact of resource income and subsidies through pipelines, and this section attempted to offer a theoretical consideration and initial research through case studies on Belarus and Georgia. This kind of resource trade appears as a new kind of income (through both transaction costs and subsidies) for transit countries in which a country receives transit fees and energy subsidies for a resource it does not actually extract or sell. Those transit countries meet their energy demands at a lower cost, below international market prices.

In attempting to explore the causal aspects of introducing a resource pipeline system to a region, this section proposed to fill a gap in the literature on the politics of natural resources. After identifying the gap within the current studies, it makes an effort to establish a causal relationship between economics, politics and being a natural resource transit country. At the initial stage of the research, there is evidence for the

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diffusion of regimes (Gasiorowski 1995; Herb 2005) through pipelines and the impact of linkage (Levitsky and Way 2010) on the government types of Belarus and Georgia.

However, there is varying evidence on the direction of causality. While the pipelines promoted further authoritarianism in Belarus in the years following the Orange

Revolution, they seem to promote slightly improved levels of democracy in Georgia. For the former, diffusion occurs through the supplier particularly during the years after Putin stabilized his regime in Russia, whereas the latter is affected more by the user countries. The upcoming chapters test the hypotheses at a global level, and should give a better idea about the direction of causality and we should be able to see whether pipelines themselves promote a certain regime type or they are only channels for diffusion. There is strong support for the fourth hypothesis on the promotion of regime stability in transit countries. Since both suppliers and users are interested in the stability of the transit country, bestowing strategic importance, we observe improved levels of regime institutionalization, more efficiency, less fragility, and lower chances for regime failure.

In addition to political outcomes, there is also evidence for the positive effect of resource transit income on economic development in Belarus and Georgia (with relatively weaker evidence in the latter). With direct monetary and indirect effects of the pipelines, both countries experienced improvements of economic development.

However, there is less support for a rise in human development in Belarus while there is stronger support for it in Georgia. Although Belarus has one of the best human development indices compared to other post-Soviet states, this does not necessarily stem from the transit pipelines. In Georgia, however, there is at least evidence for the

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promotion of environmental regulations, international standards, and social responsibility projects in the areas of education and health service by the BTC

Company.

The next section will explore these findings in a global sample. If these results at the case study level hold globally, then this will mean that a new dimension of resource politics can be argued for within the literature on resource development. The next chapter starts by explaining the main independent variables regarding natural resource transit pipelines and the dependent variables on regime qualities and development. It also presents a global data set that covers all countries and their characteristics on those variables. Along with introducing the methodological specification of the statistical analysis, the following chapter will include the Large-N analyses (LNA) test of whether being a transit country affects regime qualities and development and will provide external validity for the historical narratives and case evidence in this chapter.

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growth

-20

-40

1990 1995 2000 2005 2010 2015 year

Belarus Georgia

Figure 2-1. Economic growth in Belarus and Georgia: 1991-2010

Life Expectancy at BirthatExpectancyLife

1990 1995 2000 2005 2010 2015 year

Belarus Georgia

Figure 2-2. Life expectancy at birth in Belarus and Georgia: 1990-2009

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Infant Mortality Rate (per 1,000 live (per Mortality Infantbirths) live 1,000 Rate

1990 1995 2000 2005 2010 2015 year

Belarus Georgia

Figure 2-3. Infant mortality rate in Belarus and Georgia

Percentage Percentage (%)

1990 1995 2000 2005 2010 2015 year

FDI/GDP Unemployment Rate

Figure 2-4. Net FDI inflows and unemployment rates in Georgia

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Table 2-1. Transit pipelines in Belarus and Georgia Name / Route of the Pipeline Transit Capacity Length*

Belarus Oil Druzhba 720 Tb/d 521 km Natural Gas Northern Lights 25 bcm/y 450 km Yamal 33 bcm/y 450 km Georgia Oil Western Route Early Pipeline 115 Tb/d 351 km Baku-Tbilisi-Ceyhan 1 Mb/d 248 km Natural Gas Baku-Tbilisi-Erzurum 30 bcm/y 248 km Russia-Georgia-Armenia 5 bcm/y 160 km *Length of the pipeline within the country Sources: Open Society Georgia Foundation; World Experience for Georgia

Table 2-2. Average FH scores in BELARUS before/after the YAMAL pipeline 1991-1998 1999-2012

Political Rights 3 1.36 Civil Liberties 3.25 2 Source: Freedom House

Table 2-3. Average FH Scores in Georgia before/after the BTC Pipeline 1991-2004 2005-2012

Political Rights 4 4.37 Civil Liberties 3.64 4.62 Source: Freedom House

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Table 2-4. Average political stability and absence of violence levels in Georgia before/after the BTC pipeline 1996-2004 2005-2012

Political Stability and Absence of Violence Estimate (-2.5, +2.5) -1.34 -0.77 Percentile Rank (%) 13% 23% Source: World Bank, World Governance Indicators

Table 2-5. Average SFI Scores in Georgia before/after the BTC Pipeline 1995-2004 2005-2012

State Fragility Index 11.2 7.75 Effectiveness 6.6 4.63 Legitimacy 4.6 3.12 Source: Center for Systemic Peace, State Fragility Index

Table 2-6. Average military spending in GEORGIA before/after the BTC pipeline 1996-2004 2005-2012

Percentage of the GDP 1.1% 5.2% In (2011) US Dollars 89 Million US$ 655 Million US$ Source: SIPRI Military Expenditure Database

Table 2-7. Average SFI scores in BELARUS before/after the YAMAL pipeline 1995-1998 1999-2012

State Fragility Index 5.25 5 Effectiveness 4.75 4 Legitimacy 0.5 1 Source: Center for Systemic Peace, State Fragility Index

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Table 2-8. Average political stability and absence of violence levels in Belarus before/after the YAMAL pipeline 1996-1999 2000-2012

Political Stability and Absence of Violence Estimate (-2.5, +2.5) 0.01 0.22 Percentile Rank (%) 46% 53% Source: World Bank, World Governance Indicators

Table 2-9. Average military spending in BELARUS before/after the YAMAL pipeline 1992-1998 1999-2012

Percentage of the GDP 2% 1.4% In (2011) US Dollars 280 Million US$ 526 Million US$ Source: SIPRI Military Expenditure Database

Table 2-10. Georgia's trade balance with Russia, Turkey, and Azerbaijan Russia Turkey Azerbaijan

Year Import Export Import Export Import Export 1996 19 29 11 13 12 12 2000 13 21 16 23 8 6 2004 14 16 11 18 9 4 2008 7 2 15 18 10 14 2012 6 2 18 6 16 26 Note: The numbers are percentages of imports and exports Source: World Integrated Trade Solution (WITS)

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Table 2-11. Export and import prices in Georgia Year Exports Imports Ratio

1999 238 689.59 0.345 2000 323 709.376 0.455 2001 318 753 0.422 2002 346 796 0.435 2003 461 1141 0.404 2004 646.903 1845.55 0.351 2005 865 2490 0.347 2006 936.172 3677.745 0.255 2007 1232.1 5215.2 0.236 2008 1495.3 6301.5 0.237 2009 1133.6 4500.2 0.252 2010 1677 5257 0.319 Note: Exports and Imports in $Millions Source: UNCTAD

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CHAPTER 3 DESCRIPTIVE STATISTICS: INTRODUCING THE DATA SET

The upcoming chapter explains what a natural resource transit country is and how it is different from a producing or consuming country. It goes on to conceptualize the terms transit country and transit pipeline with specific global examples while explaining how the approach of this research is diverging from the literature.

Furthermore, this section reports worldwide statistics on international pipelines and transit countries by introducing an original data set that covers all countries and pipelines from 1990 to 2010. Finally, it presents the dependent variables of the statistical analysis and describes the main differences between oil and natural gas transit countries in comparison to high resource income countries and the rest of the world.

What is a Resource Transit Country?

A resource transit country, for oil or natural gas, is a third party which has a pipeline that carries hydrocarbon resources from supplier to user countries. All intermediary transit countries taking part in natural gas and oil trade between suppliers and users, through the use of pipelines, can be considered as the population of transit countries. To illustrate which countries qualify as a transit country and which do not, the examples of Turkey and the United States can be helpful. For instance, the US trades natural gas from Canada and Mexico through multiple resource pipelines. The country further has millions of kilometers of domestic pipelines to distribute the imported gas.

However, since it does not export the incoming gas to other countries, it cannot be considered as a resource transit country; it is only a consumer country. Turkey, on the other hand, is a transit country for natural gas, importing it from Russia, through the

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Blue Stream, from Azerbaijan through the BTE Pipeline, and from Iran through another pipeline for domestic use and reselling it to Greece. It is also a transit country for transporting Azeri oil to the world markets through the BTC Pipeline, while using some of the imported oil for domestic needs.

One of the key differences of this research lies at the conceptualization of resource transit country compared to the literature. Here I count a country as a transit country if it connects a landlocked country to the world energy markets. In such cases, a transit country ties a landlocked supplier or a user to the world market. For instance,

Azerbaijan is a landlocked country and to export its domestic oil and natural gas, it uses

Georgia for transit. Although Georgia would already qualify as a transit country within the literature since it ties Azerbaijan and Turkey on the one hand and ties Russia and

Armenia through international natural gas pipelines, it also ties Azerbaijan to the world markets through Baku-Supsa oil pipeline. That last connection alone makes Georgia a transit country tying Azerbaijan and the world markets for oil trade. This 831 km long pipeline has a capacity of 850 thousand barrels per day (b/d) capacity and was commissioned in late 1998, tying Azeri oil to the world markets. Thus, despite Baku-

Supsa pipeline passes through only two countries, it is a resource transit pipeline for the supplier, Azerbaijan and the buyers in the world market for oil. A similar case can be made for the landlocked consumer countries. For instance, FYROM is a landlocked

Balkan state and lacking access to world oil. However, in 2002 a 220 km long resource transit oil pipeline was built between Greece and FYROM. The pipeline has 50 thousand b/d capacity and supplies the Macedonian market since then. Such a pipeline makes Greece a transit country between the world markets and the Macedonian

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market. In the end, based on previous definitions of a transit country (Chow et al. 2010),

Greece and Georgia cannot qualify although they carry the same characteristics and function in the same direction. Therefore instead of keeping the concept exclusionary, it is relevant to reconceptualize the term to include countries like Greece and Georgia.

Through such conceptualization of the term, some of the transit countries in this research context would feature as gateway countries. According to the World Bank reports, a gateway country is a connection between a landlocked developing country

(LLDC) and the world markets (Mustra 2012). For LLDCs, these gateway countries are the only available connection(s) for export-import ties LLDCs can establish. A recent

World Bank report estimates that LLDCs spend on average, 30 percent of their GDP for transaction costs, which is twice as much compared to other developing countries (ibid).

Thus, these transit and gateway countries mostly benefit from the drastic transaction costs, including the resource transit fees and subsidies, largely paid by the landlocked country. Therefore, it is meaningful to include countries like Georgia and Greece as transit states when they tie the LLDC to the world market since they receive transit fees

(and subsidies in some cases).

Although natural resources are not exclusively transferred through pipelines and there are other means (and also other kinds of gateway countries) like land routes, railroad, and sea, this research only focuses on transport through pipelines because of their unique characteristics. Unlike other forms of transit, the trade through resource pipelines demands long term commitment by supplier, transit, and consumer countries and form inflexible political and economic ties between those countries and international investors. In many instances, the participating countries are expected to commit for over

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15 years of supply or consumption (Ericson 2009), demonstrating the fact that pipelines include large contracts and economic stakes for all participating parties. Furthermore, the stakes of a pipeline system can be owned by a single country, though it is rare, or multiple countries and multinational companies might have a share in the whole system’s maintenance, profits, and negotiations.1 In the end, to measure the resource transit through pipelines, oil and natural gas transfer amount (in billion cubic meters), transit fees received, and/ or transit fees as a percentage of gross domestic product

(GDP) can become helpful to identify the underlying mechanisms of being a resource transit country. These will help identifying various aspects of how natural resource transit amount impacts on a country.

A resource transit country generally receives a certain amount of transit fee for opening its borders for trade between the supplier and the user countries. Calculated by measuring the amount of travel that a pipeline makes while passing a country and the amount of oil or natural gas transport, largely in billion cubic meters (bcm), the transit fees vary for each country and pipeline system (Chyong et al. 2010). Other than the formal calculations, variations in transit fees also depend on the availability of alternative resource trade channels, the relationship or tensions between the transit country and supplier country or both. For instance, since the establishment of the

Nordstream, there is now an alternative way to sell Russian and Central Asian oil and natural gas to the Western and Central European markets. Therefore, the amount of transit fees and price subsidies that Ukraine and Belarus charges were already

1 More specifically Dulaney and Merrick (2005) define four distinct ownership structures as limited liability venture, unincorporated joint venture, partnership, and unit trust. Through making a coordination agreement, there can be multiple owners of a single pipeline system (2005, 248). More information on ownership structures is available under Pipeline Ownership section of their article (ibid, 255-259).

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expected to decrease over time (ibid, 16). These fees have been an economic and political burden for Russian resource trade for around two decades and now Russia is looking for alternatives to get rid of the dependence on Ukraine and Belarus2 through bypassing those countries with the alternatives of undersea pipelines (New York Times,

2012). Nordstream under the North Sea was one of these projects that partially commissioned around November 2011. Another alternative is South Stream which is projected to go under the Black Sea, again bypassing Eastern European transit countries to supply South Eastern and Southern European countries.

Domestic, Cross-Border, International, and Transit Pipelines

In the previous section I defined in detail what a resource transit country is and its characteristics with a few initial examples. In this research context, as explained above, the conceptualization of resource transit country is broader and a transit country either ties two or more countries by connecting suppliers with the consumers or links a landlocked country to the world markets. Where there are transit countries, there are transit pipelines. Therefore the conceptualization of transit pipeline is contingent upon transit country. Accordingly, this section defines what a transit pipeline is and what kind of classifications are required. Then it moves into reporting the characteristics of the pipelines in the world as well as providing basic global statistics on transit countries and transit pipelines with specific examples.

There are a number of ways to classify a pipeline. One can focus on the kind of material it carries, like oil, natural gas, gasoline, water, hydrogen, and other liquids or liquefied materials. Here, in this research, only crude oil and natural gas pipelines are

2 As discussed in length within the cases of Belarus and Georgia, from the perspective of the transit countries these fees and subsidies function as essential pieces of domestic economy.

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considered. These two are the most common kinds although there are many other pipelines in the world. Another way to classify a pipeline is to distinguish it as a domestic or an international pipeline. Evidently, the former type of pipeline exists only within the jurisdiction of a single country while the latter crosses at least one border and carries natural gas or oil from one country to another. In this research domestic pipelines are excluded and the data set includes only international pipelines. Within the category of international pipelines there are two other groups, cross-border3 and transit pipelines. More specifically, some say that a pipeline which directly ties the supplier and the user is a cross-border pipeline while a transit pipeline passes through at least three countries (Chow et al. 2010, 9). Thus, a transit pipeline has to pass through at least one transit country in order to get to the market and this requires three participating countries. This research diverges from the literature with a nuance in how the term transit country and -as a result- a transit pipeline are defined. As explained in previously through Greece-FYROM and Azerbaijan-Georgia pairs, a pipeline can pass through only two countries and can be a transit pipeline at the same time, only if it ties a landlocked supplier or user country to the world energy market. Here, the transit country has the means to reach the world market through the ports.

There are multiple terms introduced in this section. Table 3-1 summarizes domestic, international, cross-border, and transit pipeline and natural gas transit country and oil transit country concepts. Since some concepts are new or reconceptualized for this study, the table makes it easier to refer back to basic definitions.

3 For this research’s typology of pipelines, only transit countries and international pipelines are used. The cross-border pipeline only covers international pipelines without a transit country and thus it does not have any explanatory function for the purposes of this research.

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A final limitation was done to exclude the tiny cross-border pipelines around the world. A tiny pipeline is defined through its capacity, not length. More specifically, oil pipelines that have a transport capacity lower than 50 thousand b/d (barrels per day) and natural gas pipelines that have lower than 1 bcm/y (billion cubic meters per year) capacity are excluded from the data set. There are a few reasons for such exclusion.

First, tiny pipelines are hard to find and identify. For all the pipelines in the data set certain information is required, like the length of the pipeline, the capacity (if it is a transit pipeline), when they were built and when they stopped functioning (if they ever did), and if they are transit pipelines. For tiny pipelines, it is hard to get such details causing extensive missing data. Also, when there is very high level of economic and political cooperation between two countries and if these two countries share a long border, there are tens of tiny pipelines that are crossing the border. One such example is Canada and the United States. For instance, only for natural gas, the US singlehandedly has 59 possible export and/or import points. Some of these pipelines carry big volumes of natural gas while the others are local and very limited in volume/year. For such reasons, there had to be a cap for excluding tiny cross-border oil and natural gas pipelines.

Global Statistics of Pipelines and Transit Countries: The Sample

The statistical section of this research covers all countries globally which have population of one million or more by the year 2010. There are 153 countries that fulfill the selection criteria and all are included within the data set. The data set covers these countries from 1990 to 20104. The upcoming section will provide descriptive statistics

4 More on the sample in data set appendix.

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about all international pipelines and countries with those pipelines, within the limit of above mentioned constraints. The unit of analysis is country-year. There are 3159 observations in total. The number of observations varies in the substantive analysis section due to missing values for some key independent, dependent, and control variables.

The number of international pipelines has been increasing and countries with those resource trade connections have been expanding spatially since 1990. While there were .7 pipelines per country in 1990, by 2010, this number increased to an average of 2 pipelines per country. However, this increase is due to the rise in the number of natural gas pipelines globally. Looking at the countries with international pipelines, a similar trend is visible as Table 3-2 demonstrates. The table summarizes the number of countries with natural gas and oil pipelines in the world and their characteristics over time. Similar to the average number of international pipelines, countries with international natural gas pipelines have tripled in 20 years, increasing from 26 to 78, while countries with oil pipelines increased from 24 to 42. By the year

1990, there were 32 countries with a cross-border and/or transit pipeline. Out of those

32 countries, 18 of them had at least one international natural gas and one oil pipeline.

By 2010, out of 153 countries with population equal to one million or more, 85 of them had an international pipeline passing through their borders. This number is expected to increase in the future since, especially for natural gas, there is a growing demand worldwide and sources in some markets are depleting (Stevens 2009) while new sources are discovered through new technology in landlocked areas (Omonbude 2011).

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One of the reasons for the spike in the number of countries with international pipelines in 1990s was systemic global change. With the end of the Cold War, dissolution of Yugoslavia, and fall of the Soviet Union, many ex-Soviet and ex-

Yugoslavian republics declared their independence and became hosts of previously domestic pipelines that turned into international ones. For instance, all republics in the

Caucasus, Central Asia, Baltic Sea, and the Black Sea regions became the hosts of international pipelines in the 1990s. Therefore, along with the newly built international pipelines globally, excessive changes in the borders in the 90s were the reasons for almost doubling number in the international pipelines. As Figure 3-1 on number of countries with international pipelines demonstrates, the biggest spike in the number of transit countries occur from 1990 to 1992, increasing from 32 countries to 51 countries with international pipelines due to changing global landscape. As the figure shows, the number increases steadily over time, therefore making the issue of international pipelines prominent for more countries.

Although more than half of the world had an international pipeline, transit pipelines have not been as dispersed and common. For instance, in 1990, just around the fall of the Soviet Union, there were 13 transit countries in the world. Out of those 13, only five of these countries were both an oil and natural gas transit country at the same time. All of those were in Europe. These countries are Austria, Germany, Hungary, Italy, and Poland and they were the transit countries for Russian natural gas and oil since the

1970s. Being both an oil and natural gas transit country at the same is therefore is rare breed globally. As Table 3-3 on oil and natural gas transit countries lists, out of the 37 transit countries in the world by the year 2010, only 15 of them transit both natural gas

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and oil together.5 Currently, 33 countries transit natural gas, while 19 of them transit oil.

These countries exist predominantly in Europe (20 natural gas and 14 oil transit countries), though there are some transit points in the Middle East, North Africa, Central

Asia, Caucasus, Sub Saharan Africa, and the Pacific. This is not really surprising since

European countries already form some of the most integrated and interdependent regions in the world. Indeed, 90 percent of European natural gas is transported through pipelines (Stern 2002, 14). Interestingly, there are no transit pipelines in South Asia,

South East Asia, Latin America, and North America, although there are many cross- border pipelines in that part of the world. Table 3-4 illustrates the regional breakdown of natural gas and oil transit countries globally.

Despite that transit countries exist in different parts of the world, countries with both natural gas and oil pipelines emerged predominantly in Europe, with some more in

Central Asia and the Caucasus. Here, there are two major reasons for such geographical concentration of joint natural gas and oil transit countries. First, with the fall of Soviet Union, once domestic pipelines of the USSR became international pipelines, therefore making some countries in the region, -like Georgia, Kazakhstan,

Uzbekistan, and Russia- transit countries. Second, and more importantly, historically,

Europe has been the biggest market of Russian resources when it comes to oil and natural gas. Western and Central European countries have been importing both resources from Russia since the 60s and 70s, therefore requiring multiple transit countries and interdependencies in the process. And this is expected to continue at least in the near future. Since Europe is further oriented towards cleaner energy

5 Those 15 countries are listed in bold in Table 3-3.

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sources and scientifically natural gas is greener than oil and coal with its lower CO2 emission levels, this reliance on natural gas is not projected to decrease over the years.

As Gilardoni (2008) reports, currently one third of European electricity is generated by natural gas and such power plants are subsidized by the governments. Currently the continent consumes about 500 bcm/y and it is expected to increase up to 700 bcm/y by

2020.

As Figure 3-2 shows the number of transit countries has more than doubled in the 90s and by 2000 there were 29 transit countries in total. By 2010 the number reached to 37. The graph on the number of transit countries shows this progression in the 90s and 2000s. Still, there is a different trend within the group. Figures 3-3A and 3-

3B on natural gas and oil transit countries separately demonstrate, despite a spike in number in the early 90s, the number of oil transit countries did not change drastically in the last 15 years. However, for natural gas, there is a continuous progression even after the big increase in the early 90s. Again, for the spike in the number of transit countries in the early 90s, the dissolution of the Soviet Union and Yugoslavia is the main reason.

