Russia-Iraq Oil Ties Worry U.S.

MOSCOW (The Washington Post) — A convoy carrying Russian oil-drilling equipment arrived at the al-Waheed border crossing recently and passed from Syria into Iraq en route to the northern city of Kirkuk. About 50 Russian specialists will arrive soon to begin setting up to drill 45 wells.

For the Russian company Zarubezhneft, it’s a small project, worth $8 million, and hardly the reason why its chief executive visits Baghdad every three months. The big payoff would be Iraq’s decision to grant Zarubezhneft the rights to develop the massive Bin Umar oil field, a multibillion-dollar deal if the United Nations ever lifts sanctions.

Every day Russian companies drill or ship as much Iraqi oil as they can under U.N. auspices and dream of the day they can do more. Almost everyone here seems to have a hand in the Iraqi pot, from engineering firms to machinery manufacturers to politicians. Even the Ministry of Emergency Situations, which is usually responding to floods and forest fires, has gotten into the game, setting up a subsidiary to trade Iraqi crude.

The depth of Russia’s economic ties to Iraq, both actual and potential, poses a serious challenge to President Bush as he contemplates a military attack to overthrow Saddam Hussein’s government. Russia supported the U.S. war in Afghanistan but it has warned against any invasion of Iraq, its longtime ally.

“If there were a strike, it would put us in a very hard position,” said Yuri Shafranik, a former Russian fuel and energy minister who heads a committee promoting Russian-Iraqi economic cooperation. “It would mean Russia’s position was ignored and no one cared about Russia. For us, now as never before, these projects are very important.”

The message from the Kremlin so far has been ambiguous. President Vladimir Putin has made much of his newfound friendship with Bush and has reined in the sort of bellicose, anti-American rhetoric that erupted in 1999 with the war against Serbs in Kosovo. But Putin tends carefully to Russian economic interests and his government has confirmed that it will soon sign a long-term, $40 billion economic cooperation agreement with Iraq covering such areas as energy and transportation.

The Kremlin’s haziness may signal an interest in striking a deal. Key political and corporate figures in both Washington and Moscow have floated ideas on how to guarantee Russia’s economic interests in Iraq in a post-Hussein era. In exchange, Russia would mute its opposition to U.S. military action, if not support it outright.

“Some hard political decisions need to be made rather soon by the United States if the United States wants Russia to look at the whole situation with Iraq more favorably than it does now,” said Mikhail Khodorkovsky, head of Yukos, Russia’s second-largest oil company. “If America wants Russia to be a participant in solving the problem–and I think Russia can play a big role here–then the best way to go about doing this is to get Russia interested from an economic view. If we don’t have any interests there, why bother getting mired there?”

Yet the rumblings of compromise have not led to any concrete agreements, at least not publicly.

“I can’t imagine why this isn’t a win-win situation if we were smart about this,” Sen. Joseph R. Biden Jr., D-Del., chairman of the Foreign Relations Committee, said at a hearing last month. “But I don’t get any sense that there’s any movement on this by anybody in the administration.”

Russia’s interest in Iraq goes back to the Cold War era, when the Soviet Union cultivated client states in the Arab world. Over the years, thousands of Soviet specialists worked in Iraq, and Moscow sold Baghdad considerable weaponry. A large debt remains. Abbas Khalaf, Iraq’s ambassador to Russia, put it at $7 billion and said that “Iraq is ready to pay these debts after the lifting of sanctions.” In a recent conversation, Biden said, Putin corrected him when he said the debt totaled $11 billion.

Russia has also emerged in the past year or two as Iraq’s largest trading partner under the U.N. oil-for-food program. In the six-month period ending in May, Russia purchased 90 million barrels of oil out of 226 million sold by Iraq, a deal worth roughly $1.8 billion, according to oil executives here. As of July 31, U.N. figures show Russia had sold Iraq $4.18 billion in food, medicine and oil industry equipment since the program began in late 1996, surpassing all other countries. “Almost all Russian companies work with us,” Khalaf said.

The oil-for-food program allows Iraq to export some crude to companies such as the 10 or so Russian firms that then resell it in the United States, Europe and Asia. Most of the proceeds are reserved for humanitarian needs or infrastructure work in Iraq.

However, Iraqi crude sales have plunged lately, not even counting Hussein’s brief suspension of exports last spring to pressure Israel and the United States. Russia blames the falling sales on a U.S.-imposed pricing system in which the final cost of oil purchased from Iraq is not set until afterward, discouraging companies that want to know how much they are paying at time of purchase.

U.N. officials, for their part, maintain that Iraq has been charging a premium of 20 cents to 50 cents per barrel, most of which they deem an illegal kickback to Hussein’s regime. Russian companies, they believe, have been going along with the scheme.

The largest long-term development deal involves Lukoil, Russia’s biggest oil company. Lukoil signed a 23-year contract in 1997 entitling it to lead a consortium that would develop part of the West Qurna field in southern Iraq. Lukoil would be entitled to extract 667 million metric tons of oil and put the value of the deal at close to $20 billion. “This is a gigantic project,” said Leonid Fedun, a vice president and part owner of Lukoil.

But the project has remained frozen under U.N. sanctions, and relations between Iraq and Lukoil have soured. Iraqi officials have pressured Lukoil to begin work at West Qurna despite the sanctions, but the Russians have refused. In retaliation, Iraq cut Lukoil out of the oil-for-food sales.

For Russia, the big question is what happens if the United States goes to war to topple Hussein.

Ariel Cohen, a scholar at the Heritage Foundation in Washington, proposed in an April article that the Bush administration support the contractual rights of Russian companies to Iraqi oil fields to win Moscow’s acquiescence to a U.S. war. He also suggested the U.S. support repayment of Soviet debt by a post-Hussein government or broker a debt swap that would reduce Russia’s own obligations to the Paris Club of creditor nations by a like amount.

The idea resonates in some quarters of Capitol Hill. “This is an economic imperative for Russia and we have to do more than just protest” ties to Iraq, Henry Hyde, R-Ill., chairman of the House International Relations Committee Chairman, said in an interview after meeting with Russian officials here week. “We have to make it worth their while or at least come close to that.”