THE SHOWDOWN BETWEEN Europe and the US over Iraq has put Russian president Vladimir Putin in a delicate position. He has tried to balance the need to remain on good terms with the world’s only superpower with a simultaneous bolstering of Moscow’s traditional strong relations with the countries of the Middle East, especially Iraq.
When forced to choose between these strategies, an increasingly confident Russia followed the money. Relations between Russia and US have improved greatly since the September 11 terrorist attacks but goodwill doesn’t pay the bills.
Russia remains one of Iraq’s most important trade partners, with ties stretching back to Soviet days, when the USSR was Iraq’s biggest arms supplier. Iraq’s military is almost entirely armed with Russian hardware and Russian trading companies dominated Iraq’s legal oil exports under the UN’s oil-for-food programme, handling a third of the total. (Meanwhile, French bank BNP Paribas has exclusive rights to handle all the funds connected with the trade, despite Iraq’s dislike of this arrangement and its faltering attempts to diversify its financial arrangements.)
Modern Russia’s first president, Boris Yeltsin, put most of his foreign relations energy into establishing ties with the west, and the US in particular. However, since coming to power in May 2000, Putin has turned his attention to rebuilding traditional relations with Russia’s neighbours.
Over the past three years, Putin has been busy creating a Eurasian bloc tying the countries of central Asia and the Caucusus more closely to Russia, and to a lesser extent courting China and the countries of the Middle East.
Rich countries such as the US and the UK can afford to prosecute war on the basis of avowed principles, but Russia’s economic weakness has made Putin more pragmatic in calculating the benefits and costs of war.
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Putin: economic and political realities are |
Concern over recovering debt At the top of the Kremlin’s agenda is the recovery of Iraq’s trade debt to Russia. Some $8 billion of principal is owed, and the same again in interest payments. Secondly, Russian companies will be front-runners in the rush to exploit Iraq’s 200 billion barrels of oil reserves, the second largest in the world, once the dust has settled.
“Oil and the [$8 billion trade] debt play a big part in Russia’s position on Iraq. Putin is not on the war bandwagon but he is also not going to derail the train,” says Stephen O’Sullivan, head of research at United Financial Group.
Before the US-led invasion only 24 of Iraq’s 73 known fields were being drilled and lifting oil and Russian companies were seeking contracts to develop the rest.
Russia’s second-largest company, LUKoil, has been on the ground the longest and in 1997 it signed a deal worth an estimated $20 billion to develop the western al-Qurna oil field in southern Iraq. This is one of the world’s largest undeveloped reservoirs, containing proven reserves of 7.8 billion barrels, with a potential output of 500,000 barrels a day.
More recently, many other Russian oil companies have sought contracts in Baghdad: in the past two years, Tatneft, Slavneft, Rosneft, Surgutneftegas and Gazprom (through its subsidiaries Sibur and Stroitransgas) have all made the trip in pursuit of this goal.
Slavneft, which was recently bought from the state by Russia’s third-largest and fourth-largest oil companies, Tyumen Oil and Sibneft, has a 25-well drilling contract in the Luhais field in southern Iraq, and number six company Tatneft has been drilling 79 wells in two oil fields under a service contract. State-owned Rosneft has been involved in a Russian/Iraqi joint venture, Babylon Drilling.
Nothing has been said in public but it has been widely assumed that Moscow was negotiating quid pro quo deals with Washington in February to protect these interests, although both sides deny it. At the same time, Iraq is known to have used the deals to try to force Moscow to be tougher in its defence of its Arab trading partner.
The LUKoil contract in particular became a political football as Iraq traded diplomatic blows with Washington. In December Baghdad cancelled the LUKoil contract and Iraqi deputy prime minister Tariq Aziz accused LUKoil of trying to win US guarantees that its stake in the west Qurna field would be retained under a new regime.
In the same week, the Russian press reported that Iraq was dangling licences for the vast Nahr Umr field before state-owned companies Rosneft and Zarubezhneft. This entails estimated reserves of 26 billion barrels.
More deals – involving Gazprom’s Stroitransgaz and Soyuzneftegaz, an obscure oil firm owned by former fuel and energy minister Yury Shafranik – were signed at the end of January to try to sweeten Moscow and bolster the Kremlin’s growing opposition to war plans, although these contracts covered fields that are small compared with the west Qurna field.
The Iraq government relented and reinstated the LUKoil contract in February only to cancel it again a few weeks later. “The LUKoil contract is finished, and the contract has been scrapped, and there is no room for discussing it again,” acting Iraqi oil minister Samir Abdulazizal-Najem told reporters in Baghdad. “The company has failed to fulfil its commitments.”