Out of the 23 newly independent countries, 18 Soviet and 5 former Yugoslavian republics, 11 of those became transit countries.

Following the historical evolution and the regional breakdown of countries with international pipelines, and also the more specific statistics on the transit countries, it is worth attention to focus on countries with natural gas and/or oil pipelines separately. As mentioned before, focusing on natural gas and oil independently, and not as a whole, this research diverges from the previous literature. Natural gas and oil have different characteristics as it is more costly as well as requiring distinct means to carry natural

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gas between two trade points, compared to oil. Therefore, international natural gas pipelines are more in demand and more prevalent across the world. The two kinds of resources also have varying processes of negotiations between the participating countries and this leads to more international crises. In this research, there is individual focus on both natural gas and oil pipelines. In the following section independent and joint statistics for oil and natural gas pipelines will be reported.

Although the number of transit countries and their spatial and temporal dissemination is worth knowing, these transit countries are not identical in their possession of international pipelines, their transit capacities, length, or income. To start with, the change in the average number of pipelines per transit country is steady and continuous. Table 3-5 on natural gas and oil transit countries demonstrates the basic descriptive statistics. Here, average number of pipelines is gradually increasing for both categories since 1990. For instance, 9 natural gas transit countries, on average, had 2 pipelines per country in 1990, and this number increased up to 2.7 in 2000 for 25 transit countries and a mean number of 2.9 pipelines in 2010 for a total of 33 transit countries.

So, both the number of transit countries and their intensity of pipelines have increased over time. This shows an exponential growth in number for natural gas pipelines.

Similarly, 9 oil transit countries had a mean number of 1.6 pipelines in 1990. With a slight increase an average number of 2 pipelines existed for 19 countries by 2010.

These statistics show that not only the number of transit countries has been increasing steadily since 1990, but also the average number of pipelines also grows over time.

Thus, number of transit pipelines and countries -for natural gas and oil- as well as the trade through pipelines increased globally in the last 20 years. Since establishing an

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international pipeline requires long term economic and political commitment from the participating countries, it is plausible to say that such interdependent and participating countries have increased in number as well as their level of dependence on each other.

Resource trade through pipelines increased for both natural gas and oil.

However, the former has seen more improvements than the latter in the last 20 years, basically because of its shorter history. Further projected to increase more than 100 percent over the next three decades, natural gas has been a serious alternative for oil since the 1980s with its environmental superiority over oil, especially for electricity generation (El-Gamal and Jaffe 2009, 60-61). Although there were not enough natural gas pipelines to transport it to the markets, over the years it became more common as a substitute thanks to newly commissioned pipelines.

Figure 3-4 displays the average number of pipelines in the world between 1990 and 2010. As the figure shows natural gas pipelines keep spreading globally while the number of oil pipelines is growing much slower over time. With the independence of the

Soviet and Yugoslavian republics, there is a slight peak in 1992 for the natural gas pipelines and the average number steadily increases over the years. The average number of natural gas pipelines is more than tripled while the mean number of oil pipelines increased only about 60 percent. Therefore, going hand in hand with increased use of natural gas in electricity generation and household heating, it is fair to say that the dissemination of natural gas pipelines are faster than oil pipelines.

There are two potential reasons for such a variation between natural gas and oil pipelines. First, there is more demand for natural gas pipelines because of the lack of alternative transportation methods other than few expensive ones, like LNG trade.

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However for oil, trade can be done in various ways like by sea, railways, or ground transport. Another reason why the number of oil pipelines is stagnant is because oil market and trade connections had already saturated. At this time now, the market dynamics are hardly changing. However, natural gas trade and market are vigorously changing and developing over the years. In the end, the number of pipelines per country was rather close for oil and natural gas in 1990; by 2010, the average number of natural gas pipelines is more than three times bigger because of the market conditions, changing global demand in natural gas, and transportation differences between two resources.

Pipeline Length and Transit Capacities

Average total length and transit capacity are two other essential statistics for international pipelines. Although resource trade economy is known for its nontransparent nature, while calculating transit fees for a transit country, the length of the pipeline passing through one country and the amount of transit are two important factors while calculating the tariff amount (Energy Charter Secretariat 2012). For instance, since 1999, while transporting Kazakh oil, for every 100 ton per kilometer, 37 cents are charged as transit fee by Transneft of Russia (ibid, 34). This is only one example showing that, along with transit capacity and utilization rate of the pipeline6, transit length can become an important factor in determining transit tariffs. Therefore, both statistics have explanatory power in finding out if pipelines affect a country’s economy. Furthermore, from the pipelines’ perspective, these two statistics determine the fixed cost of a pipeline for the oil companies and the participating countries. Looking

6 As mentioned previously, due to lack of transparency in oil and natural gas trade globally, this is one statistic that is hard to obtain along with finding out the exact transit fees for all countries in the world.

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at countries with international pipelines, the average pipeline length has increased in proportionate to the number of countries with those pipelines.

Table 3-2 shows that in 1990, when there were only 26 countries with at least one international gas pipeline, the average length was around 1431 km per country for natural gas pipelines. Although the number of countries tripled in twenty years, the average length per country slightly decreased down to 1077 km. For oil pipelines, the average length increased from 647 km in 1990 to 824 km in 2010. As Table 3-5 demonstrates, within the transit country category, the average length has increased for both oil and natural gas transit countries. For oil transit countries, within twenty years, the average length increased from 594 km to 1043 km per country whereas for natural gas transit countries, the average length increased from 807 km to 1326 km per country. More pipeline length per participator country means more interdependence and more transit fees for the transit countries. The average length increased dramatically over the last twenty years and there are more participating countries as well as more transit countries leading to new dependencies.

Globally Russia has the longest international natural gas pipeline network while

Kazakhstan has the longest international oil pipeline network. Being the largest country in the world by its area, Russia has 10 international natural gas pipelines to gain the status of having the largest international natural gas pipeline network7. The country also

7 Although Russia has the longest international natural gas pipeline system, it does not own the highest number of international pipelines. Russia owns 10 major natural gas pipeline systems whereas the United States has 18 major natural gas pipelines. By 2009, the US, world’s third largest country, singlehandedly has 49 possible pipeline export and/or import points only for natural gas (EIA 2014). Some of these pipelines carry big volumes of natural gas while the others are local and very limited in volume/year, therefore being excluded because of the 1bcm/y capacity requirement for the data. Also, the country has 4.2 million km of domestic tubes carrying fuel (Cardwell 2013). These statistics are not in the data set since this research only covers international pipelines and their characteristics. However, this does not

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has the largest combined (natural gas and oil) international pipeline network in the world. Russia owes this status to its natural gas sources deep in northern Siberia where it had to build pipelines between 1960s and 1980s in order to carry the resources from that part of the country to Western European markets. In addition to pipelines that carry

Russian natural gas, like Northern Lights, Yamal, and Bratstvo, the country also receives gas from Kazakhstan, Uzbekistan, and Turkmenistan through multiple pipeline connections.

While Russia has the largest international natural gas pipeline connections, it also has six international oil pipelines, making it the country with the highest number of oil pipelines. However, it does not have the longest international oil pipeline system;

Kazakhstan does. Kazakhstan, world’s ninth largest country and the largest landlocked country in the world has the longest international oil pipeline network while owning five international pipelines. The country exports oil to the Chinese and Russian markets as well as transporting oil from Uzbek and Turkmen sources. These connections make

Kazakhstan home of the biggest international oil pipeline network by itself. Still, since both Russia and Kazakhstan are two of the largest countries in the world that own rich energy resources, it is also intuitive for them to also have longest international pipeline systems to export as well transporting for other markets.

There is a slightly different trend for average transit capacity. Among the natural gas transit countries, the average transit capacity was around 21.6 bcm/y per country in

1990. When the number of natural gas transit countries more than tripled in twenty years, the transit capacity also increased proportionately, up to an average of 37.3

undermine the fact that the US and North America in general have one of the most extensive energy networks globally.

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bcm/y. For oil, the transit capacity per country decreased slightly from 712 thousand b/d per country to an average of 672 thousand b/d and the number of oil transit countries increased from 9 to 19. Still most of the average capacity increase for natural gas transit was not due to big transit projects but rather because of the changing political landscape in early 1990s and the appearance of new natural gas transit countries because of the Soviet Union’s dissolution. Already by 1992, the average transit capacity was around 40.3 bcm/y with the new natural gas transit countries and it remained more or less the same over the years despite the additional transit countries and pipeline projects. Based on the descriptive statistics here, both average pipeline length and transit capacity have multiplied over the last twenty years along with the overall number of transit countries. Though not as much, average transit length have also increased for oil transit countries. The transit length and capacity are two important factors to calculate transit income and therefore their improvement is a sign for the boost in transit income.

Within the category of natural gas transit countries, some of them have very limited transit capabilities compared to energy hubs like Russia, Ukraine, Georgia,

Slovak Republic, and Kazakhstan. For instance, Italy has only 1 bcm/y transit capacity, carrying Algerian natural gas to Slovenia. The 2100 km long Enrico Mattei Gasline

(GEM) was mainly built to supply Italian domestic natural gas demand instead of supplying Slovenia and other European countries. Although the main section of the pipeline currently has a capacity of 34 bcm/y, the section that goes to Slovenia has a much smaller volume.

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Looking at the countries with high amount transit capacities, Russia has 144.2 bcm/y natural gas transit capacity and it already has the most extensive international natural gas network in the world. Along with producing its own natural gas, Russia’s pipeline connections mainly come from Central Asian republics. Kazakhstan is also one of the main transit hubs with 141.1 bcm/y transit capacity by the year 2010. It mainly transits Turkmen and Uzbek natural gas to Russian, Chinese, and European markets.

Finally, Ukraine, with 127 bcm/y transit capacity towards the European markets, is the main hub for Russian and Central Asian natural gas. The Ukrainian hub accounts for as much as 80 percent of the whole Russian natural gas exports to Europe (IHS CERA

2012).

Similar to natural gas transit, there are many oil transit countries with small amount of transit capabilities like Czech Republic (180 thousand b/d), Greece (50 thousand b/d), and Uzbekistan (115 thousand b/d). There are also major oil transit hubs like Turkey, France, and Russia. Regarding oil transit, Turkey, by far, has the highest capacity with 2.65 Million b/d with its two major oil pipelines, one coming from Iraq and the other coming from Azerbaijan. The 1760 km long BTC pipeline passes through

Georgia and Turkey, connecting landlocked Azerbaijan to the world markets. The pipeline was a point of discussion for almost a decade in the 1990s and eventually commissioned in 2006, currently has 1 Million b/d capacity. The other pipeline system arrives from Iraq, yet it does not work in full capacity in recent years because of the Gulf war in 2003.

Other than Turkey, Russia and France are also main transit countries for oil with

1.4 Million b/d capacities for each country. France transits oil to German and Swiss

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markets through South European Pipeline (SPSE) which was commissioned in the

1960s with a starting point at Fos, Marseille. This single pipeline makes France a major oil transit country worldwide. Russia, on the other hand, compiles its capacity through a number of pipelines. One of them is from the Soviet era, Baku-Novorossiysk pipeline, carrying oil from Azerbaijan to the world markets with 100 thousand b/d transit capacity.

All the other oil pipeline connections arrive from Central Asia towards the world markets.

Having mentioned the major and transit hubs for both natural gas and oil, comparing transit capacities with the number of pipelines also bears interesting results.

Among the transit countries, looking at Figure 3-5 on natural gas transit capacities by the number of pipelines, intuitively, having more pipelines is associated with more transit capacity. Producers like Russia and Kazakhstan appear way above the line as outliers while Germany is way below the line. So, Germany does not have a high transit capacity despite having so many international pipelines. This is particularly because

Germany has very high level of domestic natural gas consumption and those international pipelines serve as energy veins for Germany while also transporting gas to other users in the region. Russia, however, has very high transit capacity and 10 major international pipelines. This is not a surprising result since Russia is the world’s biggest natural gas exporter and a major transit country for Central Asian republics.

The same logical conclusion applies for a major consumer, Turkey, being below the line, while a major producer and a transit country, Kazakhstan is way above the line.

Figure 3-6 on oil transit capacities by the number of pipelines is prepared for oil transit countries. However, unlike for natural gas transit figure, having more international oil pipelines is not necessarily associated with more oil transit capacity. There are a few

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reasons for this result. First, there is not much variation on the number of pipelines since 16 of the 19 oil transit countries have one or two oil pipelines. Second, countries like Kazakhstan, Germany, and Russia skew the slop downward which makes the

Figure 3-6 not as intuitive as Figure 3-5.

Dependent Variables

While testing the effect of pipelines on transit countries, I use separate indicators to capture multiple dimensions of each dependent variable in question, therefore coming closer to employing Goertz’s three-level framework (2005). After naming the concepts (i.e. development, regime type, stability) at the basic level, Goertz suggests to assign the constitutive features to the basic level concepts (i.e. economic development, human development, the level of democracy, regime failure etc.). Once a multi- dimensional character for such concepts is achieved, at the indicator level, I operationalize the concepts for hypothesis testing (per capita GDP, economic growth as annual percentage change in GDP, infant and child mortality, life expectancy, aggregated FH scores, and polityII index).

I perform all of these stages of concept formation to come up with coherent, valid, and reliable concepts, so that via this framework, theoretical models can be tested

(Goertz 2005, 6, 30-32). While the small N analyses, like the case studies in this research, tend to focus more on conceptualization, large N quantitative research tends to define the concepts more narrowly and collect data from more cases to enable wider generalizations. Thickening concepts by defining multi-dimensional aspects is essential in order to avoid false assertions regarding the LNA as well as the SNA (Coppedge

1999, 468, 469).

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Using Goertz’s framework, this research evaluates the effect of pipelines and resource transit on regime type, stability, and development. They are the three main dependent variables. As the first dependent variable of regime, I test for transit pipelines’ effect on the level of democracy. In order to measure levels of democracy, in conducting the LNA, two commonly used indicators are employed: aggregated and reversed Freedom House (FH) scores for civil liberties and political rights and Polity IV

Project’s revised and combined polity score (polity2) for institutional democracy and autocracy. Both FH scores (Altman and Perez-Linan 2002; Hadenius and Teorell 2005;

Herb 2005; Knack 2004) and Polity scale (Acemoglu et al. 2005; Bruckner et al. 2012;

Herb 2005; Knack 2004; Ross 1999) are very common indicators for measuring the level of democracy. The aggregated and reversed FH index has two rankings on civil liberties and political rights varying from 1-to-7. Therefore the aggregated score varies from 2-to-14, higher meaning better levels of democracy (Freedom House 2013). The polity index takes a value between -10 and 10, a 21 point scale, with higher values indicating better levels of institutional democracy. Following the convention in the literature, to allow for easier interpretation of the results and to compare the two indices,

I rescaled both FH and Polity scores to vary between 0 and 10, 10 meaning better levels of democracy.

The second dependent variable is regime stability. The hypothesis posits that countries with transit pipelines should be more stable, compared to the countries without those pipelines. To test for this effect, I use Geddes et al.’s data on autocratic regimes combined with the democracies (forthcoming)8. I specifically employ gwf_failure

8 The data is available at http://dictators.la.psu.edu/. The authors code 280 autocratic regimes and transitions, from 1946 to 2010. The original data set includes transitions in 110 countries with a population

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dummy indicator as the dependent variable where it takes the value of 1 when a regime fails within the calendar year. This revised version of the data has multiple advantages compared to other alternatives in the field. First, the authors cover transitions from democracy to autocracy (democratic breakdown) and vice versa. Second and the more important advantage is that they also include transitions between autocracies, therefore accounting for instability of autocratic regimes within themselves. Among others, these transitions also include events like coups, popular uprisings, foreign invasion, revolutions, insurgencies, and state failures (ibid). It is important to account for such within autocratic regime transitions since many of the autocratic regime failures lead to other autocratic regimes instead of democratization.

As Kendall-Taylor and Frantz (2014) find examining data between 1950 and

2012, only one in five autocratic regime failures lead to initiation of democratic process

(36). Therefore, while examining regime stability, only focusing on transitions between democracy and autocracy would be insufficient and would miss variation on the dependent variable. In the end, the modified version of the Geddes et al. data is also comprised of democracies and democratic transitions in addition to their original data set that covers only transitions within autocracies.

The final outcome of this research is development and I examine the impact of transit revenues on levels of development. I investigate two dimensions of development that are economic and human development outcomes. The most commonly used indicators for economic development are economic growth as annual percentage change in GDP, GDP per capita, and GNI per capita (based on purchasing power of a million or more that had at least one transition. The original data set is under GWFcases.dta and GWFtscs.dta files. In this research, I employed GWFglobal.dta since it also covers all transitions including within autocracy regime change and transitions between democracies and autocracies.

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parity). The data is acquired from World Bank Data Catalog. Life expectancy and infant mortality are selected as the indicators of human development (Wickrama and Mulford

1996; Frey and Field 2000; Kosack 2002; Reenock et al. 2007; Jose and Rodriguez

2010)9.

Comparing Oil and Natural Gas Transit Countries with High Resource Income Countries, and the Rest of the World

Although there are no substantial theoretical studies on transit countries, this research still largely builds on the resource curse literature. Therefore this section highlights the differences of oil and natural gas transit countries with respect to high resource income countries and the rest of the world. Pointing out such set of descriptive variations between different groups has two purposes. First, it gives a brief summary the data set before the substantive results in the upcoming chapters. Second, it points out average differences between groups of countries over the years. Oil and natural gas transit countries form the first two groups. The third group is high resource income countries. Countries which are outside of all three groups are the rest of the world.

To determine the members of “high resource income country” group I use

Michael Ross’s publicly available10 data on natural resource income (2012). There are a few ways to operationalize natural resource dependence. Earlier studies used oil export dependence (Jensen and Wantchekon 2004), exports share of GDP (Herb 2005;

Morrison 2009; Ross 2001; Smith 2004, 2007), natural resources’ share of GDP

(Ulfeder 2007), and dummy variables like OPEC membership (Fish 2005) as indicators

9 Jose and Rodriguez (2010) also use literacy and gross enrollment ratio, and life expectancy for human development. 10 Available at http://thedata.harvard.edu/dvn/dv/mlross, Ross records oil and natural gas production and value from 1932 to 2009 in all countries in the world.

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to measure the effect of resources on the level of democracy, stability, and democracy.11

Recent studies caution against using natural resource export per GDP as an indicator since it does not account for the per capita income and disregards the resource that is consumed domestically (Ross 2012; Smith n.d.). Ross diverges from such traditional resource dependence measurements like export dependence and proposes a new indicator with oil and natural gas income per capita. This way he accounts for population of the country and the extent a country is dependent on natural resource income. Although my data set goes up to 2010, the latest available data in

Ross’s database goes up to 2009, therefore the comparison of oil and natural gas transit countries, high resource income countries, and the rest of the world are based on

2009 values of all indicators.

Table 3-6 on natural gas and oil transit countries, high resource income countries, and the rest of the world reports the comparisons of these four groups on the dependent variables. A country with $250 or more per capita oil and natural gas income is in the high resource income group. Based on this criterion, there are 49 countries under this group. Under the group of natural gas transit countries, there are 19 countries, while under oil transit countries, there are 14 countries in total. Out of these transit countries, 7 of them are also under high resource income group12, the rest are under “the rest of the world”. These four clusters of countries are compared under three groups of dependent variables: level of democracy, regime stability, and development.

11 For a more detailed discussion and meta-analysis on measurement of natural resources in the literature, see Smith (n.d. pp. 6-8) “Measuring Resource Curse.” 12 These countries are Bahrain (oil transit country), Syria, Iran, United Arabian Emirates (natural gas transit country), Kazakhstan, Russia, and Uzbekistan (both oil and natural gas transit countries).

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Table 3-6 compares high income and transit countries with the rest of the world.

Looking at the level of democracy values, high resource income countries perform as the lowest compared to the other three groups. They have on average 5.32 Polity II score and 4.75 aggregated FH rating. Interestingly, natural gas transit countries have better FH ratings (6.7) and Polity (7.51) compared all the other groups, followed by oil transit countries and the rest of the world. In terms of level of democracy indicators transit countries perform better than the other groups.

Figure 3-7A and Figure 3-7B show the historical evolution of FH and Polity ratings for all groups, respectively. The dark blue connected line represents the sample mean scores in every year. Looking at both figures, mean FH and Polity scores of the rest of the world are almost identical with the sample meanwhile both groups of transit countries perform 1-to-2 points better in terms of FH scores across all the years.

However, transit countries’ average Polity scores almost converge with the sample mean and the rest of the world. For both indicators high resource income group consistently has the worst level of democracy. Although not conclusive, the descriptive differences between high resource income countries and the other groups confirm the literature on resource curse and negative effects of resource income on democracy.

However, transit countries do not appear to be behaving in the same way with high resource income countries.

For regime stability, based on Geddes et al.’s indicator on regime failure, the table reports the number of regime failures in parentheses for each group and the rate of regime failure next to it (2014). Based on these statistics, oil transit countries have the lowest number of failures (5) as well as the lowest rate (1.5 percent). It is followed

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by the natural gas transit countries and high resource income countries. At least descriptively, transit countries are also more stable compared to high resource income countries and the rest of the world. Still, without any substantive controls, these descriptive variations do not confirm or reject any hypotheses.

Unlike the level of democracy and regime stability values and rates, the high resource income countries have slightly better economic development values. However, the transit countries have the best human development levels compared to both groups.

There are three indicators to measure economic development: economic growth, which is annual percentage change in GDP, GDP per capita, and GNI per capita based on purchasing power parity in 2009. In all three areas, high resource income countries perform better. They have slightly higher GDP per capita compared to oil and natural gas transit countries, $12.2 thousand to $11.1 thousand and $11.6 thousand, respectively. Rest of the world lags really behind with $4 thousand average per capita income.

Same applies to GNI per capita (ppp) income as high resource income countries

($14.3 thousand) have slightly better values with respect to natural gas transit countries

($14 thousand). Also, these two groups have almost tripled the rest of the world’s GDP per capita and GNI per capita (ppp) values. However, for economic growth, the transit countries perform the worst. Natural gas transit countries have an average of 2.13 percent economic growth rate while oil transit countries have it around 2.77 percent.

