Oil Prize, Past and Present, Ties Russia to Iraq


By Sabrina Tavernise

New York Times
October 17, 2002

As Russia defends its position during a two-day United Nations debate on Iraq, one thing will weigh on the minds of Russian diplomats: oil.

Russian oil companies have extensive interests in Iraq that reach back to Soviet times, when the two countries were allied. Revenue from Russia's own oil production is crucial to the government's budget, making the country very sensitive to any sudden swings in world oil prices that might be touched off by military action.

As many as 300 Russian companies now do business with Iraq, under a United Nations program set up in 1996 permitting Baghdad, which is under a trade embargo, to sell some oil to pay for essential imports like food and medicine. Russian companies control the rights to sell 40 percent of Iraq's oil on world markets. But the real prizes are Iraq's oil fields, which are now producing at far below their potential. Iraq's reserves are second in size only to Saudi Arabia's, and Iraq has offered Russian companies development rights to some of its richest fields.

About 10 Russian companies have development agreements with Iraq, not all of them formalized into contracts. Two, Lukoil and Tatneft, are mainly publicly traded; the Russian state controls many of the others, including Slavneft, Rosneft, and the Russian natural gas monopoly, Gazprom.

Zarubezhneft, a smaller state-owned company operating in Iraq since the late 1960's that has acted as the coordinator of Russian oil business there, estimates that there are 70 billion barrels of oil, more than half of Iraq's total reserves, in the fields covered by the Russian companies' deals with Baghdad.

"It's huge, it's a colossal amount," said Nikolai P. Tokarev, general director of Zarubezhneft and a member of a Russian government commission on Iraq. But very little oil is being produced now at the fields because of the embargo. Lukoil, Russia's largest oil company, has a majority stake in Iraq's giant West Qurna oil field, with an estimated seven billion barrels of recoverable oil, but has yet to get any of it out of the ground.

The Russian companies are worried that if military action by the United States pries Iraq loose from Saddam Hussein's grip, it will also break their own hold on these potentially lucrative fields. "If there is military action, the prospects for us in Iraq will be zero," Mr. Tokarev said in an interview. "Do Americans need us in Iraq? Of course not. Russian companies will lose the oil forever if the Americans come."

The Russian state also has direct financial interests in Iraq, in the form of about $7.6 billion in debts Iraq ran up with the Soviet Union that have not yet been repaid. Russia also has a huge stake in keeping the world oil market from being flooded by new production from Iraq that would drive prices down.

"Russia needs Iraq economically," said Aleksei Arbatov, deputy chairman of the defense committee in the Russian Parliament. "Iraq acknowledges its debt to Russia; a new regime might not." If the new regime — favorably inclined toward Americans — sells oil without limits, "our budget will collapse."

The Bush administration has argued that Russia stands to gain more from a government change in Baghdad than from its current business ties there, especially from the lifting of the economic sanctions that have hobbled business for 12 years. Still, American officials say they cannot give any guarantees. "We've made it clear to them that we understand their economic interests," said a senior American official in an interview last week. "It does not mean we'll sign blank checks. The approach will be to offer them a level playing field."

That position seemed to suit President Vladimir V. Putin of Russia, who commented at a joint press conference with Prime Minister Tony Blair of Britain in Moscow last week that he had not invited Mr. Blair to an "Oriental bazaar," implying he was not bargaining with Mr. Blair over Iraq.

Still, Vagit Y. Alekperov, Lukoil's chief executive, said last week that Mr. Putin had given him assurances that his company's interests in Iraq would be preserved. A Lukoil spokesman said this week that Mr. Alekperov was referring to a conversation he had with Mr. Putin in September. Even so, the Russian companies here are hedging their bets. The commodities trading firm Alfa-Eco last week concluded its largest contract so far under the United Nations program, covering up to 20 million barrels of oil.

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