Oil is a chip in the high-stakes poker game, and none of these contracts can be implemented until the current crisis is resolved. The spate of contract signing amounts to Russian manoeuvring ahead of a post-war carve-up of Iraq’s assets.
“The last decade has weakened Russia and at the end of the day it has very little clout on the international stage, despite Putin’s best efforts,” says an oil expert. “One of the few ways it has of affecting the outcome of the current imbroglio is by signing these contracts.”
Bridge-building setback The brouhaha surrounding the showdown over Iraq has undermined Putin’s efforts to build bridges with the west. The Yeltsin administration was largely passive in its relations with the west. And the assistance offered by the west to Russia was often booby-trapped with conditions, such as meeting targets set by the IMF.
Since he took over in May 2000, Putin has taken the initiative. Following the September 11 attacks he went on boldly to offer Russia’s support and made several significant gestures, such as allowing US troops to operate out of Russia’s backyard in the central Asian republics.
But such gestures cannot disguise the fact that during the past three years Putin has pushed Russia’s foreign policy centre of gravity eastwards.
Having been bottled up for a decade, the central Asian republics have been given long-term access to Russian oil and gas pipelines as part of a Eurasian economic union set up by Putin last year.
Arguably, the fracas with the US should not be seen as a reversal of Russia’s improved relationship with the west but as an increasingly strong assertion of its intention to protect its own interests. These interests have been pursued in many countries, including those in George W Bush’s axis of evil.
In parallel with Putin’s political drive, Russia’s leading companies have been doing deals far beyond its borders. Oil major Yukos is on the verge of building a pipeline to China from western Siberia and it has bought the rights to explore several blocs in northern Kazakhstan. At the same time LUKoil, Yukos’s main rival, has also signed deals in Kazakhstan and another to jointly develop the Anaran onshore block located in western Iran.
“The scale of Russian oil business is forcing them to look farther afield,” says Adam Landes, an analyst with Renaissance Capital. “Yukos and LUKoil stand apart from the rest, which are starting to look provincial. There is a gap opening up between the leading Russian oil companies and the rest.”
By placing Russia into direct opposition with the US over Iraq, Putin risked putting all this progress at risk. Why would he endanger increasingly warm relations with the world’s biggest power?
“Putin is not facing up to the US because of some misconceived notion of Russia’s position in the world order and its historic duty to defend basket-case regimes simply because the US doesn’t like them.” says Roland Nash, the head of research at Renaissance Capital. “Rather, the stand is being made because Putin objectively believes that it is in Russia’s best economic and political interest to side against the US over Iraq.”
Although much of the rest of the world lies mired in slow growth or outright recession, Russia’s strong recent economic growth – almost entirely achieved without foreign investment – has rebuilt the Kremlin’s confidence and put it into a stronger position to go it alone.
And with elections looming, standing back from an American-led war in Iraq plays well at home: in a poll last month only 2% of Russians supported military action against Iraq and just under half expressed the view that Iraq was one of Russia’s friends.
However, Russian public opinion counts for little with the Kremlin. America’s biggest stick is its support for Russia’s fast-track accession to the World Trade Organization, especially in the face of strong European objections. This has led most analysts to believe that Russia may cave in under real pressure from the US.
“This analysis, however, risks retreating into the economic paradigm of the 1990s,” says Nash. Russia is no longer about carrot-and-stick economics between states using finance to push politics. It repays debt and its biggest headache is what to do with the liquidity swamping its capital markets.
“Russia’s consumer market, finally waking up to credit, could be one of the world’s most exciting, and it is as likely that international companies will be pushing for access to Russian consumers as that Russian firms will be clamouring for entrance to foreign markets,” Nash says.
“Russia needs foreign private capital, preferably of the direct variety with accompanying technology and expertise. It does not need conditionality-packed institutional financing or concessions.”
More to gain from Europe
Even if the confrontation badly wounds US-Russia relations, it is likely to have the opposite effect on its relations with Europe. The US may dominate finance from multilateral institutions such as the IMF but it is a minnow when it comes to investment money from businessmen seeking openings in Russia.
Weighing up the pros and cons the Kremlin is accounting for the fact that despite its power and wealth it has received very little help from the US. American companies have invested half that invested by European companies and the White House is even threatening to withdraw its support for Russia’s World Trade Organization bid – the only tangible reward Russia has been offered for its previous support for the war against terror.
Of last year’s $126 billion in Russia’s non-CIS trade volume, the US accounted for only $7 billion, putting it well down the league table. The biggest trade partner by far is Germany, with $14.6 billion, and the US even lags behind Russia-China trade of $9.6 billion. In all, western Europe makes up 44% of Russia trade, while the US accounts for 5%.
“Geography and history determine that Russia’s economic future lies with Europe and China, not the US,” says Nash.