Both high resource income and the rest of the world groups have better averages, 4.1 and 3.88, respectively.

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Figure 3-8 tracks the historical changes in economic development through all three indicators for each group of countries. Figure 3-8A shows the changes in economic growth values. For most part, all four groups correlate over the years and especially from 1999 to 2008, the averages are really close to each other. There are two major points of differentiation. One is the sharp decline among the economic growth values of natural gas transit countries between 1990 and 1995. Although other groups also do not do well in those years, natural gas transit countries particularly suffer from economic contractions. One possible reason is the dissolution of the Soviet Union and newly emerging gas transit countries in the Post-Communist Eurasia. Since many of the ex-Soviet republics and Eastern European satellites suffered economic crises in early

1990s, this can be the reason that drives gas transit countries lower than the other groups of countries. Another sharp decline is in 2009, right after the 2008 global financial crisis. Many countries suffered economic decline in the following year after the crisis. Interestingly, both oil and natural gas transit countries are among the ones that experienced the sharpest decline in the year following the crisis. Also, within the transit groups, those seven transit countries which are also high resource income ones enjoy an average of 1.54 percent economic growth13, showing that oil and natural gas transit states would perform even worse without those seven high resource income transit countries. Therefore, based on statistics of economic growth, transit countries appear to be more vulnerable to economic crises, compared to other groups.

As two final demonstrations for economic development, Figure 3-8B and Figure

3-8C show the changes in GDP per capita and GNI per capita (ppp) since 1990.

13 Without those seven countries, the average growth of the transit countries is around -3.1 percent.

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Expectedly, the two figures follow similar paths over the years for the same groups.

There is constant, global progress in terms of per capita GDP and per capita GNI (in real values) in twenty years. At different rates, all four groups experience improvements.

While natural gas and oil transit, and high resource income countries perform above the sample mean, the rest of the world is way below the sample mean values across all country-years. Especially for per capita GDP, the changes in all three groups are very similar. Although the level of democracy figures are very different for transit countries and high resource income group, economic development indicators are very similar.

Finally, for human development, the transit countries do better than the other two groups of countries. Life expectancy (years) and infant mortality rate are the two indicators that measure human development. For life expectancy, gas transit countries perform the best with 72.7 years while for infant mortality rates, the oil transit countries do slightly better with 16.1 deaths per 1000 newborns. High resource income countries also perform better than the rest of the world in both indices. Again, this is on par with economic development values. As Figure 3-9A and Figure 3-9B show, human development improves globally over the years. For instance, the average life expectancy increases from 64 to 69 years among over the world in twenty years. Still, oil and natural gas transit countries perform better in all country-years in both life expectancy and infant mortality indicators. Again, although all four groups observe decline in infant mortality rates, the decline is at different degrees, with the rest of the world experiencing the highest degree of improvement over the years.

This section explained the main characteristics of a resource transit country.

Starting with conceptualization of basic terms like transit country, transit fee,

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international, cross-border, and transit pipelines, major statistics on transit countries and pipelines are reported based on a global sample. Finally, breadth of the sample and the rationale behind the limitations of the study are explained. Based on the average values of the dependent variables this chapter illustrated the basic differences between the transit, high resource income countries, and the rest of the world. The upcoming section will shift from descriptive to substantive results through time-series regression models to explain the variation on the level of democracy, regime stability, and development values of the natural resource transit countries.

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84 85 85

80 76 74 74 75 71 66 66 64 65 61 59 60

60 55 55 55 51

40 32

NumberCountries of

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 3-1. Number of countries with international pipelines

40 37 37 36

32 32 32 32 32 32

29 29 29 29

30 28 28 26 26 26 24

15 13

NumberCountries of

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 3-2. Number of transit countries

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NumberCountries of

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 A)

NumberCountries of

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 B)

Figure 3-3 Transit countries over the years. A) Number of natural gas transit countries. B) Number of oil transit countries.

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1.5

NumberPipelines of per Country

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Natural Gas Pipelines Oil Pipelines Pipelines

Figure 3-4. Average number of pipelines in the world per country

Figure 3-5. Natural gas transit capacities by the number of pipelines (2010)

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Figure 3-6. Oil transit capacities by the number of pipelines (2010)

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FH Scores

1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean A)

Polity Scores

1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean B) Figure 3-7. Average democracy scores over the years. A) Combined Freedom House scores. B) Combined Polity scores.

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Growth(%)

-5

-10 1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean A)

20000

15000

10000

per GDPCapita

5000

1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean B)

20000

15000

10000

per GNI(ppp)Capita

5000

1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean C) Figure 3-8. Average economic indicators over the years. A) Economic growth. B) Per capita GDP. C) Per capita GNI (ppp)

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Life Expectancy (years)

60 1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean A)

Infant Mortality (per Infant Mortality1000)

1990 1995 2000 2005 2010 Year

Sample Mean Gas Transit Country Mean Oil Transit Country Mean High Resource Income Mean Rest of the World Mean B) Figure 3-9. Average human development indices over the years. A) Life expectancy B) Infant mortality rates

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Table 3-1. Basic terms

Pipelines

International Pipeline A pipeline that crosses at least one border and carries materials from one country to another Domestic Pipeline A pipeline that exists only within the jurisdiction of a single country Cross-border Pipeline A pipeline which directly ties the supplier and the user Transit Pipeline A pipeline which requires a third country to tie the supplier and the user

Countries

Natural Gas Transit A country with a transit pipeline that carries natural gas Country Oil Transit Country A country with a transit pipeline that carries oil

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Table 3-2. Natural gas and oil pipelines in supplier, user, and transit countries

1990 2000 2010 Natural Gas Countries with International Pipeline(s) 26 59 78 Total Length per Country 1431 1123 1077 Transit Capacity per Country 7.52 17.8 15.8 Number of Pipelines per Country 2.1 2.6 3

Oil Countries with International Pipeline(s) 24 38 42 Total Length per Country 647 712 824 Transit Capacity per Country 267 269 304 Number of Pipelines per Country 1.6 1.6 1.7

Table 3-3. Natural gas and oil transit countries in the world (2010)

Natural Gas Transit Countries Oil Transit Countries

Austria Romania Austria Belarus Russia Bahrain Belgium Singapore Belarus Benin Slovak Republic Cameroon Bulgaria Slovenia Croatia Czech Republic Spain Czech Republic France Switzerland France Georgia Syria Georgia Germany Togo Germany Hungary Tunisia Greece Iran Turkey Hungary Italy UAE Italy Jordan Ukraine Kazakhstan Kazakhstan Uzbekistan Poland Kyrgyz Republic Russia Lithuania Slovak Republic Moldova Turkey Morocco Ukraine Poland Uzbekistan

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Table 3-4. Regional breakdown of transit countries Natural Gas Oil

Central Asia and Caucasus 4 3 Europe 20 14 Latin America - - Middle East & North Africa 6 1 North America - - Pacific 1 - South East Asia - - South Asia - - Sub Saharan Africa 2 1

Table 3-5. Natural gas and oil pipelines in transit countries 1990 2000 2010

Natural Gas Countries with Transit Pipeline(s) 9 25 33 Total Length of Pipelines per Transit Country 807 1459 1326 Transit Capacity per Country 21.6 41.9 37.3 Number of Pipelines per Transit Country 2 2.7 2.9

Oil Countries with Transit Pipeline(s) 9 18 19 Total Length of Transit Pipelines per Country 594 861 1043 Transit Capacity per Country 712 568 672 Number of Pipelines per Transit Country 1.6 1.8 2

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Table 3-6. High resource income countries, oil and natural gas transit countries, and the rest of the world (1990-2009)

High Resource Income Oil Transit Gas Transit The Rest

Number of Countries 49 14 19 101

Regime The Level of Democracy PolityII (0 - 10)*** 5.32 7.05 7.51 6.47 Agg. FH (0 - 10)*** 4.75 6.31 6.78 5.21

Stability

Regime Failure Rate 0.02* (13)** 0.015 (5) 0.02(10) 0.052 (88) Average Length of Rule 59.6 27.1 29.9 39.7

Development

Economic Growth (percent) 4.1 2.77 2.13 3.88 GDP per Capita (USD) 12178 11196 11591 4025 GNI per Capita (ppp USD) 14341 13991 14059 5301 Human Life Expectancy (years) 70 72.5 72 .7 62.6 Infant Mortality (per thousand) 29.5 16.1 16.6 54.3

*Proportion of the total number of regimes in existence or that came into existence during the time period that ended between 1990 and 2009. **Number of regime failures in each category ***Both FH and Polity scores are rescaled to vary between 0 and 10 (higher is better)

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CHAPTER 4 THE EFFECT OF RESOURCE PIPELINES ON THE LEVEL OF DEMOCRACY AND POLITICAL STABILITY

This chapter analyzes the impact of transit country status on two political outcomes. Through regression analyses and postestimation procedures, it gives an account of the influence of natural resource pipelines on transit countries’ regime types and stability. The previous chapter explored the data set, provided details on the main characteristics of transit countries and introduced the main explanatory variables

(number of oil and natural gas pipelines, oil and natural gas pipeline length, and oil and natural gas transit capacity). In this section, the logic and theoretical reasoning behind choosing such indicators as explanatory variables are discussed, and statistical analyses with control variables are used to substantively test the descriptive distinctions between the oil and natural gas transit countries, high resource income countries, and the rest of the world.

Following the regressions and postestimation procedures, the findings show that only natural gas pipelines have statistical influence on the level of democracy and stability of the transit countries. By diffusion of regimes through pipelines, natural gas transit countries promote authoritarianism in autocratic regions whereas in regions that have a high concentration of democracies already, the promotion of democracy remains limited. I also find that, especially in lower per capita income states, natural gas pipelines make transit countries more stable. Among richer countries, the probability of regime failure is already pretty low; therefore, the positive effect of the pipelines is negligible.

Following the summary of descriptive statistics in the previous chapter, the structure of this chapter is as follows: it discusses the logic of choosing the indicators for

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the main explanatory variables. Then, separate sections report the results of the statistical tests on the dependent variables beginning with regime type and political stability. For these dependent variables there are corresponding sets of control variables and methodological discussion subsections since the coding of the dependent variable changes for each concept, and each dependent variable has different potential determinants. Finally, certain methodological specifications and alterations are reported before each regression test.

The Logic of Choosing the Main Independent Variables

There are limited means of representing the effect of pipelines since the oil industry1 is not particularly transparent. The best way to capture the influence would be to use the quantity of transit fees and subsidies received by the transit country; however, even in single case studies, it is almost impossible to collect such data. The difficulties of collecting such data is documented in the Revenue Watch Institute’s report on the lack of transparency of oil and natural gas transit operations in transit countries

(2012). This report clearly documents the secretive nature of the oil industry, especially with respect to transit tariff structure and volumes of transit gas. In order to measure transparency in transit countries, the institute hires experts from Bulgaria, Georgia,

Turkey, and Ukraine to send information requests to private companies and government institutions while simultaneously collecting the same information from websites and publicly available official reports.

1 According to a Global Witness (2004) report, a quarter of income out of oil production disappears in Angola, while a recent Kazakh-gate scandal revealed secret presidential accounts at the Swiss banks as well as at least $1.1 billion unaccounted petrodollars in Kazakhstan.

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Such investigations conclude that these four prominent transit countries do not disclose transit information publicly, mostly fail to respond to information requests, and when cooperating, provide incomplete information (ibid, 5-6). For instance, for Bulgaria, there are no publicly available figures on transit fees, revenues, or payments for its transit of gas to Macedonia, Turkey, and Greece. This is mainly due to a discretion agreement held between Russia and Bulgaria for natural gas contracts (ibid.7).

The situation is not very different for Georgia. Despite the existence of citizens’ rights to access public data within the constitution of Georgia, the researchers were not able to collect the necessary information. Furthermore, as Open Society (n.d.) reports,

Law on Oil and Gas and The Regulations of Oil and Gas Operations of Georgia also requires the companies to report public data, yet Revenue Watch Institute fails to collect necessary information from the state and operating companies. Under such circumstances, it gets even harder to collect data on transit pipelines, since even in countries that have passed necessary regulatory frameworks, the access to transit information is limited.

This low-transparency and low-accountability situation is similar for crude oil.

The Energy Charter Secretariat report paints a very similar picture on oil pipelines, their tariff structure, and transit revenues (2012). Although prepared by completely separate institutions,2 both reports suggest that negotiations are difficult to document due to confidential intergovernmental agreements. Both reports also criticize the lack of transparency in tariff negotiation processes and the fees collection (ibid, 8, 64). More

2 Similar concerns are raised by other researchers when the security aspect of energy transit is the main point of discussion (Stern 2002), 10, 30. The issue of transparency for oil and natural gas transit is important not only because of the economic repercussions but also for the security and regulation of energy transit.

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specifically, according to IEA data, by 2012 the source of 39.8 bcm/y natural gas import through pipelines is unaccounted for. More importantly, the destination of such trade is not the underdeveloped world or the nontransparent and corrupt authoritarian countries.

33.6 bcm/y is within the OECD countries with Germany accounting for at least 11.6 bcm/y. These numbers evidence how closed the natural resource trade market is globally; even in developed world.

In the Energy Charter Secretariat report the commission gives details regarding how the standard transit fees are measured in Europe and discusses the specific amounts in multiple countries (2012). Among many technical, economic, legal, and regulatory factors, the report concludes that the two most important elements that constitute the tariff calculation process are: transit capacity and utilization rate of the pipeline (ibid, 7). Other than covering the exact transit fees and subsidies or transit amount, any indicator on transit pipelines will have downsides and be imperfect.

Therefore, the point is to attempt to capture as much detail and variation across the transit cases over time in order to measure the significance and the effect of transit pipelines.

In the regression models in this section, four sets of indicators attempt to measure oil and natural gas pipelines separately. In total there are eight indicators. The first set is the transit dummy. Two indicators, gastc and oiltc, take the value of 1 if a country is a transit point at a given year. This probably does not capture enough variation since the effect should vary depending on the number of transit pipelines, their capacity, the length they travel within the country, and size of the economy. Still, within the field of resource politics similar dummy variables have been used for oil rent

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dependence before (Fish 2005; Gandhi and Przeworski 2007). Yet, they also received rightful criticisms because of their failure to capture enough variation on the independent variable and due to the availability of continuous data on rent dependence

(Smith n.d., 6). Therefore, in this study, the other three pairs of indicators measure the number of natural gas and oil pipelines passing through a country, their length, and finally, the ratio of their capacity to the GDP. In total there are four sets of indicators for natural gas transit pipelines and oil transit pipelines and all are tested in separate models.

Table 4-1 (below) lists the top five countries with highest transit capacity per GDP ratios (separately for natural gas and oil) in 2009.3 The rationale for such a transformation is to account for pipeline impact given the size of the economy. In a country with a large economy (high GDP), the effect of the pipelines should not be the same compared to a country with a small economy (low GDP). For instance, Russia

(144.2 bcm), Ukraine (127 bcm), and Kazakhstan (111.2 bcm) have the largest natural gas transit capacity figures. However, looking at Table 4-1, Moldova (5.148), Georgia

(3.251), and Uzbekistan (2.743) are the top three countries in terms of their transit capacity to GDP ratio. Compared to these three countries, Russia’s ratio is only 0.118 because of its greater GDP despite its greater transit capacity. By the logic of the hypotheses that follow, the natural gas transit capacity in Moldova (28 bcm/y) or

Georgia (35 bcm/y) as well as the expected income from this capacity should have a greater effect on their regime type and stability compared to Russia’s 144.2 bcm/y transit capacity.

3 The table is prepared according to 2009 values since the regression models cover the years up to 2009 because of the missing values in Ross’s oil rent dependence measure.

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Again, for oil transit capacity, Turkey (2.65 Million b/d), Russia (1.4 Million b/d), and France (1.4 Million b/d) are the top three transit countries; however, in terms of oil transit capacity per GDP ratio in 2009 figures, Table 4-1 lists Georgia (0.107), Belarus

(0.015), and Bahrain (0.011) as the top three. Following the same logic, the transit capacity per GDP ratio is more representative of the capacity and the effect of its eventual income compared to using raw transit capacity indicator. The next section introduces the control variables for regime outcomes, the methods used to test my hypotheses, and presents the results of the tests.

The Level of Democracy

Control Variables

I control for six variables that are associated with quality of democracy. Since

Lipset (1959), scholars associate economic development with better democratic qualities (Przeworski and Limongi 1997; Barro 1997).The log of per capita GDP controls for economic development’s effect on regime qualities. The data comes from the World

Bank (2014). Theories of the resource curse posit that natural resource production undermines democracy under certain conditions (Ross 2001; Fish 2005; Morrison 2007;

Kaya and Bernhard 2013). The log of Ross’s updated oil and natural gas income per capita measure should is used to control for the effect of natural resources (2012).4

To capture the effect of institutional and historical background, I employ the lagged dependent variable (LDV) on the right hand side of the equation (Ross 1999;

4 Because of the peculiarities with taking the logarithm, I added a value of 1 to the whole variable to move the minimum value from 0 to 1. Taking the logarithm of values between 0 and 1 creates highly distorted results while logarithm of 0 does not exist and this characteristic of natural logarithm would induce missing observations in the regression model. The practice of addition is widely used in the literature (Gasiorowski 1995; Dixon et al. 1993) and is discussed and explained at a greater length below, in the control variables section of the regime stability models.

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Herb 2005). Apart from accounting for effect of regime, the LDV also accounts for autocorrelation issues inherent to pooled time series cross sectional (TSCS) data (Beck and Katz 1995). Ross (1999) employs a five year lag and Herb (2005) uses both a one year lag and five year lag of the dependent variable. Ross also checks for Organization for Economic Cooperation and Development (OECD) membership and finds significant evidence for its effect on regime type (ibid). In addition to OECD membership, I also control for EU membership as previous studies found evidence for its positive effect on the level of democracy (Kopstein and Reilly 2000; Smyth 2006; Pop-Eleches 2009).

The OECD and EU dummies take the value of 1 for the year that a country becomes a member, unless it is very late in the year (the last two months).

One final control variable is regional democracy. Herb (2005) and others find evidence that regional levels of democracy correlate with democracy scores since cultural, historical, ideological, and geographical proximity also explain the variation in regimes (Kopstein and Reilly 2000; Gasiorowski 1995)5. Kopstein and Reilly measure the effect of Western European countries on democratization by measuring the distance of Post-Communist countries from major Western European capitals (2000).

Gasiorowski’s measure only includes the proportion of countries that are democratic at the measured year as a ratio variable (1995). On the other hand, Herb breaks down the world in six regional groups, sums the aggregated FH scores of every country in a region, and takes the average. Those averages for six regions in every year comprise the indicator for measuring regional democracy trends. This way of measurement has

5 Through different measures and approaches, other scholars also theorize the foreign influence. For instance, Boix concentrates more on the effect of great powers on countries with democratic or autocratic tendencies concerning the rivalry in the interwar period (2011). Weyland, on the other hand, stresses the importance of demonstration effect and severe external shocks from a historical perspective (2009; 2010). He also mentions the role played by the domestic actors in conveying the effect of foreign actors.

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multiple advantages over others. It does not employ region dummies, and as a result, avoids loss of degrees of freedom and brings further variation, it projects change over the years, and, finally, it includes the effect of countries that are not in the regression model due to missing data in other variables (Herb 2005, 305).

In addition to Herb’s six-region breakdown, I also checked for other regional demarcations. Among others, World Bank defines nine regions globally: Central Asia and Caucasus, East Asia, Europe, Latin America and the Caribbean, Middle East and

North Africa, North America, Pacific, South Asia, and Sub-Saharan Africa. I chose to follow the World Bank’s regional divide to measure the effect of regional democracy as it is a more comprehensive divide and conveys major local effects more efficiently. After coding 153 countries in nine regions, I followed the same procedures as Herb and calculated regional mean values of aggregated and rescaled FH scores for every year from 1990 to 2010 for those nine regions.

Although regional democracy is a control variable, in order to test hypothesis 2a6 and 2b7, which measure the effect of regional regime qualities on a country through the pipelines, the regional democracy level variable is used in an interaction model with indicators on natural gas and oil transit variables.

Methods

Due to the changes in the dependent variables for the level of democracy and stability, I use two different methods in the statistical analyses of regime-related

6 H2a: Higher transit fees and subsidized energy imports should increase the diffusion effect of the supplier countries, therefore leading to a convergence of the regime type of the transit country and supplier country.

7 H2b: Higher transit fees and subsidized energy imports should increase the diffusion effect of the user countries, therefore leading to a convergence of the regime type of the transit country and user countries.

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dependent variables. In all analyses, I test the effect of pipelines on transit countries in a global setting. The dependent variable in this section is aggregated, reversed, and rescaled FH scores. It is vital to select the appropriate method because of important issues that time-series cross-sectional (TSCS) country-year data: autocorrelation, panel heteroscedasticity, and contemporary correlation.

In order to deal with such potential statistical problems, the main statistical analysis employs ordinary least squares (OLS) regressions with panel corrected standard errors (PCSE)8. Using PCSEs deals with the issues of panel heteroscedasticity and contemporary correlation, and is also suitable for models that examine the variance across the units (Beck and Katz 1995). The models are estimated with PCSEs that calculate serial correlation, particularly for time-series analysis, with country-specific calculation with first order temporal autocorrelation correction, the

AR(1) option9. In order to get accurate confidence intervals, Reed and Ye (2011) suggest employing the AR(1) option in Stata, especially when the number of units (N) is more than the number of time periods (t) in the data ( 999). Following Reed and Ye

(2011) and others (Bergh and Nilsson 2010; Pickering and Kisengani 2006) I use the

AR(1) option.

One final issue is the use of a lagged dependent variable in the regression model. Along with Keele and Kelly (2006), Beck and Katz warn against serial correlation issues in TSCS models and suggest including a lagged version of the dependent

8 Stata 11’s xtpcse command is specifically what I use in this context. xtgls (Generalized Least Squares Estimation) command is another alternative to xtpcse, but xtpcse also works with unbalanced panels with its pairwise option and it is more suitable for this data set. Therefore, PCSEs are reported for the effect on level of democracy.

