Russia chases Baghdad oil bonanza

23 August 2002

Investment in the oil sector will be at the heart of the $40,000 million economic co-operation deal that Russia and Iraq are expected to sign by the end of August. The deal, disclosed by Baghdad's representative in Moscow Abbas Khalaf on 16 August, is designed to consolidate relations between the two traditional allies. However, the agreement is likely to be viewed by the US as a further obstacle to Washington's plans to launch a military attack on Iraq.

The five-year co-operation programme is expected to cover a variety of sectors, foremost among which will be Iraq's battered oil industry. Other fields of interest to Russian companies include power, chemical production and transport infrastructure. Russian engineers played an integral role in the construction of much of Iraq's infrastructure before the imposition of UN sanctions in 1990. Since then, Russian companies have been unable to realise existing oil contracts worth hundreds of millions of dollars and Baghdad still owes Moscow billions of dollars for weapons purchased from the former Soviet Union.

Iraq, home to the second-largest oil reserves in the world, is keen to boost its crude oil output to levels close to the 3.5 million barrels a day (b/d) that it was producing in the late 1970s. But with international oil companies prevented under UN regulations from participating in the reconstruction of the hydrocarbons industry, efforts to ramp up production face serious difficulties.

Russian companies, however, have not been deterred by Iraq's position as an international pariah and have for many years been seeking to negotiate further contracts with the Iraqi authorities. Baghdad meanwhile has worked hard to maintain good relations with Moscow, recognising the importance of having one of the permanent members of the UN Security Council as an ally. 'Russia was, is and will be our main partner,' says Khalaf. 'What we need from Moscow is moral, political and diplomatic support. America's aggressive statements against Iraq aroused negative reaction in Russia.'

'Russian companies are very serious about their exploration contracts in Iraq,' says Amy Myers Jaffe, senior energy analyst at the Baker Institute for Public Policy. 'Russian companies have been involved for many decades and they want to maintain their pre-eminent position when the country re-opens for business.' Jaffe refutes those who argue that the US' dream scenario of a stable regime change would signal the end of the Russian success. 'Contracts are honoured even when governments change,' she says. 'The Russians will be seeking to enforce agreements regardless of who is in power in Baghdad.'

Washington has played down the significance of the economic co-operation deal between Iraq and Russia. The State Department has said only that it would expect any agreement to be fully consistent with UN Security Council resolutions. Some individual politicians, however, have voiced concern over the deal saying that it seems to challenge the renewed warmth in relations between Moscow and Washington. The two 'have a coincidence of interests in Iraq and it's not very nice to express it this way, with a symbolic gesture, even if it doesn't mean very much,' Senator Richard Lugar, a senior Republican on the Foreign Affairs Committee said in a US TV interview on 18 August.

Russian sources have been quick to stress that any activities stemming from the co-operation agreement, which has been under negotiation for several years, will be in line with the UN sanctions.

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