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Russian Oil Stake in Iraq

W By Michael Dobbs and Susan B. Glasser

wASHINGTON – Like his father during the run-up to the 1991 Persian Gulf War, President Bush is using the lure of money and political respect to persuade a reluctant Russia not to stand in the way of a U.S.-led war with Iraq.

Russian officials say they have reached an understanding with the Bush administration on Russia’s economic interests in Iraq, including concerns about the plummeting price of oil as a result of an Iraqi oil boom in the wake of President Saddam Hussein’s overthrow. While vigorously denying that there has been a specific agreement, U.S. officials say they are aware of Russian concerns and are taking them into account in planning for a post-Saddam Iraq.

“We understand that Russia has got interests there, as do other countries,” Bush told the independent Russian television station NTV in an interview broadcast Thursday night. “And of course those interests will be honored.”

On Saturday, Bush will acknowledge Moscow’s role in agreeing to a unanimous United Nations Security Council vote on a stringent new inspections regime for Iraq by traveling to the former Russian imperial capital of St. Petersburg for his seventh meeting with Russian President Vladimir Putin. Over the past few days, Bush has gone out of his way to praise Putin for his help in the war on terrorism and his handling of a recent hostage crisis in Moscow in which 128 civilians were killed by poison gas administered by government security forces in an attempt to free them from Chechen guerrillas.

The American wooing of Putin is reminiscent of the diplomatic campaign waged by President George H.W. Bush in the fall of 1990 to win the support of then-Soviet leader Mikhail Gorbachev for U.N. resolutions endorsing the use of “all necessary means” to end Iraq’s occupation of Kuwait. In return for Soviet acquiescence in the use of military force against Baghdad, Bush held out the prospect of political and economic support for Gorbachev at a time when he was struggling to hold the Soviet Union together.

The main difference between the two rounds of diplomacy, according to U.S. and Russian analysts, is that Putin is more realistic than Gorbachev about what he can get in return for giving Washington a relatively free hand in Iraq. Rather than demanding a huge infusion of western aid for a moribund economy, he has focused his attention on gaining U.S. assurances of respect for Russian economic interests in Iraq, most of which center on the country’s future as the largest Middle East oil producer after Saudi Arabia.

“Putin is a very pragmatic politician,” said Dmitri Simes, president of the Nixon Center, a Washington think tank that has focused on U.S.-Russian relations. “Instead of trying to stop things that are going to happen anyway, he tries to get the most he can, both for his country and for himself politically.”

At the top of Putin’s list of economic concerns is the fear of collapsing oil prices once U.N. trade sanctions against Baghdad are removed and western investment begins to pour into the neglected Iraqi oil sector. According to an estimate by Celeste Wallander of the Washington-based Center for Strategic and International Studies, a $6 fall in the price of a barrel of oil would slash Russian economic growth in half. If the price fell to $13 a barrel, most Russian oil companies would no longer be profitable.

Russian and U.S. officials said Putin is also anxious to protect the contracts of Russian oil companies in Iraq, including a $3.5 billion deal for the state-owned Lukoil to develop a giant oil field in southern Iraq, and would like to recover up to $12 billion in old Iraqi debts. One possibility believed to be under discussion is to use a portion of Iraqi oil proceeds to pay off part of the Russian debt.

A high-ranking Russian foreign ministry official involved in negotiations with the United States over the U.N. resolution told an American visitor to Moscow this week that a “gentleman’s agreement” had been reached with Washington on Iraq. He said the deal centered on maintaining a price of oil at around $21 a barrel, the price used by Russian government planners for long-term budget estimates. Oil prices have been hovering around $25 a barrel for much of this year.

While acknowledging that discussions have taken place with the Russians over the price of oil, U.S. officials dismissed suggestions that the United States can do very much to influence the market. They added, however, that they have tried to allay Russian concerns about plummeting oil prices in the wake of a U.S. victory in Iraq, concerns that are described as exaggerated by many American experts.

“Generally, we would like to see stability (in the oil price),” said a U.S. official involved in Russia negotiations. “Wild swings up and down unsettle the markets.”

At present, Iraq produces around 2.4 million barrels of oil a day, compared to Saudi daily output of around 7.4 million barrels. Estimates of Iraqi oil production by 2010, in the event of large-scale foreign investment and a lifting of sanctions, vary from around 4 million barrels a day to 7 million or even 8 million.

By addressing Russian concerns about falling oil prices, the United States would also be looking after the interests of Saudi Arabia, a key U.S. ally in any future Persian Gulf conflict. In the short term, however, the low cost of extracting Saudi oil means that Riyadh is much better positioned than Moscow to ride out a period of low prices. In the past, analysts note, the Saudis have deliberately used low oil prices as a weapon for forcing other producers out of the market.

Russian officials have painful memories of the way in which the Saudis used their excess capacity to flood world oil markets in 1985, the year that Gorbachev came to power, causing prices to drop by more than half to a low of $12 a barrel. Combined with declining Soviet oil production, plummeting oil prices effectively destroyed Gorbachev’s hopes of reinvigorating the Soviet economy, leading directly to the breakup of the Soviet Union.

Since Putin took office in 1998, by contrast, Russian oil exports have jumped sharply from 3.8 million to 5.4 million barrels a day, providing a ray of light in an otherwise gloomy economic picture.

By drawing up a concrete economic wish list on Iraq, Putin is following a different strategy from Gorbachev, who dreamed of a “grand bargain” with the United States under which the Soviet Union would receive large-scale economic assistance in return for sweeping economic reforms. “Both sides made promises that they could not come through on,” said Jack Matlock, a Princeton university professor who served as U.S. ambassador to the Soviet Union during the Gorbachev period.

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