9 psar1 and rhotype(tscorr) options in Stata 11 are employed in the regressions.

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variable (LDV) as a control variable in the original model (1995). However, an LDV comes with a few problems itself. In his renowned article on LDVs, Achen posits that such variables falsely dominate the whole model while suppressing the valid effects of other independent variables and potentially bias the estimates (2000, 24).

One of the ways to deal with this problem is to resort to Prais-Winsten’s transformation and use of AR(1) procedure only (Plumper et al. 2005, 349). In doing so, the model eliminates the issues of autocorrelation while providing better estimates.

While investigating the determinants of economic growth, Pickering and Kisangani

(2006) and others (Bergh and Nilsson 2010) follow Plumper et al.’s suggestion of using the AR(1) only while excluding the LDV, while Ross (1999) and Herb (2005) employ an

LDV or do both (Ross 2006). Herb (2005) suggests one final way; mainly, to transform the dependent variable to a change variable by subtracting the value of FH scores at year t-1 from the value at the year t. That way the LDV is no longer the LDV of the newly transformed dependent variable.

Here, the main models report the results excluding the LDV. Still, in order to check for the suggestions by Beck and Katz (1995), and to address some of the substantive issues with various models, I compare the coefficients in the main models that include the LDV to those without the LDV as well as running a change model as robustness checks.

Results

Below, Table 4-2, reports the results of the regressions on FH scores and statistical significance of their potential determinants. As the models on the effect of transit pipelines on regime type show there is support for the hypothesis that transit pipelines increase the diffusion of the regional democracy, but only through natural gas

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transit pipelines. Also, there is stronger support for the diffusion theory in more authoritarian settings. Here, it is worth noting that, in the previous chapter, where the descriptive statistics were introduced, natural gas transit countries enjoyed higher levels of functioning democracy, both based on aggregated FH scores (6.78) and Polity II scores (7.51). However, when controlled for other possible factors and added interaction terms, the impact of pipelines is actually conditional on the level of democracy based on regional democratic values.

In Table 4-2 there are a total of 4 groups of models. Within these four groups, the models are divided along the lines of indicators of transit pipelines. Within each group of models, the first model includes the explanatory and control variables, whereas the model with a letter denominator consists of two interaction variables between the regional regime variable and the main explanatory variables on transit pipelines in that subgroup. First, looking at each model in isolation, reveals that the existence of oil or natural gas pipelines decrease the level of democracy across all specifications. The oil pipeline variable is statistically significant only in the second model, which has the number of oil pipelines as an indicator (p<.1). On the other hand, the natural gas pipeline variable is statistically significant across three models (p<.01), except natural gas transit capacity per GDP indicator. Furthermore, the control variables are also consistent across the models with rather unchanging coefficients and significance levels.

Looking at the role of economic development (or modernization effect), there seems to be strong support for its positive correlation with the level of democracy in any of the eight models presented here (p<.01). Expectedly, the resource curse theories

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receive confirmation across all models (p<.01). Finally, OECD and EU membership are positively related to having better levels of democracy, with their coefficients at the expected direction of effect. Still, while OECD membership is significant at the 99 percent confidence interval across all models, the EU membership is significant at the

95 percent for the models without the interaction variables. When the interaction variables are included, EU membership becomes significant at the 99 percent level.

Examining the models without the interaction variables, the substantive effect of the main explanatory variables appears to be rather limited despite the fact that the findings are mostly significant. For instance, in the first model, the explanatory variable of being an oil transit country is expected to diminish the level of democracy by 0.348 point when controlled for other explanations (p<.01). Considering the fact that the dependent variable (FH scores) is aggregated, reversed, and rescaled (it ranges from 0 to 10), the change corresponds to very weak change; almost 3-4 percent overall variation in the level of democracy.

Again, in the second model, an additional pipeline is expected to decrease the level of democracy only by 0.082 points (p<.1). The natural gas transit countries, on average, have 3 pipelines and the maximum number is 11. Even having the maximum number of pipelines does not have a substantive effect on the dependent variable and less than an expected single point change in the dependent variable. The coefficient is slightly larger for oil pipelines variable, -0.114 (p<.1), although the maximum number of oil transit pipelines is 610 within the data set.

10 Russia in total has six international oil pipelines.

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The result is similar for the third model. In Model 3, only natural gas transit pipeline length variable is statistically significant (p<.05). However, the substantive impact for an additional thousand kilometer of pipelines is only -0.13. The average pipeline length is only around 1.4 thousand kilometers across natural gas transit countries, with Russia hosting the longest gas pipeline network (12.4 thousand kilometers). Again, the overall negative effect of the natural gas pipelines is negligible.

Finally, the pipeline indicators in Model 4 are not significant.

In the end, the direct substantive effect is rather limited in all models. Pipelines do harm levels of democracy in transit countries and the findings are mostly statistically significant for natural gas pipeline indicators (3 out of 4 models), while there is much less support for the oil pipelines. The difference between the effect of natural gas pipelines and oil pipelines shows the importance of the peculiarities of gas networks, compared to its oil counterparts. As explained in the earlier chapters, because of the physical and chemical characteristics of natural gas, two types of pipeline networks have different markets and transportation schemes as well as varying political and economic negotiations and commitments (more on this below).

Looking at the models with interaction variables in all four groups (in Table 4-2), the interaction variable is statistically significant for natural gas pipelines in all four models, while the oil pipeline interaction is only significant for oil pipeline length indicator. However, regarding the interactions of most comprehensive and well-formed indicators of interest, that are oil and natural gas transit capacities per GDP and regional democracy levels interactions, only natural gas variable is statistically significant (p<.01). Also, the diagnostic tests show that Model 4a is the most

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comprehensive model and it statistically performs better than the other models. Model

4a also has the highest R-squared statistics across all models (.9567).

Before moving on to substantive impact of pipelines and its theoretical implications about regional democracy levels and regime diffusion, I employed additional controls for the outliers of natural gas transit capacity per GDP (Moldova) and oil transit capacity per GDP (Georgia) as part of robustness checks and reported the models in Table 4-3. The table compares the results from the original models, Model 4 and Model 4a, listed in Table 4-2. Interestingly, controlling for Moldova and Georgia, natural gas transit capacity per GDP variable and its interaction with regional democracy level ameliorate their significance and coefficient values. The impact of the transit capacity per GDP indicator improves from -0.477 to -0.57, while the value of the interaction variable for natural gas changes from 0.073 to 0.097. However, oil transit capacity per GDP and its interaction are not statistically significant even when controlled for Georgia, which is a major outlier case as Table 4-1 lists above. The next section discusses the substantive meaning of the pipelines and the interaction variables through a series of tables and figures.

With the inclusion of the transit pipeline and regional democracy level interaction variables, the impact of pipelines increase and the effect is no more negligible even without the interaction term. In two-by-two tables, Table 4-4 displays the substantive impact of the interaction variables in Table 4-2, models 1a, 2a, and 3a. Natural gas transit country, regional democracy level indicators, and the interaction term are statistically significant in both models (p<.01). The table shows how the effect of the

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pipeline changes at low and high levels of regional democracy.11 For instance, in the first two-by-two table (Table 4-4A), when the regional democracy levels are low, or in other words, in more autocratic regions, being a gas transit country decreases the level of democracy by 1.88 points (the difference between the values of the first raw).

However, when the regional democracy levels are high, or in other words, in more democratic regions, being a gas transit country increases democracy levels by 1.48 points.

Much like the first table, the second two-by-two table (Table 4-4B), displays the expected effect in Model 2a. Compared to non-natural gas transit countries, when the mean number of transit pipelines (the mean number is around 2.7) are introduced in more autocratic regions the level of democracy decreases by 2.79 points, while in more democratic regions, the effect is much more modest - an improvement of 0.54 point.

Finally, the last two-by-two (Table 4-4C) table displays the expected impact in Model 3a.

When a country is introduced with average length of pipelines transit (around 1500km), it loses around 2.34 points in more autocratic regions, while in more democratic regions the pipelines only help to increase its democracy score by 0.45 point.

There are two major interpretations of the findings in Table 4-4. First, pipelines do not necessarily promote authoritarianism or democracy by themselves, but rather, they act as channels to diffuse the regional levels. Secondly, the promotion of autocracy is a much stronger effect compared to democratic diffusion in all three models.

Especially, in Model 2a, the drop from 5.2 points to 2.41 points is almost a 3 point change, at a 10-point scale of FH scores, making the affected country an authoritarian

11 Low level of regional democracy is defined as 1 out of 10 while high level of regional democracy is defined as taking a value of 9 out of a possible score of 10.

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one if it is based in a more autocratic region. All three models support the diffusion theory, with emphasis on authoritarian demonstration effect or autocratic diffusion through pipelines in areas that are lacking democracies.

This final section demonstrates the impact of the most comprehensive transit indicators which are transit capacity indicators per GDP. These indicators, as mentioned previously, take into account, not only the possible amount of transit but also the size of the economy. Intuitively, the transit of natural gas in small economies like Georgia or

Benin should have a higher effect compared to bigger economies like Russia or

Germany. In order to demonstrate the role of natural gas pipelines on the level of democracy after the robustness checks in Model 5a of Table 4-3, a series of figures display the impact at different levels of regional democracy. Figure 4-1 displays the substantive effect of natural gas pipelines at low (1 out of 10) and high (9 out of 10) levels of regional FH scores. The vertical lines are 95 percent confidence intervals for marginal effects at varying levels of pipeline transit capacity per GDP. The x-axis of the figure ranges from the natural gas transit capacity variable’s minimum value to the value at two standard deviations above the mean (mean+2SD).

In regions with higher levels of democracy, where the regional democracy score is high, the effect of pipelines is again lower than the effect in more autocratic regions.

In more authoritarian settings, there is growing authoritarianism in transit countries. For instance, compared to a country with no transit capacity, a country with two standard deviations above the mean natural gas transit capacity per GDP ratio (around 2.86) would be 1.4 points more authoritarian. The effect in more democratic regions of the world is more limited. With the same amount of change on the transit variable, the

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impact is around 0.9 point. Considering the results of the previous models and a more representative transit capacity per GDP indicators, the hypothesis that regimes diffuse through pipelines is valid with statistically significant results.

Yet, there are two conditions on the hypothesis. The first condition is that the proposition is only statistically significant for natural gas pipelines. For oil pipelines, the results are inconsistent and are not significant when controlled for the outliers. The second condition is that the effect of is more visible in authoritarian regions; in relatively democratic regions (like Europe), the expected effect is smaller according to the models and Figure 4-1.

Robustness Checks

The models lead to the conclusion that there are statistically significant effects of natural gas transit pipelines on levels of democracy, yet, there is not enough support for oil pipelines. Before moving into theoretical implications of this finding, this section addresses the previously introduced methodological discussions as well as controlling the results for robustness by employing Polity IV Project’s revised, combined, and rescaled polity scores.

Initially, despite Beck and Katz’s suggestion of employing the LDV, Christopher

Achen strictly criticized the inclusion of it in the TSCS models (2000). Later, Plumper,

Troeger, and Manow (2005) have confronted the use of LDV in regression models because inclusion of the LDV gives biased estimate results and offered to use the AR(1) procedure instead. Here, I rerun the results both by following the original suggestion by

Beck and Katz as well as following Herb’s (2005) idea of running a change model. To start with the models with the LDV, when the LDV, which is FH scores at time (t-1), is included in the models, there are a few certain changes.

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First of all, log of GDP, OECD membership, and EU membership lose their significance across all the models. Since, Plumper et al. (2005) and others (Achen

2000; Reed and Ye 2011; Pickering and Kisengani 2006) already expect suppression of legitimate effects of other variables, this change is consistent with their criticism.

Regarding the significance of the main independent variables in every model, all oil transit indicators are still statistically insignificant, except oil transit dummy in Model 1 which excludes the interaction variable.

The oil transit capacity per GDP and regional democracy interaction is significant, but it loses the impact once Moldova and Georgia controls are added to the model.

Finally, natural gas transit variables and their interactions are still statistically significant in these models, though they lose some impact and part of their significance levels

(p<.05). The interactions with the gas transit are also significant with a smaller confidence level (p<.05)12. Again, the loss of significance and legitimate impact is expected when the LDV is included in the models since major authors reject this approach largely based on this reason.

Before moving on to robustness checks with Polity scores, Herb attempts to deal with the LDV’s repercussions by transforming the dependent variable and running a change model by subtracting the value of FH score at year t-1 from the value in the year t (2005, 307). Now that the dependent variable is the change in the FH scores from year t-1 to year t, the LDV in the model, that is FH(t-1), is no longer a lagged dependent variable. Similar to Herb’s findings and interpretation, FH(t-1) has no longer an inflated coefficient in robustness checks. In the replication model with the LDV, the coefficient is

12 Table 1 in the appendix includes the whole set of replication with the LDV.

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(0.932) and in the change model it is much smaller, (-0.068). However, the coefficients and the significance of the rest of the variables remain unchanged. Therefore the change model does not provide any additional insight.

Models with the Polity Data

There are multiple robustness checks on the findings regarding the determinants of the level of democracy. Using the Polity IV Project’s revised and combined polity score (polity2) as a robustness check, I rerun the same models with polity2 as the dependent variable as well as controlling for main outliers, Moldova and Georgia. Like the FH scores, the polity scores are rescaled to vary between 0 and 10, with 10 meaning higher level of institutional democracy and 0 meaning higher level of institutional autocracy. Table 4 reports the results with Polity data as well as the robustness checks with Georgia and Moldova as dummy controls. Looking at the control variables, all controls, except EU membership keep their expected direction and significance levels. EU membership is only significant at a one-tailed test (p<.1). The results remain unchanged with the inclusion of the interaction variables.

Regarding the values and significance levels of main independent variables in

Table 4, the results are almost identical with those including FH as the dependent variable. The substantive results are consistent. Natural Gas Transit Capacity per GDP is not significant in Model 1 and becomes significant (p<.001) when interacted with regional democracy levels in Model 1a. However, the oil transit capacity per GDP indicator or its interaction with regional democracy is not significant, unlike the models 4 and 4a in Table 4-2. Therefore the substantive impact is similar to the FH models with a few nuances. In order to demonstrate such nuances, similar to the FH models, the interaction variable for natural gas transit capacity per GDP is plotted to show the

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marginal impact on the level of democracy. Figure 4-2 shows the effect of natural gas transit capacity per GDP on Polity scores in high and low regional institutional democracy levels. As the figure displays, in more democratic settings, the effect of pipelines is rather restricted. Compared to a country with no transit capabilities, a country with two standard deviations above the mean transit capacity ratio has only 0.20 point better conditions for democracy. Although this is a statistically significant effect, it is negligible since it merely corresponds to a 2 percent change at a 10-point scale.

In more autocratic regions, the interaction impact is much larger. At the same level of variation between a transit country and a non-transit one, the one with pipelines has 1.4 points worse conditions for democracy. Therefore, in more authoritarian regions, the impact of pipelines is much more significant, showing better conditions for the diffusion of regime through pipelines. Finally, Model 2 and Model 2a control for the outliers of transit capacity variables, Georgia and Moldova. In Model 2 of Table 4-5, only

Georgia demonstrates a significant effect; though the coefficient of Moldova gains significance in Model 2a. However, the significance of natural gas transit capacity per

GDP and its interaction remain unchanged. The direction of the coefficient is in the expected path and is consistent with other natural gas indicators used in FH models previously.

To conclude, the diffusion of regimes through pipelines argument has statistical support only for natural gas pipelines. There is stronger support for diffusion of authoritarianism rather than democracy diffusion. The potential reason for lack of statistical support regarding the effect of oil transit pipelines is that they do not possess the unique characteristics of natural gas transit pipelines. As mentioned earlier, the oil

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pipelines are not as indispensable as natural gas pipelines since there are other ways of transporting oil between the markets. However, for natural gas pipelines, interdependence among the participating countries is more concentrated and intense.

Among other reasons, this deep interdependence is mainly because transporting natural gas through means other than resource pipelines is more costly and participating countries do not always have better economic alternatives compared to the pipeline trade13.

There are two more points to be stressed about the nature of diffusion effect through natural gas pipelines. First, the hypothesized effect of the pipeline variables is not necessarily independent of regional democratic values. Although there is evidence to support the idea that pipelines promote more authoritarianism even when it is not interacted with the regional democracy variable, there is stronger evidence for the interaction term. Theoretical formation of this research also supports the idea that the effect of pipelines depends on regional democracy levels as well as the supplier and the user countries’ influence on the transit country. This theoretical nuance leads to the second point where the full impact of the natural gas pipelines is still suppressed to a certain extent in regression models (and note in the case studies), because of the bi- directional effect of the pipelines.

13 One observable dependency on natural gas pipelines and diffusion of influence through pipelines is demonstrated also by Moraski and Giurcanu (2013). Examining the voting behavior in the Parliamentary Assembly of the Council of Europe (PACE), the authors find that higher dependence on Russian natural gas lowers the probability of condemning Russian violation of sovereignty of Georgia and the ceasefire agreement following the Georgian-Russian War in 2008 (ibid, 447). Still, their finding is not directly an instance of diffusion of democratic/autocratic norms and values; rather, it refers to nuances regarding the nature of pipeline politics; a U-shaped effect of energy dependence and sub-regional variations. Yet, it also consists of evidence regarding the repercussions of high natural gas dependence and transmitting power through pipelines, therefore demonstrating how pipelines function as not only an economic connection, but also channels of political power.

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Although there is ample variation on the dependent variable (especially in more authoritarian settings) which allows us to observe a significant relationship in this sample, the real effect could be higher. The diffusion of regimes argument includes two possible effect directions: one coming from the supplier and the other coming from the user. However, the structure of the OLS regressions14 only allows the model to investigate the role of regime diffusion on the regime of all transit countries in a unidirectional way, therefore losing potential explanatory power due to summing the effect of multiple streams of influence. For instance, while calculating the diffusion effect of natural gas pipelines in Ukraine, one has to consider the likely effect of the supplier,

Russia, and the user countries (various Western, Central, and South East European

Countries) independently.

In a case study, it is possible to dissect the potential relevance of various players in the region independently, and, through process tracing, it is possible to demonstrate the diffusion effect more clearly. However, in a regression model, the model loses explanatory power due to aggregation and in search for external validity for the general hypothesis. In the end, this could potentially lead to a smaller coefficient for the transit pipeline indicator and its interaction. This is another reason why combining small-N analysis and large-N analysis in this research is the best way to establish internal and external validity as well as demonstrating the effect of pipelines on the level of democracy in case level and worldwide.

14 Coding the data in a way to observe all potential relationship between dyads could enable to measure the impact through a regression model; however, this would lead to absence of some of the potential control variables and would require a completely different process of data collection and coding.

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One final note is about how these findings relate back to the literature on diffusion. The findings support the linkage politics argument of Levitsky and Way (2005;

2010) to a certain extent, while demonstrating a more nuanced feature of linkage, namely natural gas pipelines. In addition to linkage politics, the findings on regime qualities also bring forward a specific mechanism of regime diffusion, discussed within the literature in the form of regional democracy (Gasiorowski 1995; Herb 2005) as well as in the form of authoritarian convergence in other studies (Silitski 2010). Among the possible theoretical connections, Levitsky and Way count five possible channels of linkage as: economic, geopolitical, social, communication, and transnational civil society linkage (2005; p.21-22). Diffusion through pipelines qualifies for almost all five types of linkages with economic linkage being the first initiator. However, especially because of the nature of natural gas pipeline connections, the initial economic linkage brings forward additional linkage potentials, and despite the fact that Levitsky and Way see linkage from the Western perspective, balanced through dark knight status of Russia in certain cases (like Belarus), diffusion of regimes can also be promotion of authoritarianism as the regressions show.

Silitski, on the other hand, explains this phenomenon through authoritarian convergence (2010). Following the electoral revolutions in the post-communist space and rise of Russian authoritarianism with regional dominance, the surviving authoritarian regimes strengthened themselves getting close to becoming full-blown authoritarian (ibid; p.340). It included authoritarian learning from electoral revolutions as well as regional cooperation groups and assistance from Russia. In the end, the regression findings confirm the notions of diffusion, especially in promotion of

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authoritarianism, coupled with the effect of natural gas pipelines as catalysts in the process.

Regime Stability

Following the results on regime type (FH scores), this section presents statistical tests of the effect of being a transit country on regime stability. It starts with briefly introducing the control variables for Geddes et al.’s data on regime failures

(forthcoming). After discussing my methodological treatment of BTSCS data and specification of the main statistical analysis, it reports the results of the tests.

In previous chapters I discussed case evidence from Belarus and Georgia on the effect of pipelines on regime stability and presented descriptive statistics that compare the average regime duration and regime failure rate of oil and natural gas transit countries in comparison to high resource income countries, and the rest of the world.

Through varying mechanisms, the case studies demonstrated a stabilizing impact for transit pipelines in both countries. Furthermore, based on descriptive statistics, oil transit countries have a lower rate of regime failure compared to other groups, while high resource income countries have longest length of rule under a single regime.

However, these findings are only descriptive and there are no statistical controls. In this section, at the global level, ordinary logit analysis with cubic splines and cubic polynomials test the initial hypotheses in search of external validity and further confidence in the initial findings. While doing so, it is essential to control for other variables that might influence regime stability. The following sections explain the control variables, discuss the methodology of the regression analysis, and report the results of the tests. The regressions suggest that natural gas pipelines decrease the probability of regime failure while there is not enough statistical support for oil pipelines. Although this

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variation between natural gas and oil pipelines was not observed in the case studies, there is clear variation based on the regression results. Finally, in a more nuanced way, the stabilizing impact of natural gas pipelines is higher among the lower per capita GDP countries, while for the rich countries the effect is negligible due to the fact that they already have lower probability of regime failure.

Control Variables

One of the control variables considered to have an effect on regime stability is ethnic fractionalization. Horowitz (1985) finds evidence that more fractionalization leads to instability and it is a common control in the regime change literature (Bernhard et al.

2003; Gasiorowski 1995; Morrison 2009). For this control, Roeder’s (2001) index is a common indicator. The index has two observations for ethnolinguistic fractionalization: one for 1961 and one for 1985. Since all observations in this dataset are from post-

1990, I code the 1985 values of Roeder’s index for the respective countries. The index ranges from 0 to 1; higher scores meaning a higher probability that two randomly chosen people in a country belong to different ethnolinguistic groups.

Additional controls include natural logarithm of per capita GDP (Lipset 1959;

Morrison 2009; Przeworski et al. 2000; Smith 2004; Smith n.d.) as well as variables to test for economic crises that are logarithm of GDP growth (Escribà-Folch and Wright

2010; Smith 2004; Smith n.d.) and logarithm of inflation (Gasiorowski 1995). 15 The data for the first two come from the World Bank, whereas for inflation, I use the IMF

15 Since logarithm of negative values and 0 do not exist and logarithm of values below 1 is highly distorted, Gasiorowski adds the lowest variable value plus 1 to the original values of the variable (1995, 895). For instance, lowest values for growth and inflation are -51.03 and -72.73, respectively. Following Gasiorowski, I added 53 and 74 to the values of growth and inflation, respectively, before taking the logarithm of the variables. Dixon et al. discusses this procedure in a similar context in their research as common practice (1993, 985).

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indicator as it has far fewer missing values compared to World Bank. Per capita GDP and growth are hypothesized to decrease the probability of regime failure.

I also control for urbanization (Huntington 1968; Morrison 2009). Morrison hypothesizes it to increase the probability of regime failure, although usually urbanization is correlated with GDP. Another control is trade dependence (Gasiorowski

1995). Trade dependence is the sum of imports and exports divided by the GDP of a country to stand for its reliance on other countries compared its national economy and is hypothesized to decrease the probability of regime failure. The data is from the World

Bank.

Also, using the same data as before, I control for natural resource dependence

(Morrison 2009; Smith n.d.). Higher reliance on natural resource rents is associated with higher probability of regime failure. One final control is the age of the regime

(Gasiorowski 1995; Morrison 2009; Smith 2004; Smith n.d.; Ulfeder 2007). The variable stands for the years passed since the last regime failure. Again, I use the natural logarithm of the age of the regime following Gasiorowski (1995) and include regime duration in the analysis controls for institutionalization of the regime. The result dictates that the more time that passes after the establishment of the regime, the less likely it is to fail (Gasiorowski 1995). The next section discusses the methodology of the regression analysis and the possible methodological problems to be aware of.

Methods

The dependent variable for regime stability is Geddes et al. (forthcoming) regime failure indicator. The indicator takes a value of one when a regime fails and makes a transition from democracy to autocracy, autocracy to democracy, or a transition

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between different types of autocracies16. Therefore, since the dependent variable is binary, testing for regime change, I follow Beck et al.’s suggestion to perform ordinary logistic analysis with cubic splines (1998). The errors are clustered around the country code.

Much like the issues that exist in previous models regarding the level of democracy, there are also certain problems that binary time-series cross-sectional

(BTSCS) data suffer from. To correct for such issues it is important to account for temporal dependence in the data. Including the age of regime and its cubic splines as control variables corrects the ordinary logistic regression models of BTSCS data for temporal dependence, matches the ordinary logistic regression technique to survival analysis models, and thus improves the earlier specification (Beck et al. 1998, 1270).

Therefore, including the regime duration variable and its splines in the analysis has additional functions other than controlling for the institutionalization of the regime.

Despite being the dominant approach in regime change literature, there are also criticisms and alternatives to the use of cubic splines. Carter and Signorino (2007) criticize the cubic splines because of Political Scientists’ arbitrary knot selection in creating the splines without any detailed knowledge about the characteristics of knots or even which spline type to implement (14-8). As an alternative, they suggest using cubic polynomial of time, t, 풕ퟐ, and 풕ퟑ, (squared and the cubic term of the age of regime variable instead of the cubic splines) in approximating the hazard. The authors suggest that this approach performs as good as the cubic splines and better than the country dummies, although not completely ruling out the use of splines as an alternative.

16 When autocracies are concerned, the authors specifically observe the transitions between single party, monarchy, military, and personalistic regimes (Geddes et al. forthcoming).

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In the end, I follow Beck et al.’s suggestion of using restricted cubic splines

(1998) to estimate the coefficients, the results, and the figures due to the convention in the literature (Morrison 2009; Smith 2004, n.d.; Sorli et al. 2005; Tusalem 2010). Still, in order to be sure about the reliability of the tests, I also run several robustness check models later in the results section. These results are reported separately.

Results

There is support for the hypothesis that transit pipelines improve the stability of the countries they are installed in. However, after postestimation procedures and robustness tests, I show that compared to the effect of oil transit pipelines, there is stronger evidence for the argument that natural gas transit pipelines decrease the probability of regime failure. This is largely due to the fact that natural gas pipelines require more robust cooperation between the participating countries of the pipeline and because gas transit lacks alternative economically viable trade options.

The stability of the transit country is in the interest of both supplier and user countries. The user countries want a stable route without any interruption on the supply of natural gas while the supplier countries would like the same kind of stability for continued flow of revenue. Any kind of regime change would come with insecurity as well as uncertainty about the nature of the international agreements on supply of energy. Therefore, stability and security of the natural gas transit country are of the interest of all participating countries. However, in the case of oil transit pipelines, the suppliers and users are not necessarily too concerned with the stability of the transit country as there are other options to buy oil in the case of pipeline flow disruption. This leads to less interest in the stability and security of the oil transit country. Ultimately, the results confirm two things. First, the hypothesis about the influence of natural gas transit

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pipelines on regime stability. Second, the specific mechanism of such natural gas transit pipelines that is associated with more regime stability, since two pipeline indicators have varying levels of significance and direction of effect.

Table 4-6 lists the four models that examine the determinants regime survival.

The coefficients are raw coefficients with robust standard errors, clustered around the country code reported in parentheses. In all models, cubic splines are included but not reported17. Across the four models, I test for the effect of natural gas and oil transit pipelines on regime failure. The models include all control variables and two potential indicators of natural gas and oil transit pipelines. Only in the fourth model are the two pipeline indicators, natural gas and oil transit capacity per GDP, statistically significant.

Although it is not possible to make a substantive interpretation of the raw coefficient in the model, looking at the signs, it is possible to say that natural gas transit capacity per

GDP is negatively correlated with regime failure (p<.01) while oil transit capacity per

GDP is positively related to probability of regime failure (p<.001), controlling for other possible determinants.

Other than the main independent variables, three controls are also statistically significant for the probability of regime failure. Two economic variables, the natural logarithms of the GDP growth rate and of per capita GDP decrease the probability of regime failure across all models. These findings support the theories of economic development and economic crises literature on regime failure. Though, another

17 In creating the cubic splines, the knots are selected in 2, 8, 17, 36, and 99 years as suggested by the statistical software. These are the corresponding years at the 5th, 25th, 50th, 70th and 95th percentiles of the regime duration variable.

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economic crisis control variable, logarithm of inflation, is not statistically related to regime failure in any of the models.

Other than the economic variables, the age of regime also appears as statistically significant across all models, bringing substantive evidence for institutionalization arguments on regime stability. Aside from these three control variables, there does not appear to be any support for ethnolinguistic fractionalization, urbanization, or trade dependence arguments on regime stability. Finally, for resource curse variable, the logarithm of natural resource dependence per GDP, there is no support across the models18.

Since transit capacity per GDP indicators take the size of the country’s economy into account, they are the most representative of the transit effect compared to other indicators of transit impact. Furthermore, the models in which they are included in also have the best goodness of fit measures compared to the other three models as well as a base model (not reported) that excludes all control variables. Therefore, statistically,

Model 4 is the best to examine the determinants of regime failure. There are a few measures of fit for logistic regression models, like AIC, BIC, and negative log likelihood.

In all three measures Model 4 performs better than the other three models and the base model, with values of 0.273, -19497.698, and -338.665 respectively. Therefore, these three scalar measures of fit provide support for Model 4.

Table 4-7 presents the substantive results of the fourth model in odds ratios.

Based on the results of Model 4, the table reports the percent change in the odds of

18 As part of robustness checks, I ran the same models with the raw version of natural resource dependence variable (excluding the logarithm). I also excluded the main transit pipeline variables and reran the models. In any of those robustness checks, despite small changes in coefficients and p values, the results were still the same for all control variables.

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regime failure for a standard deviation (SD) increase in the independent variables. Only the odds ratios for statistically significant variables (p<.01) are listed in the table.

Looking at the percentage changes, younger regimes, poorer countries, and countries with low or negative growth rates are more susceptible to regime failures.

Regarding the two main explanatory variables, an increase in natural gas transit capacity to GDP by one standard deviation decreases the odds of regime failure by 37 percent while an increase of the same magnitude in oil transit capacity to GDP ratio increases the odds of regime failure by 16 percent (p.<.01). This provides a mixed support for the hypothesis that pipelines decrease the probability of regime failure.

However, as the section on robustness checks for outliers and influential cases will demonstrate, the effect of oil pipelines is generated single-handedly by the Georgian case. Speaking only for the odds ratios of natural gas transit variable’s effect, a SD change is around the ratio of 1.35 and responds to countries like Belarus (1.18),

Slovakia (1.08), and Togo (1.58) according to figures for 2009. Among those countries,

Belarus and Slovakia are transit countries for Russian and Central Asian natural gas since the late Cold War years whereas Togo has been a transit country for Nigerian natural gas transit to Ghana since 2008.

Although natural gas transit capacity per GDP decreases the odds of regime failure by 37 percent with a SD change, its effect varies at different levels of per capita

GDP. When considered along with per capita GDP, at different levels, the effect of natural gas transit pipelines on the probability of regime failure changes. Figure 4-3 displays the changing effect of natural gas transit pipelines at varying levels of per capita income. The y-axis shows the probability of regime failure while the x-axis shows

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the change in the main explanatory variable - natural gas transit capacity per GDP ratio

- moving from no transit capacity to an average and two standard deviation ratio.

Substantively, in high per capita GDP income countries, the transit pipelines’ effect on probability of regime failure is not very significant. This is mainly because richer countries often do not experience regime failure. Therefore, the starting point of the probability of regime failure is already very low on the scale. On the other hand, in low per capita income countries, introduction of natural gas transit pipelines brings stability. In fact, the poorer the country, the greater the effect of natural gas transit pipelines on decreasing the probability of regime failure.

Such a finding perfectly fits the theoretical framework of this research since it argues for greater effect in smaller economies and poorer countries. That is not to say that transit pipelines do not have any effect in larger economies or richer countries, but the substantive effect should be negligible and it should be hard to observe even through case studies. For instance, in countries with high per capita GDP and bigger economies like Germany, Russia, and France, it is harder to observe the effect of being a natural gas transit country compared to low per capita GDP countries and smaller economies like Moldova, Uzbekistan, and Togo. Although all six countries are natural gas transit countries, even a case study on the influence of natural gas transit on regime stability in France would be rather inconsequential. Yet, a case study on Moldova or

Togo (which became a transit country very recently) would provide more significant results. In the end, the regression results and the figure above exhibit that natural gas transit pipelines bring stability to the countries they are installed in, with greater levels of influence in poorer countries and smaller economies.

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One final point that is important to mention about the substantive models is the insignificance of trade dependence variable. Much like transit capacity measures, trade dependence is measured as the ratio of total imports and exports of a country to its

GDP. Statistical support for the effect of transit capacity measures and statistical insignificance of trade dependence on regime failure adds further nuance to the initial theoretical explanation on transit pipelines’ effect on regime stability. These findings suggest that not all kinds of trade have an influence on regime stability. While natural gas transit capacity per GDP ratio is a determining factor in increasing the stability of a regime, other kinds of trade are not necessarily a deciding factor for regime failure. This further supports the initial theory because it supports the argument that it is not the trade itself that brings stability, but it is the particular characteristics and peculiarities of natural gas pipelines and its conditions for trade.

Robustness Checks for Outliers and Influential Cases

Model 4 in Table 4-6 showed both natural gas and oil transit capacity per GDP ratios as statistically significant in affecting regime stability. The sign of the natural gas coefficient is negative, meaning that it decreases the chances of regime failure, while the sign and the eventual effect for oil is the opposite of natural gas, increasing the probability of regime failure. However, this is mainly caused by a single outlier of oil transit capacity per GDP ratio variable, Georgia.

Georgia first became an oil transit country when Baku-Supsa oil pipeline was introduced in late 1998, with Georgia receiving 8 cents a barrel transit fee for allowing

Azerbaijan to export its oil to the world markets through the Supsa port. The 831 km long pipeline started to bring 8 million dollars per year, with 150 thousand b/d transit capacity. Then in 2006, 1070 kilometers long Baku-Tbilisi-Ceyhan oil pipeline was

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commissioned. The Baku-Tbilisi-Ceyhan pipeline has a much bigger transit capacity than the Baku-Supsa pipeline and carries up to 1 million b/d to Turkey and the world oil market. From this agreement, Georgia receives up to 13 cents per barrel since the introduction of the pipeline. At the same time, strictly speaking in terms of regime failures, the country experienced three instances of failures since 1992, as Geddes et al. report (forthcoming), in 1992, 2003, and 200419. Therefore, out of 113 regime failures covered between 1990 and 2010, three of them occurred in Georgia and this mainly drives the negative effect of oil transit capacity per GDP on regime stability.

Table 4-8 reports the results of the robustness checks on the original models.

There are two sets of regressions in this table. The first set of models includes the cubic splines and is methodologically identical to the models in Table 4-7. These are the models from Model 1 to Model 5. The second set of models does not include the cubic splines and instead runs by using t, 풕ퟐ and 풕ퟑ to account for temporal dependence, as in certain cases they are considered superior to cubic splines (Carter and Signorino 2007).

In all the models, the usual control variables from Table 4-5 are included, but not reported in the table for briefness. And finally, Model 1 is the original model from before, the model for reference when comparing the robustness check models.

The models with the cubic splines will be examined first. To start with the first model, as reported before, it has both natural gas and oil transit variables as significant.

However, when controlled for the outlier country, Georgia, the oil variable is no longer

19 According to the codebook of Autocratic Regime Data, the authors note the overthrow of the Gamsakhurdia government in January 6 1992 by the National Guard and militia forces, fall of Shervardnadze Government in 2003 Rose Revolution, and the replacement of the interim government in 2004 (2014, 63).

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significant while natural gas variable remains statistically meaningful (p=0.017). Other control variables do not show any change in their significance.

Several other additional robustness check measures were included in the table.

First, Cook’s Statistic determines the influential cases in the regression model by dropping one observation each time and computing the change in the original coefficients. By standard, any value above 0.8 is considered to be too influential and excluding these cases and rerunning the regression examine whether such cases change the significance of the explanatory variables. Out of 2582 observations, the regime failures of Armenia 1994 (1.18), Thailand 2006 (1.03), and Thailand 2007 (1.66) stand out as the influential observations in the model.

As it is seen by looking at the change in the number of observations in Model 3, the model excludes only the three influential cases from the original model and reports the results. Although the coefficients of the natural gas and oil transit pipeline change, the significance of the variables remains intact. Second, following the report from the influential cases, I also controlled for the all observations of Armenia and Thailand.

Again, the significance of the main independent variables did not change despite small variations in the coefficients and the error terms. However, Thailand is positively related to regime failure. Finally, Model 5 controls for Georgia, Armenia, and Thailand at the same time. Similar to the results in Model 2, oil transit capacity variable loses its significance while natural gas transit capacity is still statistically significant at the 95 percent confidence interval (p=0.025). Interestingly, in this model, Georgia and Thailand are both statistically related to regime failure positively (p<.01).

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In order to account for the criticisms of Carter and Signorino (2007) and suggest an alternative way of estimating the coefficients of regime failure, Model 6 includes the squared and cubic terms of the duration variable in the original regression model (t, 푡2 and 푡3) instead of the cubic splines.20 These models function as additional robustness check on the original findings. As the right hand side of the Table 4-8 displays, the results change only slightly, with oil and natural gas transit pipeline variables having slightly bigger error terms, still remaining statistically significant at the conventional levels (p<.05).

Although, not reported in the table, the regime duration variable is also slightly less significant (p<.05) and unlike the cubic splines in previous models, the squared and cubed terms of the regime duration variable (the cubic polynomials) are also statistically meaningful (p<.05). Again, in order to account for the major outliers, Model 7 includes

Georgia as a control variable. Similar to the models with the splines, the oil transit pipeline variable is no longer significant while natural gas transit pipeline variable only has a slightly larger error term (p<.05). This time adding Georgia to the model makes a significant change.

A separate Cook’s Statistic test points out the influential cases; though this time only Armenia appears as an influential case. However, when controlled for in Model 8, the substantive results remain unchanged. Although Thailand does not appear as an influential case in the Cook’s Statistic test, I still controlled for its effect. Model 9 reports

20 As a part of further robustness tests, in addition to the four original cubic splines I generated in the initial models by selecting five knots, I replicated the original set of models employing Beck et al.’s (1998) selection of three knots at the years 1, 4, and 7 and thus creating two restricted cubic splines. In rerunning the original models with the new set of knots and cubic splines as additional robustness check, the results were unchanged.

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the model that controls for Thailand’s effect. Again, the coefficient of natural gas transit capacity per GDP remains unchanged.

In addition to the effect of pipelines on democracy, it is safe to conclude that natural gas pipelines also bring regime stability to the countries that they pass through.

As part of its nuanced effect of decreasing the probability of regime failure, natural gas transit pipelines have a higher influence on lower per capita income countries compared high income ones. However, despite initial support for the oil pipelines’ effect, the postestimation analysis and robustness checks show that the effect is driven by a single transit country case, Georgia.

The difference between the effect of oil and natural gas transit countries mainly stems from the peculiarities of natural gas pipeline trade and the economic conditions underlying gas agreements. Unlike oil trade, trade through pipelines is by far the most viable option for transporting natural gas. However, this comes with high fixed costs and inflexible international financial agreements. Second, unlike oil, it is hard to store natural gas cheaply and many user countries do not have large storages for gas. Because of such reasons, the stability of the transit countries is essential for both supplier and user countries due to economic and energy security concerns.

Regime failures in the transit countries would bring insecurity to the pipeline route as well as uncertainty for future energy supply. This is why in the official documents of the European Commission regarding its energy policy, the mutual interests, predictability, and stability of transit states, producers, and consumers are mentioned as part of EU’s particular focus while promoting modernization of the pathways of pipelines

(Market Observatory for Energy 2010, 3). Encouragement of the stability of transit

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pipelines by the suppliers and consumers, which have high stakes in those pathways, is an essential mechanism in upholding regime stability in transit countries.

Conclusion and Further Research

This chapter presented the tests on the hypothesized effects of resource pipelines on the level of democracy and stability of transit countries. The substantive results concluded that natural gas pipelines make transit countries more authoritarian in authoritarian regions of the world while there is not as much of a democratizing effect in regions with high democratic levels. Yet, in addition to the case evidence in previous chapters, the theory of regime diffusion through pipelines finds statistical support in a global data set.

There is also support for the influence of natural gas pipelines on the stability of transit countries, although the effect is much larger among lower per capita income countries. Since the probability of regime failure is much lower among the rich, the influence of pipelines is also negligible. Again, the negative effect of oil transit pipelines is not a robust finding and is affected by an outlier in the data set, the Georgian case.

Although the case studies point out possible variation between the effect of oil transit pipelines and natural gas transit pipelines, it was not completely possible to explore all the variation between the impact of natural gas and oil pipelines through the case studies of Belarus and Georgia. However, the results in this section provide statistical support for the variation between the processes, worth, and significance of natural gas and oil pipelines.

One final finding is the insignificance of trade dependence on regime failure. This finding shows that despite the fact that pipeline trade stabilizes a country, not all kinds of trade have a significant effect hence the lack of support for trade dependence

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indicator. In light of the theoretical framework of this study, one interesting test could be to control for trade dependence on the neighboring countries. Instead of adding up all exports and imports to form a trade dependence indicator, it might be a better idea to focus on the effect of trade with the neighbors on regime failure. Further research can focus on a general neighbor effect on regime stability.

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Predictive Margins with 95% CIs

FH Scores 5

0 .3 .6 .9 1.2 1.5 1.8 2.1 2.4 2.7 3 Natural Gas Transit Capacity / GDP

Regional FH Score=1 Regional FH Score=9

Figure 4-1. Diffusion effect through natural gas pipelines with 95% CI (with FH scores)

Predictive Margins with 95% CIs

Polity Scores

0 .26 .52 .78 1.04 1.3 1.56 1.82 2.08 2.34 2.6 2.86 Ratio of Gas Transit Capacity per GDP

Regional Polity Score=1 Regional Polity Score=9

Figure 4-2. Diffusion effect through natural gas pipelines with 95% CI (with Polity scores)

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.15

.05

ProbabilityRegime Failureof

0 1 2 3 Natural Gas Transit Capacity per GDP

GDP/cap=MEAN-2SD GDP/cap=MEAN-SD GDP/cap=MEAN GDP/cap=MEAN+SD

Figure 4-3. Effect of natural gas pipelines on regime survival

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Table 4-1. Countries with highest ratio of natural gas and oil transit capacity per GDP (2009) Natural Gas Transit Capacity per GDP Oil Transit Capacity per GDP Moldova 5.147606 Georgia 0.10681 Georgia 3.250723 Belarus 0.014613 Uzbekistan 2.742495 Bahrain 0.010899 Togo 1.580777 Croatia 0.010443 Belarus 1.177157 Cameroon 0.010151 Note: Calculated Using Original Data on Transit Capacities and World Bank's indicator for GDP

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Table 4-2. Transit pipelines and the level of democracy: dependent variable is aggregated Freedom House scores Model 1 Model 1a Model 2 Model 2a Model 3 Model 3a Model 4 Model 4a

Natural Gas Transit Country Dummy -0.348*** -2.295***

(0.123) (0.374)

Oil Transit Country Dummy -0.003 -0.436

(0.096) (0.356)

Number of Natural Gas Pipelines -0.082* -1.068***

(0.043) (0.196)

Number of Oil Pipelines -0.114* 0.432*

(0.066) (0.229)

Natural Gas Pipeline Length -0.13** -1.798***

(0.055) (0.422)

Oil Pipeline Length -0.177 1.212***

(0.141) (0.346)

Natural Gas Transit Capacity per -0.048 -0.477*** GDP (0.039) (0.117)

Oil Transit Capacity per GDP 2.321 2.058

(3.695) (9.592)

GDP (ln) 0.27*** 0.405*** 0.29*** 0.443*** 0.287*** 0.464*** 0.27*** 0.405*** (0.056) (0.079) (0.055) (0.078) (0.054) (0.075) (0.054) (0.078)

Annual Oil and Natural Gas Income -0.155*** -0.228*** -0.16*** -0.245*** -0.16*** -0.256*** -0.159*** -0.217*** (ln) (0.015) (0.02) (0.016) (0.02) (0.016) (0.021) (0.016) (0.018)

OECD Membership 1.101*** 1.901*** 1.193*** 2.051*** 1.155*** 2.196*** 1.112*** 2.319*** (0.169) (0.223) (0.165) (0.239) (0.164) (0.261) (0.168) (0.274)

EU Membership 0.394** 0.764** 0.383** 0.815*** 0.341** 0.918*** 0.347** 0.917*** (0.157) (0.218) (0.152) (0.265) (0.153) (0.285) (0.153) (0.281)

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Table 4-2. Continued Model 1 Model 1a Model 2 Model 2a Model 3 Model 3a Model 4 Model 4a Regional Democracy (FH) 0.72*** 0.152*** 0.719*** 0.177*** 0.721*** 0.182*** 0.719*** 0.166*** (0.024) (0.053) (0.023) (0.053) (0.023) (0.056) (0.024) (0.053) 0.419*** 0.139*** 0.233*** 0.073*** Gas Pipelines X Regional Democracy (0.061) (0.026) (0.054) (0.016)

Oil Pipelines X Regional Democracy 0.058 0.051 -0.258*** 2.132 (0.065) (0.036) (0.062) (2.527) Constant - 0.918* 1.029 - 1.086** 0.72 - 1.067** 0.562 -0.912* 0.889 (0.49) (0.841) (0.477) (0.83) (0.474) (0.807) (0.475) (0.818)

Number of Observations 2888 2888 2888 2888 2888 2888 2888 2888 Prob > chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 * significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors)

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Table 4-3. Transit pipelines and the level of democracy: robustness checks for influential cases Model 4 Model 4a Model 5 Model 5a Natural Gas Transit Capacity per GDP -0.048 -0.477*** 0.049 -0.57*** (0.039) (0.117) (0.035) (0.133) Oil Transit Capacity per GDP 2.321 2.058 1.682 5.391 (3.695) (9.592) (3.945) (9.522) GDP (ln) 0.27*** 0.405*** 0.266*** 0.41*** (0.054) (0.078) (0.054) (0.079) Annual Oil and Natural Gas Income (ln) -0.159*** -0.217*** -0.16*** -0.225*** (0.016) (0.018) (0.016) (0.018) OECD Membership 1.112*** 2.319*** 1.072*** 2.301*** (0.168) (0.274) (0.162) (0.27) EU Membership 0.347** 0.917*** 0.348** 0.942*** (0.153) (0.281) (0.149) (0.284) Regional Democracy (FH) 0.719*** 0.166*** 0.734*** 0.169*** (0.024) (0.053) (0.025) (0.055) Gas Pipelines X Regional Democracy 0.073*** 0.097*** (0.016) (0.021) Oil Pipelines X Regional Democracy 2.132 0.993 (2.527) (2.634) M oldova (dummy) - 2.463*** -2.143*** (0.64) (0.823)

Georgia (dummy) 1.991*** 1.184*** (0.411) (0.424) Constant - 0.912* 0.889 -0.945** 0.882 (0.475) (0.818) (0.464) (0.829)

Number of Observations 2888 2888 2888 2888 Prob > chi2 0.0000 0.0000 0.0000 0.0000

* significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors)

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Table 4-4. The expected effect of transit pipelines

A) Natural Gas Transit Country

NO YES

Low 4.99*** 3.11***

High 6.25*** 7.73***

RegionalScore FH

B) Number of Natural Gas Transit Pipelines 0 3

Low 5.2*** 2.41***

High 6.53*** 7.07***

RegionalScore FH

C) Length of Natural Gas Transit Pipelines

0 1500 km

Low 5.28*** 2.94***

High 6.52*** 6.97***

RegionalScore FH

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Table 4-5. Transit pipelines and the level of democracy: dependent variable is Polity scores Model 1 Model 1a Model 2 Model 2a Natural Gas Transit Capacity per GDP -0.12 -0.485*** -0.033 -0.533*** (0.024) (0.15) (0.026) (0.152) Oil Transit Capacity per GDP -3.206 -3.533 -3.538 -6.633 (3.779) (5.187) (3.705) (14.706) GDP (ln) 0.148*** 0.57*** 0.143*** 0.576*** (0.043) (0.084) (0.043) (0.085) Annual Oil and Natural Gas Income (ln) -0.194*** -0.318*** -0.183*** -0.303*** (0.024) (0.029) (0.023) (0.029) OECD Membership 0.847*** 1.399*** 0.837*** 1.353*** (0.124) (0.164) (0.126) (0.162) EU Membership -0.016 0.337 -0.016 0.341 (0.078) (0.22) (0.079) (0.224) Regional Democracy (Polity II) 0.813*** 0.139*** 0.836*** 0.126*** (0.037) (0.048) (0.038) (0.049) Gas Pipelines X Regional Democracy 0.068*** 0.066*** (0.017) (0.017) Oil Pipelines X Regional Democracy 1.751 2.364 (3.723) (3.661) Moldova (dummy) 0.22 1.176*** (0.366) (0.362) Georgia (dummy) 3.959*** 2.454*** (0.359) (0.356) Constant 0.088 1.226 0.076 1.189 (0.522) (1.018) (0.525) (1.033)

Number of Observations 2842 2842 2842 2842 Prob > chi2 0.0000 0.0000 0.0000 0.0000

* significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level

OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors)

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Table 4-6. Transit pipelines and regime stability Model 1 Model 2 Model 3 Model 4 Natural Gas Transit Country Dummy -0.264 (0.501) Oil Transit Country Dummy -0.045 (0.264) Number of Natural Gas Pipelines -0.168 (0.169) Number of Oil Pipelines 0.173 (0.383) Natural Gas Pipeline Length 0.127 (0.196) Oil Pipeline Length -0.727 (0.321) Natural Gas Transit Capacity per GDP - 0.324*** (0.084) Oil Transit Capacity per GDP 22.198*** (0.000) Annual Oil and Natural Gas Income (ln) 0.022 0.024 0.026 0.02 (0.057) (0.057) (0.057) (0.056) GDP per Capita (ln) -0.747** -0.755** -0.742** -0.766*** (0.142) (0.14) (0.142) (0.133) GDP Growth (ln) -3.125*** -3.112*** -3.063*** -3.363*** (0.032) (0.032) (0.034) (0.026) Ethnolinguistic Fractionalization -0.303 -0.286 -0.268 -0.277 (0.349) (0.359) (0.37) (0.362) Inflation (ln) -0.135 -0.134 -0.145 -0.114 (0.187) (0.183) (0.184) (0.188) Urbanization 0.011 0.011 0.011 0.012 (0.016) (0.016) (0.016) (0.016) Trade Dependence -0.687 -0.702 -0.731 -0.611 (0.279) (0.274) (0.274) (0.291) Age of the Regime (ln) -0.845*** -0.848*** -0.853*** -0.802*** (0.133) (0.132) (0.131) (0.139)

Number of Observations 2582 2582 2582 2582 Log Pseudolikelihood -341.026 -340.948 -340.766 -338.665 * Significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level Ordinary Logistic Regression: Coefficients are raw values and robust standard errors are reported in parentheses. Cubic splines are included in all models, but not listed here. Dependent Variable: Regime Failure (Geddes et al. 2014)

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Table 4-7. Percent change in odds of regime failure for a SD increase in the IV Percent Change in Odds of Regime Failure Natural Gas Transit Capacity per GDP -37% (1.43) Oil Transit Capacity per GDP 16.1% (0.007) GDP per Capita (ln) -71.9% (1.66) GDP Growth (ln) -32.2% (0.12) Age of the Regime (ln) -61.5% (1.19) Notes: Standard deviation (SD) of each independent variable (IV) is in parentheses

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Table 4-8. Transit pipelines and regime failure: robustness checks Models with Cubic Splines Models with t, t^2 and t^3

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9

Natural Gas Transit Capacity -0.324*** -0.326** -0.282*** -0.287** -0.288** -0.371** -0.378** -0.363** -0.341** per GDP (0.084) (0.099) (0.08) (0.084) (0.096) (0.109) (0.129) (0.126) (0.104)

Oil Transit Capacity per 22.198*** 7.007 22.698*** 23.752*** 9.345 23.07** 8.355 7.981 10.893 GDP (0.0000) (11691) (0.0000) (0.0000) (122170) (0.0000) (55.489) (38525) (578536)

Georgia 9.62 3.606*** 1.575** 1.616** 1.44** (3.12) (2.817) (5.603) (5.895) (2.712) Armenia 14.901 14.804 0.932* 0.577 (0.683) (0.72) (1.357) (0.756) Thailand 0.509*** 0.542*** 3.556*** (20.901) (19.953) (18.743)

Number of Observations 2582 2582 2579 2582 2582 2582 2582 2582 2582 Log Pseudolikelihood -338.665 -337.692 -326.226 -329.929 -329.064 -341.113 -340.24 -339.759 -331.686

* significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level Ordinary Logistic Regression: Coefficients are raw values and robust standard errors are reported in parentheses. Control variables are included in all models. Cubic splines are in Models 1-5 and t, t^2, and t^3 are in Models 6-8. Dependent Variable: Regime Failure (Geddes et al. 2014)

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CHAPTER 5 TRANSIT PIPELINES, ECONOMIC GROWTH, AND INFANT MORTALITY RATES

The previous chapter discussed the role of pipelines in determining the level of democracy and regime stability. This chapter explores the impact of transit pipelines on economic growth and provision of health services. As discussed in the previous chapter,

I use the standard measure for economic growth: annual change in GDP (World Bank

2013). The findings suggest that natural gas pipelines cause slower growth in transit countries. This is abundantly clear across the diverse set of transit indicators developed for this thesis. However, there is little support for any effect of oil pipelines in any of the models.

Attempting to measure provision of health care services, infant mortality rates at birth (ibid) are employed as the dependent variable. For methodological purposes the natural logarithm of infant mortality rates is used. For the determinants of infant mortality rates there is consistent support for the positive effects of natural gas and oil pipelines in promoting better health care services in transit countries, with oil pipelines having slightly larger impact. Following the introduction of the control variables and a brief discussion of the methodology, the main statistical analyses are presented.

Economic Growth

This section discusses the effect of pipelines on economic growth. After a brief review of control variables and the methods used, it reports on the results of the regressions. In addition to the evidence that natural gas transit pipelines promote slower growth, the models with interaction terms between transit pipelines and initial income show that the effect is larger in higher initial income countries, while lower initial income countries are less affected. Possible reasons for such a negative relationship between

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pipelines and growth could be the Dutch Disease or ineffective institutions that squander transit fees through corruption or rentierism. Dutch Disease may emerge when a country’s income is dominated by a single sector (usually natural resources or foreign aid), leading to the appreciation of its domestic currency. Such over-valued currency then makes that country’s exports more expensive while imports become cheaper. Eventually manufacturing sectors lose competitiveness in the market.

Other than the direct effect of pipelines, the differences between higher and lower initial income countries might be another indication of economic convergence theory. In his earlier research, Barro finds strong statistical support for convergence theory when controlling for human capital levels (1991; 1997). Here, in this research, in addition to original support for convergence theory, the interaction terms also provide additional insights into understanding convergence in general. Finally, a split sample regression shows the relationship between pipelines and growth stands when developed countries are excluded from the models.

Control Variables

I control for several important variables from the literature on economic growth.

Initial GDP per capita is hypothesized to have a negative impact on economic growth

(Barro 1997; Pickering and Kisangani 2006). The natural logarithm of population has been shown by Barro (1997, 18)) to have a small negative effect on growth (World Bank

2013). Two essential control variables that have been shown to have a positive impact on economic growth are: higher starting levels of education (Barro 1997) and a positive change in the terms of trade (Barro and Sala-i-Martin 1995; Barro 1997; Easterly et al.

1993; Mendoza 1997; Polterovich and Popov 2007), measured as the ratio of export to import prices. To measure education, I use the percentage of the population aged 25 or

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older enrolled in secondary school, from Barro and Lee (2010). Their data is limited to observations every five years, so I have interpolated their figures for use with the TSCS model.

For change in the terms of trade, the ratio of total export prices to total import prices is employed (World Bank 2013). Another control variable is natural resource rents per GDP, from Ross’s recent data (2012). The ‘resource curse’ literature usually associates higher resource dependence with slower growth compared to resource-poor countries, controlling for other possible explanations (Sachs and Warner 1995; Collier and Goderis 2012; Williams 2011). However, in more recent years, Alexeev and Conrad

(2009) and others (Brunnschweiler 2008; Brunnschweiler and Bulte 2008; Chang et al.

2013; Mehlum et al. 2006; Pineda and Rodriguez 2010) object to these ‘resource curse’ claims of slower growth in resource-dependent countries. Through an argument based on the quality of extractive institutions, these authors posit that resource producers also include countries that are growth winners (Alexeev and Conrad 2009).

Barro (1996; 1997) and others (Gerring et al. 2005; Koteski et al. 2014) also test for the effect of the level of democracy on economic growth finding a positive relationship between the two. In doing so, Barro (1997) finds a curvilinear relationship between democracy and economic growth. Up to a certain point of democratic development, the expansion of political rights promotes economic growth; however, after passing a threshold, further democratization harms growth. In order to test the effect of democracy, I employ combined, reversed and rescaled FH democracy scores.

However, some others do not find any conclusive and systemic relationship between democracy and economic growth (Alesina et al. 1996; Helliwell 1994).

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In some instances the inflation rate is also negatively associated with economic growth, mainly because of the negative impacts of hyperinflation (Barro 1997). Though there are also studies claiming a non-linear relationship (Sarel 1995), or varying effects at different thresholds of law and order in a country (Polterovich and Popov 2007). The source for the data on inflation is the IMF since this data has fewer missing values as compared with the World Bank data set. Following the literature, the logarithm of inflation is used. However, since the logarithm of negative values and zero do not exist, in keeping with Gasiorowski (1995) and Dixon et al. (1993), I added the lowest variable value plus one (in this case 74) to all the observations1. The same procedure was followed in previous regression models.

Methods

In measuring the effect of military interventions on economic growth, Pickering and Kisangani (2006) use Prais-Winsten regressions with panel corrected standard errors (PCSEs) and the AR(1) option, which are suitable for country specific time-series data. Specifically, psar1 and rhotype(tscorr) options in Stata 11 are employed in the regressions. A larger discussion of this method was done previously under the section on the level of democracy regressions. This method of employing OLS regressions with

PCSEs is identical to the methods I used in calculating determinants regime type in previous sections of this research.

Results

Based on the regression results, there is evidence that natural gas pipelines hinder economic growth. Compared to the countries without such pipelines, natural gas

1 The same procedure was followed for the natural resource rents per GDP variable where the lowest value was 0 and a value of 1 was added to all observations of that indicator.

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transit countries grow slower, controlling for other possible explanations. Oil pipelines, on the other hand, do not have any statistically significant impact on economic growth.

The substantive results are presented below, in Table 5-1. The table has a total of eight models, testing the effect of different oil and natural gas indicators and their relationships with economic growth. It also tests the association between democracy and growth where there is no consensus about the relationship.

As the table displays, natural gas transit indicators are statistically significant across all eight models, with the same negative direction in each, therefore showing a slowing of economic growth. Oil pipeline indicators, on the other hand, do not have a consistent direction of effect. For instance, the oil transit dummy has a negative sign in models 1 and 2 while the other three indicators have a positive sign. Even if that was not the case, the indicators lack statistical significance except in Model 5; yet the effect disappears with the inclusion of the squared term.

For the control variables as well, the results are generally consistent. The effect of initial per capita GDP in the previous year of observation is in the expected direction, with a negative sign, and it is statistically significant across all models. Although the variable is significant at the 99 percent confidence interval when the squared FH scores indicator is absent, it loses some level of significance (p<.05) when it is included

(Models 2, 4, 6, and 8). With the inclusion of the squared term, the indicator also loses close to 50 percent of its coefficient value across the models. The finding is consistent with Barro’s findings (1991; 1997) and in general with the conditional convergence theories on economic growth, which posit that countries with lower levels of initial per capita GDP grow faster holding other control variables constant.

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In addition, with a starting level of per capita GDP, having more natural resource income per capita increases the growth rate, controlling for other factors. This shows a steady and positive impact of additional resource income per capita on growth and is supportive of Alexeev and Conrad (2009) and others’ (Brunnschweiler 2008;

Brunnschweiler and Bulte 2008; Mehlum et al. 2006; Pineda and Rodriguez 2010) view on the resource-growth relationship.

Other than resource income and democracy’s role, higher inflation rates are negatively related to economic growth and the sign is in the expected direction. The variable is significant across all the models (p<.01). For Barro (1997), such findings on inflation are largely driven by the cases of hyperinflation and the economic crises that follow. Interestingly, terms of trade is negatively associated with growth, with more export dependence resulting in a slower growth rate. The rate of enrollment in secondary education, however, does not influence economic growth in any of the models, although the sign of the variable is in the expected direction.

Another variable that lacks significance is population. The initial hypothesis, that a higher population will lead to slower growth rates, only holds in the last two models, which include oil and natural gas transit capacity per GDP indicators (p<.05). Other than these two models, the effect is neither consistent nor significant. One final finding is regarding the effect of democracy. Earlier, I reported varying views on the effect of democratization on growth. When FH scores are included in the models, the indicator is not significant. However, when the squared term is added to the models, the models improve and both the initial indicator and the squared term gains significance, creating a curvilinear relationship between democracy and economic growth. This confirms Barro’s

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(1997) initial proposition on democracy’s positive influence on growth early on, with a decreasing effect with further democratization.

Regarding the substantive impact of natural gas pipelines, every indicator measures a different aspect of those pipelines while all other explanations hold constant. Before starting with the expected outcome for each indicator of gas transit, it is worth noting the descriptive differences between different groups of countries. In previous chapters, where the data set was introduced, the descriptive findings showed that natural gas transit countries had the slowest economic growth rates (2.13 percent), as compared with high resource income (4.1 percent) and oil transit (2.77 percent) countries as well as the rest of the world (3.88 percent). Although these illustrations do not have any control variables, the findings of the regressions confirm those previous inquiries since, controlling for other factors; natural gas transit countries display slower growth. On the other hand, the statistical evidence is inconclusive on the effect of oil transit on countries. The indicators for oil transit have insignificant and inconsistent coefficients across all models.

This potential variation between two types of pipelines can be addressed through the differences between natural gas and oil transit fees and subsidies.2 While natural gas transit countries are receiving immense discounts for domestic energy as well as receiving additional transit fees, this is not necessarily the case for oil transit countries.

In many instances natural gas transit countries are gatekeepers (Belarus and Ukraine

2 As mentioned in the case studies of Belarus and Georgia as well as throughout the dissertation, the subsidized natural gas has been very common for the transit countries, especially for Russian natural gas. For instance, up until the establishment of Blue Stream pipeline that directly carries natural gas from Russia to Turkey, Bulgaria was one of the main gatekeepers for Russian natural gas. Because of this major transit function, Bulgaria’s domestic demand for natural gas was largely subsidized by Russia (Gramatikov 2009, 219).

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for Russian natural gas, Morocco for Algerian gas, Benin and Togo for Nigerian gas) and they can impose ransom-type transit fees on the supplier country or the operating company. Conversely, there are multiple potential sources for the importation of oil.

Therefore, the possible income from oil should be lower in the long run. For such reasons, the effect of oil transit on growth might be insignificant based on such differentiation between the additional incomes of being a transit country.

Having elucidated the deviation between the impacts of two types of pipelines, it is important to explicate the role of natural gas pipelines in determining economic growth. For instance, looking at Model 2 and the transit country dummy (p<.01), countries grow 1.07 percent slower when they host at least one natural gas transit pipeline. Similarly, interpreting the number of transit pipelines indicator in Model 4, controlling for other factors, having a mean number of transit pipelines (3) makes countries grow .98 percent slower; this number increases to 1.63 percent for one standard deviation above the mean (5) level (p<.05). The effect of an average number of pipelines is closer to the one in Model 2, the transit dummy.

For Model 6, the effect of the average length of transit pipelines (1400 km) is around .77 percent, while mean plus one standard deviation change brings 2.02 percent slower economic growth (p<.05). Although the mean amount of change results in a smaller impact, moving towards more marginal observations, the transit pipeline length indicator creates a larger effect. Finally, the last and most comprehensive gas transit indicator, natural gas transit capacity per GDP, has the lowest marginal effect, with a mean increase of the ratio (1.5). Compared to other models, a mean amount of increase in the ratio slows the rate of economic growth by only .58 percent, while a standard

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deviation above the mean (4.5) change has an effect of 1.75 percent slower economic growth, controlling for other variables.

The last indicator also has the smallest marginal impact on economic growth.

Since natural gas transit capacity per GDP is the only indicator that accounts for the size of the economy, it is thus far the most reliable and comprehensive measure on transit pipelines. As mentioned before, accounting for the size of the economy enables one to differentiate between smaller economies, such as Benin, Togo, and Georgia, and larger ones, such as Russia, Germany, and Italy when measuring the impact of transit pipelines.

Figure 5-1 plots the previously mentioned negative marginal effect and compares transit countries with an average transit capacity per GDP ratio to the rest of the world while holding other variables constant. Such findings are a confirmation that, unlike natural resource income, subsidized energy prices and transit fees from natural gas transit pipelines inhibit economic growth. This partly demonstrates a special kind of nontax revenue ‘curse’. Countries with natural gas pipelines receive massive discounts for domestic gas as well as receiving additional income in the form of transit fees. It may be assumed that such discounts and additional income could trigger economic growth by lowering the production costs of other goods as well as direct supporting the economy. However, as the regressions and figures show, in fact it is the opposite which happens in natural gas transit countries.

Given the finding that natural gas pipelines make transit countries grow slower than the rest of the world, the next test could be asking if the effect depends on different levels of initial income, or on the level of development. To do so, Table 5-2 includes a

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model with an interaction term between transit capacity and initial income and also a split sample regression which only includes developing countries. The idea is borrowed from Clemens et al. (2004), in which the conditional impact of foreign aid on economic growth is measured. The IMF lists developing countries in the world and updates the list accordingly in its annual World Economic Outlook.

Model 1 is the original model from Table 5-1, while Model 2 includes the interaction variable. The next set includes only the developing countries, and in that subset there are 1890 observations (compared to 2355 in the original models).

Compared to the original model, when the interaction is included, initial income (p<.05), gas transit capacity (p<.01), and the interaction term (p<.01) are significant.

Interestingly, the secondary schooling rate also gains significance (p<.1).

When plotted, as Figure 5-2 shows, additional transit capacity makes countries grow slower. Among lower initial income countries, the effect of pipelines almost vanishes, while at higher initial income levels, the impact is more significant.

Furthermore, looking at models 3 and 4, the effect is almost identical among the developing countries. The models with the interaction term show that the economic convergence theories hold, even when controlling for the effect of transit pipelines.

Although the pipelines promote slower growth, the effect is smaller in lower income counties and larger among the higher income countries.

From a theoretical perspective, there can be a few reasons for the promotion of slower growth by the presence of natural gas pipelines. In order to borrow from previous theoretical and empirical research, it is important to look at two other notable nontax revenues: natural resource income and international aid. The theories and empirical

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evidence on each could help in explaining the effect of pipelines. However, there is no consensus in explaining the relationship between nontax revenues and economic growth. For instance with regard to foreign aid, shaped by Burnside and Dollar’s (2000) conditionality of foreign aid effectiveness, international banks and aid agencies have long invested in research and tried to stimulate economic growth through foreign aid.

The premise is that by improving monetary, fiscal, and trade policies, it is possible to achieve economic growth (ibid) and there is evidence of positive growth experiences through foreign aid (Headey 2008; Levy 1988). However, Easterly (2003) calls for scrutiny of the “aid buys growth myth” (34) and criticizes the evaluations of aid effectiveness, while many others fail to find a conclusive relationship between the two

(Doucouliagos and Paldam 2009; Rajan Subramanian 2008). Among those explanations, Doucouliagos and Paldam (2009) suggest that the Dutch Disease can be one of the reasons for foreign aid’s negative impact on economic growth. Calling the issue a transfer problem, the authors posit that the aid received by the least developed countries (LDCs) might create a type of ‘resource curse’ through exchange rate appreciation (25). Within the case studies, Georgia does not demonstrate this behavior.

There are also initial background studies on the introduction of major pipelines in

Georgia and those did not find evidence for such a potential currency appreciation3

(Billmeier et al. 2004).

Turning to Belarus, scholars like Balmaceda (2006) criticized the Belarusian economy’s unsustainable nature due to its immense reliance on transit fees, subsidized

3 Billmeier et al. do not find currency appreciation to be a problem in Georgia, unlike the oil producing countries (2004). The potential income is around 2-3 percent for Georgia and this should not encourage a competitive disadvantage within the country (ibid, 9).

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domestic energy, and the re-export of oil products. She observes the falling value of the dollar in Belarus in 2005, while it stayed more or less the same in many other markets.

Another instance of Dutch Disease within the country has been an increase in the re- exporting of oil products imported from Russia, mainly through subsidized prices (ibid,

12). This makes Belarus one of the unique cases where oil price volatility would have a negative effect on the economy, despite the country not being an oil producer. Still, thinking only in terms of growth rates, the Belarusian case is nowhere close to observing the negative growth effects of pipelines, especially after the establishment of the Yamal pipeline in 1996. Yet it also does not change the fact that the country lives in a risky economic environment.

Other explanations focus on resource abundance generating inefficiencies and ineffective institutions. For instance, Mehlum et al. (2006) explain slower growth among resource rich countries through institutional failures. Another institutional view describes increased corruption in resource rich countries (Ades and Di Telia 1999; Auty 2001;

Fish 2005). For such an account, let us turn to Ukraine as an example of a nation with institutional failures. Since independence, Ukraine receives transit fee payments not in cash, but in kind, in the form of natural gas (Dodonov and Opitz 2001). The country uses these in kind payments to supply household4 energy demand, which is almost 70 percent dependent on natural gas (Ericson 2009, 34). The rest of the natural gas imported from Russia goes to power plants for electricity generation. However, such in- kind transfer fees create inefficiency within Ukraine, since domestic gas prices have

4 The household gas prices were $33.6/tcm for the Ukrainian household consumer while the industrial consumers paid $63.3/tcm, still much lower than regional prices (Lageida 2002).

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been far below regional market prices.5 The domestic energy market has been subsidized by the central government for a long time; yet the government is neither the producer of the incoming gas nor did it pay the international market price to receive it.6

In addition, the subsidies and the demand for subsidies are locked in a vicious cycle. Apart from household needs, the ferrous metals and energy sector as well as agriculture, transportation, and communal sectors are subsidized by the gas sector, in which rent seeking and interest groups hold great power (Lageida 2001, 28).

Furthermore, there is constant municipal pressure on national government officials for the continuation of subsidized domestic gas prices, in exchange for maintaining local political support. In order to break the pressure, the state demanded cash payments from Russia in the mid 2000s;7 attempting to remove direct in kind subsidies on natural gas.

5 The inefficiency emerges mainly because of lower prices for energy use which encourages wasting. This is already a habit from the Soviet times since the households did not have thermostats or gas meters at the doors, therefore not accounting for which household used how much energy (Newnham 2011). This legacy has survived in the post-Soviet republics.

6 A similar case is Iran. Iranian domestic market is largely subsidized. The natural gas is sold in the domestic market below the market prices and this produces inefficiency. Because of the subsidies in domestic gas no private investors can enter the market (Jalilvand 2013, 14). Because of such reasons Iran is a net importer of natural gas in terms of quantity. However, thanks to cheap natural gas from Turkmenistan and the deal with the Turkish government it still earns a positive sum out its gas trade.

7 Due to constant problems in negotiating transit fees (the type and the amount), similar to the transit crises between Belarus and Russia in mid 2000s, Ukrainian demands from Russia also started causing problems in affairs between the two countries, and the situation worsened after the Orange Revolution. Price negotiations during the tenure of Ukraine’s pro-Western president, Victor Yushchenko, led to a series of energy crises in 2006 and 2009. Since the Russian favorite, Victor Yanukovich, lost the presidential race against Yushchenko, the Kremlin decided to stop subsidizing gas prices for Ukraine. Initially, they announced an increase in the gas price from $50 to $230 per 1000 cubic meters, which meant more than quadrupling the price of gas for Ukraine. Yushchenko rejected this and Russia decreased the gas supplies through the pipeline. This action affected almost all countries in Europe as most of the continent was (and still is) dependent on Russian gas. The gas crisis was resolved after settling on a final price of $95, still almost doubling the cost (Bahgat 2006, 961, 2). In the end, this whole process placed strong negative pressure on the Ukrainian economy. It also increased Western European anxiety about the future security of its energy imports, since Russia could blackmail the transit countries as well as its European counterparts (Bahgat 2006; Stern 2006).

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This creates a peculiar kind of a rentier relationship between the state, the citizens, and the industry.8 Once the subsidies are imposed for an indeterminate time, they then create a vicious cycle wherein it becomes impossible to remove said subsidies because of interest groups, rentierism, and clientelism. Even if the sectors fail, the government continues to prop them up (ibid), creating economic inefficiency while only benefiting the chief interest groups. In the end, because of such institutional failures, Ukraine fails to maximize the potential benefit from the transit fees and subsidies it receives from Russia.

In a similar case, Djiraibe et al. (2002) questions the World Bank’s credibility in its financial and institutional support of the Chad-Cameroon oil pipeline (5). The authors mention spreading corruption and lack of dedication on the part of the pipeline host governments as well as overlooked environmental management issues by the World

Bank9. The support for both countries has continued, despite the nations’ presence on the list of the “most corrupt countries on earth,” prepared by Transparency International, and the World Bank’s having been implicated in a few corruption scandals itself (Ndika

2004). Finally, Philippe Viel, commenting on the pipeline project, mentions the high level of corruption in the governments of Chad and Cameroon as well as a lack of safety, development projects, and respect for human rights in both countries (2004).

Although the Belarusian explanation of Dutch Disease, the Ukrainian case on inefficiencies, and issues regarding the Chad-Cameroon pipeline are good examples in

8 In the year 2000, an average Ukrainian industrial natural gas consumer paid ($63.3/tcm), slightly more than half that of Czech and Polish consumers, $30/tcm less than Hungarians and $15/tcm less than Slovak consumers (Lageida 2002, 6).

9 Same issues were reported for Georgia when the BTC pipeline was being built in early 2000s.Corruption during the land acquisition and compensation process was widespread as the observers report (Marres and Rogers 2008, 268).

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clarifying the potential reasons for slower growth among transit countries, further casework should focus on finding more mechanisms and evidence. For instance, in addition to currency related and institutional explanations, the corruption effect could also be explored further, as surplus rents usually lead to further corruption (Ades and Di

Telia 1999). In Belarus, Lukashenka decided to remove the intermediaries between the state and the re-export of oil products (Balmaceda 2006, 11). Since the state buys such oil products from Russia at low cost, removing liaisons in re-export means extra hard currency for the state budget, as well as further control of rents by the government.

However, so far there is no study investigating the amount of corruption among the transit countries which might further explain slower growth.

Provision of Health Services

After discussing the effect of transit pipelines on economic growth and the possible mechanisms regarding the negative relationship, this section presents the regression results on health services. In order to measure better provision of health services, infant mortality rates are used (World Bank 2013). Following the presentation of control variables and the methodology, results are presented. As shown in the case studies of Belarus and Georgia, the findings confirm the positive impact of transit pipelines on health services. Observed through a decrease in infant mortality rates with increased natural gas pipeline presence, the findings suggest that both natural gas and oil pipelines promote a better provision of health care services in transit countries.

Between the two, oil pipelines have a somewhat higher influence.

Control Variables

One of the common control variables is per capita GDP income, testing for the effect of economic development on broadly used indicators of human development

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(Baliamoune-Lutz and Boko 2012; Bergh and Nilsson 2010; Gerring et al. 2012;

Mukherjee and Krieckhaus 2011; Ross 2006; Tsai 2006). Most of the research finds income to be one of the main determinants of multiple types of human development.

Population growth is another control, and is expected to harm provision of health services since governments might struggle to provide adequate benefits to impoverished and/or large populations (Mukherjee and Krieckhaus 2011; Ross 2006).

The data for per capita personal income and population growth are from the World Bank

(2013).

In order to measure the effect of a demographic structure, urban share of population is used (World Bank 2013). Although it is hypothesized to have a positive effect, promoting better levels on indices of human development (Tsai 2007), some find significant results (Gerring et al. 2012) while others fail to find a significant relationship

(Bergh and Nilsson 2010). Some scholars find that democracies provide better human services to their populations (Boix 2001; Brown and Hunter 2004; Brown and Mobarak

2009; Shandra et al. 2004) while Ross (2006) and others (Saha and Zhang 2012; Tsai

2006) disagree, finding little evidence on the impact of democracy on various indicators of human development. Gerring et al. (2012) agree with the latter view and through testing the effects on infant mortality, they say democracy does not have an immediate effect on human development; it rather has a historical impact through establishing necessary institutions. In this section, I test the direct effect on the levels of infant mortality rates through employing both combined FH scores and the Polity scale and annual natural gas and oil income controls for the ‘resource curse’ argument.

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Alexeev and Conrad (2011) only find negative evidence among the transition economies while Sovacool (2010) does not find any ‘resource curse’ in South East Asia.

Among others, Carmignani (2013) finds a direct negative effect with inequality being an intervening variable, while Bulte, Damania and Deacon (2005), on the other hand, develop an institutional framework wherein weak institutions cause a human development deficiency among the resource producers. Pineda and Rodrigez (2010), on the other hand, find a positive impact of natural resource abundance on HDI, life expectancy, and literacy.

Finally, Mukherjee and Krieckhaus (2011) argue that economic, political, and social globalization improves the conditions for human development. They use Dreher’s globalization indices, available for 207 countries since 1970 on a yearly basis (2006).

The author measures the three dimensions of globalization by evaluating trade, FDI, portfolio investment, income payments to foreign nationals, hidden import barriers, mean tariff rate, taxes on international trade, capital account restrictions (economic), telephone traffic, transfers, international tourism, foreign population, international letters, internet users, TVs, trade in newspapers, number of McDonald’s restaurants, number of

IKEAs, trade in books (social), embassies in the country, membership in international organizations, participation in UN security council missions, and international treaties

(political).

Methods

The dependent variable is the natural logarithm of the infant mortality rate per

1,000 live births in order to measure quality of health care services (World Bank 2013).

It uses the estimates collected by the UN Inter-agency Group for Child Mortality

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Estimation.10 In this data set, infant mortality rates are continuous and vary between 2.2

(observed in Singapore between 2007 and 2010) and 165.5 (Liberia in 1991), having a similar continuous structure as economic growth and FH/Polity scores. Therefore, OLS regressions with PCSEs, country specific error calculation with AR(1) option, and time- series specific rhos are applicable for the dependent variable. This is the preferred option in the literature when the dependent variable is infant mortality rates (Pickering and Kisangani 2006; Ross 2006; Safaei 2012) or indicators in similar structure.

Results

Table 5-3 lists a series of regressions with control variables testing the effect of pipelines on infant mortality. The results show that there is strong support for the positive impact of the introduction of natural gas and oil transit pipelines on the quality of health care services. The four indicators for transit pipelines are tested across four models. For natural gas transit, all indicators except the pipeline length are statistically significant (p<.01), while for oil transit, all indicators except oil transit capacity per GDP are significant (p<.01). The indicators of pipeline transit provide sufficient support, and the expected negative direction is consistent across three out of four models (except for natural gas pipeline length in Model 3 and oil transit capacity per GDP in Model 4).

These findings are consistent with the case evidence as well as the findings in the descriptive chapter. In the latter, when the data set was introduced, in those findings, oil and natural gas transit countries faired three times better than the rest of the world and twice better than high resource income countries. The substantive results confirm the tests in previous sections of the research.

10 The group is formed by UNICEF, WHO, the World Bank, and the UN DESA Population Division. There is additional information at www.childmortality.org.

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Before moving on to the substantive impact of pipelines, it is worth discussing the control variables. Interestingly, all control variables are also significant across the four models (p<.01) in Table 5-3, with their effect in the hypothesized direction. As expected, higher per capita income is negatively associated with infant mortality, providing support for better health services in richer countries (p<.01). Furthermore, population growth is positively correlated with higher infant mortality rates, hinting that governments struggle to expand health care services at the same pace as population growth (p<.01).

More urbanization is also significant across the models, providing support for the modernization thesis for better conditions for health services (Gerring et al. 2012) as well as the idea that governments fail to provide health care and other public goods in more rural areas (Ross 2006). Finally, more globalization decreases the extent of infant mortality rates across the models, providing support for Mukherjee and Krieckhaus’s thesis on the positive impact of globalization on human development (2011), while more democracy is also associated with better levels of health services.

Although there is not much research (except Alexeev and Conrad’s work) that specifically tests the relationship between resource income and infant mortality rates, here in this study, the relationship is significant and negative. As descriptively discussed in previous chapters when the data set was introduced, high resource income countries

(29.5) already fair worse as compared with oil (16.1) and natural gas (16.6) transit countries in terms of infant mortality rates. Contrary to what Alexeev and Conrad (2011) and Sovacool (2010) find there is consistent support for the direct negative effect of resource income on infant mortality rates.

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Since all regression models in this section are log-level models (meaning that the dependent variable is logged), in interpreting the main explanatory variables, a unit increase in the independent variables (X) result with 100⋅β1 percent change on the dependent variable (Y). The mathematical equations are demonstrated in Equation 5-1 and 5-2. Based on this method of interpretation, the substantive impact of transit pipelines is also relatively high. For instance, being a natural gas transit country decreases infant mortality rates by 6.2 percent while being an oil transit country decreases the rates by 22.2 percent, controlling for other explanations.

Looking at other models, dummy indicators look like they have an inflated effect on infant mortality rates. An additional natural gas transit pipeline decreases infant mortality rates by 1.7 percent where there are 2.7 transit pipelines in a transit country.

An average gas transit country would decrease the rate by 4.9 percent according to this model. An additional oil pipeline, on the other hand, has -3.7 percent impact on the dependent variable. The unit impact is higher for oil transit countries, but the average number of pipelines is also lower, 1.8 pipelines per transit country, making it a 6.7 percent change in total for an average transit country.

In terms of pipeline length, the natural gas indicator is insignificant. The opposite is true for the fourth model, where the oil transit indicator does not reach the conventional levels of significance. Mean total pipeline length in an oil transit country is

902 kilometers. Based on the mean pipeline length levels in Model 3, an average oil transit country would decrease infant mortality rates by 8 percent, controlling for other factors (p<.01). In the last model, the mean ratio for gas transit capacity per GDP is around 1.54. Therefore, an average natural gas transit country would have 5 percent

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lower infant mortality rates compared to a non-transit country, holding other variables constant. Table 5-4 below summarizes all four models and expected variation on the dependent variable for a mean change on the main independent variables, holding the controls as constant. Based on these results, the introduction of a transit pipeline improves health care services for both types of variables, with oil transit pipelines having a larger effect compared to natural gas pipelines.

Due to the disagreements on the role of democracy on health care services, the results are re-estimated with combined and rescaled Polity scores instead of aggregated FH scores as part of a robustness check. Table 5-5 displays the results with

Polity scores. Despite slight changes on the coefficients of the main explanatory variables, the substantive results do not change. The effect of natural gas pipelines is slightly higher, while oil transit indicators are smaller as compared to the models with

FH scores. Yet, oil transit indicators still have larger coefficients than gas transit indicators.

Looking at the regression tests and diagnostics, there is strong support for a positive influence of transit pipelines on the provision of health care services and better conditions for the population in general. Apart from the descriptive evidence, the initial conclusions do not change controlling for other possible explanations and robustness checks. From the results, there is confirmation that transit countries have lower infant mortality rates. Case studies on Georgia and Belarus in previous sections provided initial evidence, showing how multinational stakeholders spend money for the betterment of the pipeline path as well as promoting national projects on human development.

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Other than the earlier case studies, there is also evidence apart from these two cases. For instance, the BTC pipeline passes through 330 villages on its 1100 km path through Turkey. The social responsibility projects regarding those villages range from rural development projects on agricultural learning to sustainable development support through the BTC Company. As the national Turkish news agency Anadolu Ajansi reports, the company completed over 500 local projects that include building local hospitals, schools, and other infrastructure (Hurriyet 2013).

Still, there is criticism towards the introduction of international oil and natural gas pipelines on the basis of human rights concerns, corruption allegations, and environmental issues. For instance, a recent Columbia University project on the Chad-

Cameroon oil pipeline reports that when the World Bank gave the final approval for the loan to build the oil pipeline in 2000, many NGOs criticized the decision, asking for a two-year moratorium in order to introduce necessary technical and legal environmental safety measures (Martin 2013). Since the early 2000s, there have been constant criticisms regarding unaddressed environmental issues, protection of indigenous populations on the pipeline route, food security in Chad, and failure of public health measures (Djiraibe 2002, 2). Reflecting on the failure of the World Bank, the authors wrote:

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Such environmental and public health issues have been dismissed by the international institutions so that the multinational companies and other international stakeholders can maintain their profits (Ballande 2002).

Conclusions and Further Research

This section tested the hypotheses on transit pipelines and their relationship to economic growth and infant mortality. The regression results showed that transit countries with natural gas pipelines grow slower than those without pipelines, controlling for other factors. The impact of pipelines is strongest among countries with higher initial income levels; those with lower initial incomes do not show signs of slower growth. This result is consistent across the models and in different regressions tests with varying samples such as those that exclude developed countries. For infant mortality rates, the statistical evidence shows clear support for the effect of both oil and natural gas pipelines as well. However, despite the support, cases report conflicting views on the behavior of multinational stakeholders of the pipelines as well as the use of transit income on health care service provision in the transit countries.

Although the case evidence is more at odds for the findings on economic growth than the ones for human development, further research for both dependent variables should focus on additional statistical tests with multiple indicators of human development as well as providing further case evidence for better measurement of the impact while validating the narratives in the cases. For economic growth, the potential reasons for such negative impact could be Dutch Disease or ineffective institutions leading to inefficient use of transit fees due to corruption or rentierism.

The findings on infant mortality rates are in line with Pineda and Rodriguez’s research on natural resource abundance and its impact on human development (2010).

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In their research, the authors posit that resource abundance has a positive relationship with better levels of HDI, literacy rate, and life expectancy. On these results there is strong evidence, especially for health care provision. For future research, it might be a better idea to have life expectancy as another indicator of the dependent variable to see if pipelines behave the same way with natural resources on this part of human development. If the results would hold, then additional case work can identify further mechanisms for promotion of better health care services in transit countries.

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Figure 5-1. Effect of natural gas transit pipelines on economic growth with 95% confidence intervals

Figure 5-2. Effect of natural gas transit pipelines on economic growth with 95% confidence intervals

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(5-1)

(5-2)

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Table 5-1. Transit pipelines and economic growth Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Natural Gas Transit Country Dummy -1.003*** -1.072*** (0.388) (0.388) Oil Transit Country Dummy -0.144 -0.3 (0.331) (0.327) Number of Natural Gas Pipelines - 0.33** - 0.327** (0.136) (0.134) Number of Oil Pipelines 0.223 0.219 (0.201) (0.202) Natural Gas Pipeline Length - 0.48** - 0.511** (0.226) (0.226) Oil Pipeline Length 0.761* 0.736 (0.459) (0.448) Natural Gas Transit Capacity per GDP - 0.36*** - 0.389*** (0.131) (0.134) Oil Transit Capacity per GDP 23.54 25.996 (21.352) (19.588) GDP per Capita (ln) (t-1) - 0.634*** - 0.425* - 0.633*** - 0.441* - 0.688*** - 0.485** -0.816*** -0.601** (0.227) (0.245) (0.223) (0.24) (0.217) (0.232) (0.211) (0.227) Annual Oil and Natural Gas Income (ln) 0.241*** 0.209*** 0.247*** 0.222*** 0.27*** 0.243*** 0.258*** 0.229*** (0.065) (0.062) (0.062) (0.059) (0.061) (0.058) (0.061) (0.057) Population (ln) -0.066 -0.082 -0.061 -0.077 -0.099 -0.106 -0.144* -0.153** (0.094) (0.092) (0.091) (0.089) (0.086) (0.085) (0.074) (0.073) - Inflation (ln) -2.968*** -2.944*** -2.958*** -2.938*** -2.934*** 2.913*** -2.97*** -2.943*** (0.503) (0.5) (0.502) (0.499) (0.502) (0.499) (0.504) (0.499)

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Table 5-1 Continued. Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Democracy Index 0.053 0.656*** 0.063 0.64** 0.067 0.675*** 0.066 0.728*** (0.078) (0.254) (0.076) (0.251) (0.075) (0.255) (0.078) (0.255) Democracy Index (squared) -0.06*** -0.058*** -0.061*** -0.065*** (0.023) (0.023) (0.023) (0.023) Secondary Schooling (t-1) 0.014 0.015 0.009 0.011 0.006 0.009 0.019 0.021 (0.015) (0.015) (0.015) (0.015) (0.015) (0.015) (0.015) (0.015) Terms of Trade (export/import) -0.876*** -0.913*** -0.815*** -0.853*** -0.829*** -0.86*** -0.835*** -0.876*** (0.3) (0.298) (0.304) (0.302) (0.304) (0.302) (0.306) (0.304) Constant 21.431*** 18.898*** 21.291*** 18.907*** 21.631*** 19.08*** 22.57*** 19.828*** (2.873) (3.155) (2.85) (3.122) (2.818) (3.101) (2.773) (3.06)

Number of Observations 2355 2355 2355 2355 2355 2355 2352 2352 Prob > chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 * significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors) Dependent Variable: Economic Growth Rate (percent)

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Table 5-2. Transit pipelines and economic growth Full Sample Developing Countries

Model 1 Model 2 Model 3 Model 4 Natural Gas Transit Capacity per GDP -0.389*** 3.734** -0.376*** 4.779*** (0.134) (1.515) (0.135) (1.711) Oil Transit Capacity per GDP 25.996 31.607 19.626 24.316 (19.588) (19.166) (20.726) (19.833) GDP per Capita (ln) (t-1) -0.601** -0.582*** -0.547* -0.511* (0.227) (0.224) (0.29) (0.287) Annual Oil and Natural Gas Income (ln) 0.229*** 0.216*** 0.269*** 0.259*** (0.057) (0.056) (0.072) (0.071) Population (ln) -0.153** -0.135* -0.074 -0.045* (0.073) (0.073) (0.101) (0.101) Inflation (ln) -2.943*** -2.87*** -2.956*** -2.861*** (0.499) (0.488) (0.498) (0.484) Demo cracy Index 0.728*** 0.748*** 0.506** 0.532** (0.255) (0.254) (0.254) (0.252) Democracy Index (squared) -0.065*** -0.068*** -0.038* -0.041** (0.023) (0.023) (0.023) (0.022) Secondary Schooling (t-1) 0.021 0.026* 0.021 0.026* (0.015) (0.015) (0.014) (0.014) Terms of Trade (export/import) -0.876*** -0.891*** -0.992*** -1.039*** (0.304) (0.302) (0.309) (0.305) Natural Gas Transit X Initial GDP per Capita (ln) -0.669*** -0.837*** (0.242) (0.274) Constant 19.828*** 19.283*** 19.581*** 18.819*** (3.06) (2.988) (3.201) (3.13)

Number of Observations 2355 2355 1890 1890 Prob > chi2 0.0000 0.0000 0.0000 0.0000 * significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors) Dependent Variable: Economic Growth Rate (percent)

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Table 5-3. Transit pipelines and infant mortality rates Model 1 Model 2 Model 3 Model 4 Natural Gas Transit Country Dummy -0.062*** (0.018) Oil Transit Country Dummy -0.222*** (0.027) Number of Natural Gas Pipelines - 0.017** (0.007) Number of Oil Pipelines -0.037*** (0.013) Natural Gas Pipeline Length 0.001 (0.007)

Oil Pipeline Length -0.09***

(0.02) Natural Gas Transit Capacity per GDP - 0.029*** (0.005) Oil Transit Capacity per GDP -0.911 (0.614) Annual Oil and Natural Gas Income (ln) 0.025*** 0.025*** 0.027*** 0.025*** (0.004) (0.004) (0.004) (0.004) Log GDP per Capita (t-1) -0.282*** -0.28*** -0.287*** -0.292*** (0.022) (0.021) (0.022) (0.022) Population Growth 0.023*** -0.024*** 0.025*** 0.027*** (0.004) (0.004) (0.004) (0.005)

Urbanization -0.01*** -0.01*** -0.01*** -0.009*** (0.001) (0.001) (0.001) (0.001) The Level of Democracy (FH) -0.018*** -0.018*** -0.018*** -0.017*** (0.003) (0.002) (0.003) (0.003) Globalization -0.014*** -0.014*** -0.014*** -0.014*** (0.001) (0.001) (0.001) (0.001) Constant 6.701*** 6.695*** 6.728*** 6.754*** (0.106) (0.106) (0.109) (0.109)

Number of Observations 2869 2869 2869 2859 Prob > chi2 0.0000 0.0000 0.0000 0.0000 * significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors) Dependent Variable: Infant Mortality Rates (ln)

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Table 5-4. Expected effect of pipelines (percent change in infant mortality rates)

Transit Dummy Natural Gas 6.2 Oil 22.2 Number of Pipelines Natural Gas 4.9 Oil 6.7 Pipeline Length Natural Gas -- Oil 8.1 Transit Capacity/GDP Natural Gas 4.5 Oil -- Note: Percentage calculations are based on a mean change in the IV

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Table 5-5. Transit pipelines and infant mortality rates Model 1 Model 2 Model 3 Model 4 Natural Gas Transit Country Dummy -0.075*** (0.017) Oil Transit Country Dummy -0.196*** (0.025) Number of Natural Gas Pipelines - 0.017** (0.007) Numb er of Oil Pipelines -0.32** (0.014) Natural Gas Pipeline Length - 0.004 (0.007) Oil Pipeline Length -0.01*** (0.022) Natural Gas Transit Capacity per GDP - 0.028*** (0.005) Oil Transit Capacity per GDP -0.871 (0.607) Annual Oil and Natural Gas Income (ln) 0.024*** 0.024*** 0.026*** 0.025*** (0.004) (0.004) (0.004) (0.004) Log GDP per Capita (t-1) -0.281*** -0.283*** -0.289*** -0.292*** (0.021) (0.021) (0.021) (0.022) Population Growth 0.021*** 0.023*** 0.023*** 0.025*** (0.004) (0.004) (0.004) (0.004) Urbanization -0.01*** -0.01*** -0.009*** -0.009*** (0.001) (0.001) (0.001) (0.001) The Level of Democracy (Polity II) -0.013*** -0.014*** -0.014*** -0.014*** (0.002) (0.002) (0.001) (0.002) Globalization -0.014*** -0.015*** -0.015*** -0.015*** (0.001) (0.001) (0.001) (0.001) Constant 6.734*** 6.739*** 6.769*** 6.799*** (0.108) (0.109) (0.112) (0.114)

Number of Observations 2824 2824 2824 2815 Prob > chi2 0.0000 0.0000 0.0000 0.0000

* significant at the .1 level; ** significant at the .05 level; *** significant at the .01 level OLS (ordinary least squares) Regression with PCSEs (panel corrected standard errors) Dependent Variable: Infant Mortality Rates (ln)

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CHAPTER 6 CONCLUSION: SUMMARY OF FINDINGS AND FURTHER RESEARCH

This dissertation has investigated the impact of natural resource pipelines using the literature on resource politics. The central aim of the case studies and the statistical analyses presented have been to identify whether current theories on resource dependence can be applied when explaining development and regime outcomes in transit countries as well. Questioning the premises and theoretical foundations of

‘resource curse’ and nontax revenue literature through case studies and statistical research, it locates a series of mechanisms that pipelines trigger within transit countries.

In doing so, it uses a multi-method framework derived from Lieberman (2005) and combines SNA and LNA for theoretical robustness.

Examining four central outcomes -- the level of democracy, regime stability, economic growth, and human development outcomes, the four substantive chapters tested a series of hypotheses at different levels of analysis. Table 6-1 summarizes the results of the analyses using case and statistical methods of investigation. For the regime-related dependent variables, there are four hypotheses which test the effect of oil and natural gas pipelines on the level of democracy.

Summary of Findings

Regime Outcome Variables

The case studies of Belarus and Georgia have played an exploratory role in evaluating the existing theories on the relationship between pipelines and regime diffusion, building an initial theory to test in a larger context. In doing so, the case studies did not provide clear evidence for either the first or third hypotheses on the promotion of authoritarianism or democracy. The case studies on the transit pipelines in

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these countries did not provide confirmatory evidence on the mechanisms that produce regime outcomes in the literatures on resource politics and nontax revenues. On the other hand, there is partial support for both hypothesis 2a and 2b. The network of suppliers, consumers, and regional partners in which pipeline politics is embedded had a hand in shaping domestic political process in both cases. While the case of Belarus provided partial evidence for the hypothesis 2a, the case of Georgia introduced some evidence for 2b.

Following the case studies, the statistical analyses tested the initial findings at a more general level and found further evidence for the diffusion hypotheses. Although there is partial support for the promotion of authoritarianism (without the diffusion effect), there is stronger support for the diffusion of regimes through natural gas pipelines. Here, the structure of the data set does not allow for separate tests for the effects on supplier or user. However, the statistical evidence shows that the natural gas pipelines intensify the neighborhood effect of regime diffusion. The effect appears to more strongly support authoritarianism than democratization. However, for oil pipelines, there is no enough statistical evidence to either promote authoritarianism or democracy.

The final regime-related hypothesis (4), argues that pipelines increase the stability of regimes. There is strong case evidence, though through different mechanisms, in both the Belarusian and Georgian cases. In Belarus, the supplier country Russia’s economic assistance through natural gas and oil subsidies and transit fees as well as the allowing the re-export of oil products has played an important role in

Lukashenka’s establishment of a stable authoritarian regime. In Georgia, on the other hand, the regime that was established after the independence had been very weak.

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Under Saakashvili, with the introduction of the pipelines, the country earned a new, transit identity, which helped Saakashvili and later governments to invest in state building efforts.

This fourth hypothesis is also tested through regression analysis, measuring the effect of pipelines on the probability of regime failure. Here, too, there is strong evidence for the stabilizing effect of natural gas pipelines. Controlling for other potential explanatory factors, introduction of pipelines decreases the probability of regime failure.

The findings show that poorer countries generally have a higher probability of regime failure, but that this is diminished substantially by the presence of pipelines. The interaction of the presence of natural gas pipelines and economic development, shows that the poorer the country the higher the effect of the pipeline. The introduction of natural gas pipelines influences richer countries in a more limited way compared to a poorer Eurasian or an African cases in the sample.

Development Outcome Variables

The last two hypotheses deal with the potential influence of pipelines on economic and human development. While the case studies have been able to test the effect on various aspects of economic and human development, the last substantive chapter of the dissertation explores two important indicators: economic growth and infant mortality rates, respectively. The case studies show that pipelines have promoted economic and human development in Belarus and Georgia. Specifically, starting in late

1990s (after the introduction of the Yamal pipeline) Belarus benefited vastly from the perks coming with transit pipelines, enabling the country to recover from the devastating economic crisis in early 1990s that affected all post-Communist countries. Georgia became a transit country later than Belarus and through a different process compared, 242

managed to recover from the crisis provoked by the introduction of rapid economic liberalization. By using large international pipeline projects, Georgia embedded itself within the Western economic and political system, allowing the country to maximize its economic benefits.

However, the regression results provide little to no support for a positive relationship between natural gas pipelines and economic growth. Instead, the statistical evidence suggests a negative relationship between the two, hinting at a new type of nontax revenue curse or pipeline curse. Therefore the statistical evidence contradicts the fifth hypothesis. In an even more nuanced test, the effect of pipelines is compared across differing levels. The evidence still contradicts the hypothesis (5). Countries with higher initial income level show no impact of natural gas transit pipelines, while for lower income countries the effect is negative. Since more advanced economies are less dependent on transit revenues, they are less prone to the transit curse. And finally, oil pipelines have no statistical effect on economic growth.

The last hypothesis is related to the relationship between resource transit pipelines and human development. For this hypothesis, the research finds partial support in the case studies of Belarus and Georgia. In Georgia, the direct and indirect income from the pipelines, as well as the non-monetary contribution of the pipeline projects, have played a role in improving human development. The additional income provides additional budgetary resources for education, health services, and environmental protection. The non-monetary benefits could be the new legal framework borrowed from the EU and the international banks which in turn provided the legal base for improving the aforementioned areas. However, there is more limited evidence from

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Belarus on the benefits of pipelines for human development. The statistical analysis, on the other hand, provides positive support that pipelines had a positive effect on one of the most important indicators of human development, infant mortality rates. Yet, despite the positive support in both case and statistical levels, further research should focus on testing the outcomes on other dependent variables in order to observe and examine the variations of the pipelines’ effect in different areas of human development.

The Distinction between Natural Gas and Oil Pipelines

In the introductory chapter, I discussed a series of differences between natural gas and oil as products, cost of extraction, trade, and preservation as well as the consequences of these differences on global pricing of the products. Following this discussion based on varying characteristics of different types of pipelines, which pointed to the likelihood of differing effects depending on the resource being transported, I coded natural gas and oil pipelines separately. The statistical evidence presented in the last two chapters, show that there are indeed differing impacts of the two types of pipelines. Natural gas transit pipelines have a much more substantial effect in determining the level of democracy, regime stability, economic growth, and provision of health services. Infant mortality outcome is the only area in which there is evidence of the effect of oil pipelines.

I argue that the different effects of the two types of pipelines are a product of the special properties of natural gas pipelines. Unlike oil pipelines, natural gas pipelines are indispensible for the supplier and consumer countries at the same time. Although there are financially viable non-pipeline transport alternatives for oil trade, none yet exists for natural gas. The lack of alternatives for natural gas trade creates additional interdependencies outside the pure economic sphere. Therefore, especially on the 244

regime related variables (the level of democracy and regime stability), where diffusion through pipelines is present, the statistical evidence shows a positive influence of transit pipelines on the stability of transit countries, as well as strong promotion of regional levels of democracy through pipeline trade.

In the end, this research is only the first step in theorizing natural resource pipelines and situating them in the literature.1 This dissertation should initiate further discussion within resource politics and pipeline literature so that we could uncover additional impacts of the introduction of a resource pipeline into a set of countries.

Further Research

There is no doubt that the economic and political effects of transit pipelines need to be explored further in the comparative politics literature. Resource trade through pipelines brings new revenues for transit countries via transit fees and energy subsidies

1 Indeed, one of the major areas of contention in natural gas pipeline trade, transit interruptions and their effect on the transit countries have not been discusses at length in this research. The problems Russia had with its major transit countries like Belarus and Ukraine led it to invest in the Nordstream pipeline under the Baltic Sea that bypasses Belarus and Ukraine. Stevens (2000) calls disruptions in flow of pipelines a historical reality which happened in the Middle Eastern pipelines several times due to economic and political factors. Economic reasons for disruptions at the pipelines are mainly due to a failure to agree on a fair transit fee. It also happened multiple times in Eurasia to carry Russian products to the European markets as well as in the Middle East in the past. Political reasons also play an important role in transit disruptions.

Unsurprisingly, the first transit disruption in pipeline history occurred in the Middle East, at the first transit pipeline that was built to carry Iraqi oil to the world markets. When Israel was founded in 1948, the pipeline carrying oil from Kirkuk (Iraq) to the Mediterranean ports at Tripoli and Haifa was interrupted and the Haifa link was closed indeterminately. The line to Syria was also damaged during the 1956 Arab- Israeli war and this showed the operating companies and western governments how pipelines would become the weak spots in times of crises (Stevens 2000, 227).

The possibility of interruptions also increased Western European anxiety about the future security of its energy imports, since Russia could blackmail the transit countries as well as its European consumer countries (Bahgat 2006; Stern 2006). Despite the search for alternative gas markets and increased efforts on shale gas exploration, Europe continues to be dependent on Russian gas supplies through transit countries. Thus secure energy supplies will continue to be an important concern for all countries that rely on pipelines for their gas supplies. The region and stability in a region where a pipeline passes through, the availability of alternative transport routes, and trust among participating countries are all crucial and need to be studied at length.

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for a resource it does not actually extract or sell. This dissertation offers a starting point and a guide for further investigation. Additional research should focus on testing the four dependent variables studied here with other indicators. For instance, apart from the provision of health care services, human development might include rates of life expectancy at birth, education levels, and others. Similar tests could be framed for additional economic and political outcomes.

Regarding the regime-related dependent variables, further casework can focus on the behavior of a prominent supplier in multiple transit countries. Resources trade is not only a form of economic linkage, but also a strategic one, that has political implications. There is already further research on economic linkages and its effective use on trade partners (D’Anieri 1999; Hirschman 1945). For instance, Moraski and

Giurcanu (2013) examine the voting behavior of European countries during the in PACE following the Georgian-Russian War in 2008 and find variation based on the countries’ dependence on Russian energy resources. From a different perspective, Newnham

(2011) examines Russia’s petro power during the Putin administration. Putin has used

Russia’s energy resources as part of expanding the country’s regional power, punishing hostile countries or threatening them with a cutoff of gas supplies, and rewarding his allies with lower prices (ibid, 138-140).

At least until the 1980s the Soviet Union subsidized their CMEA (the Council for

Mutual Economic Assistance) partners during the Cold War. Even in the 1980s, the price of oil for the CMEA countries was based on five-year rolling averages (Stokes

2011, 79). While prices for the CMEA countries did rise in the 1980s this method of pricing protected them from the disruptive effects of oil booms and busts. In return the

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recipient countries had to invest in pipelines and other programs that boosted Soviet energy capacities (ibid and Marer 1986). This pipeline construction in Eastern Europe helped to establish Soviet and later Russian natural gas and oil trade negotiations with the EU. Although this petro power declined over the 1980s and 1990s, petro power has been a useful instrument for Putin in 2000s (Newnham 2011).

Much like Newnham’s research, it might be meaningful to focus on how Russia’s petro power has changed over the years and how it affects different transit countries.

Although such transit countries are dependent on Russian oil and natural gas, they also have leverage over Russia, being the essential transit routes for Russian resource trade. Therefore, investigating the extent to which being in the Russian transit network affects regime type and stability remains a potential research question of importance to understanding the development of the post-Communist region.

Beyond the outcomes studied here, several other areas may be subject to the impact of pipelines. Other interesting questions have not been subjected to substantial research as the impact of international pipelines on the protection of human rights, corruption levels, and environmental quality. One recent Columbia University project on the Chad-Cameroon oil pipeline reports that when the World Bank gave the final approval for the loan to build the oil pipeline in 2000, many NGOs criticized the decision, asking for a two-year moratorium in order to introduce necessary technical and legal environmental safety measures (Martin 2013). Since the early 2000s, there has been constant criticism regarding unaddressed environmental issues, protection of indigenous populations on the pipeline route, food security in Chad, and failure of public

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health measures (Djiraibe 2002, 2). Reflecting on the failure of the World Bank, the authors wrote:

In the case of Cameroon where environmental impacts as a result of pipeline construction are more severe, the World Bank ignores the findings of its own Operations Evaluation Department (OED) which documents in detail the lack of environmental credibility of the Cameroonian government and the World Bank’s own strategic mistakes: “The Bank rightly recognized institutional weaknesses in Cameroon, but preferred to rely on technical assistance to deal with the issue. Failure to develop local institutions undermines the sustainability of any achievements in this context” (Djiraibe 2002, 6). Such environmental and public health issues have been dismissed by international institutions so that multinational companies and other international stakeholders can maintain their profits (Ballande 2002). Further study should examine the environmental impact of transit pipelines. For instance, the repercussions of the Baku-Tbilisi-Ceyhan

Pipeline in Turkey or the environmental effects of Nigeria-Benin-Togo-Ghana Pipeline on the shores of the four countries would provide additional information about the impact of pipelines on the quality of human life.

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Table 6-1. Evaluation of the hypotheses

Hypothesis Case Evidence Statistical Evidence H1: Higher transit fees and subsidized energy imports should encourage authoritarianism None Partial

H2a: Higher transit fees and subsidized energy imports should increase the diffusion effect of the supplier countries, therefore leading to a convergence of the Partial Partial regime type of the transit country and of the supplier country

H2b: Higher transit fees and subsidized energy imports should increase the diffusion effect of the user countries, leading to a convergence of the regime type of the Partial Partial transit country and of the user country

H3: Transit fees and subsidized energy imports should encourage democratization as long as these are not the dominant sources of foreign revenues to None None a transit country

H4: Higher transit fees and subsidized energy imports should improve the stability of a country Strong Strong

H5: Higher transit fees and subsidized energy imports should increase the credibility and perceived economic security of a Strong Contradictory country therefore encouraging higher levels of economic growth

H6: Transit fees and subsidized energy imports should promote Partial Strong higher levels of human development in transit countries

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BIOGRAPHICAL SKETCH

Ruchan Kaya graduated from Sabanci University with a Bachelor of Arts degree in social and political sciences in 2008. He received a Master of Arts and a Doctor of

Philosophy in political science from the University of Florida in 2011 and 2014, respectively.

His research focuses on the issues of development, regime change, comparative democratization, and authoritarian institutions. In particular, the dissertation, entitled A

New Type of Resource Curse? The Effect of Natural Resource Pipelines on the Level of

Democracy, Regime Stability, and Development, centers upon how resource transit pipelines affect the level of democracy, regime stability, and economic and human development in natural resource transit countries.

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