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Russia: Prospects Dim For Postwar Investment In Iraq

Russia has serious economic interests in postwar Iraq. It hopes to collect on an outstanding Soviet-era debt and it has also set its sights on Iraq's potentially lucrative oil fields. Russia's LUKoil energy company had signed contracts with Saddam Hussein's government and says it is ready to initiate legal proceedings if the future Iraqi government fails to honor the deal. But analysts say priority in postwar-Iraq business deals will likely be given to those countries whose forces toppled Hussein's regime -- and not to countries like Russia, which bitterly opposed the war.

Prague, 11 April 2003 (RFE/RL) -- Russia has two major economic concerns in Iraq. One is getting back $8 billion in unpaid debts. The other is to secure the interests of one of its most powerful oil companies. But both goals may prove hard to achieve for a country that openly opposed the war to topple the regime of Saddam Hussein.

LUKoil is the largest Russian investor in Iraq. In 1997, the company signed a $3.8 billion, 23-year deal to extract oil from Iraq's West Qurna field. Until now, LUKoil has been prohibited by UN sanctions from developing the field. With Baghdad now in the hands of coalition forces, the oil company now fears any new Iraqi government will not honor the agreement. This week it announced its plans to fight for what it considers its legal interests in Iraq.

LUKoil Vice President Leonid Fedoun told the Russian daily "Kommersant" that "West Qurna is our field from a legal point of view and if anyone tries to squeeze us out of there, LUKoil will file an international arbitration suit in Geneva [at the International Commercial and Industrial Arbitration Court.]"

Fedoun also said LUKoil would block the oil fields from any development if U.S. or British firms refused to grant the Russian company a leading role in the project.

Valerii Nesterov is an energy and oil analyst at Troika Dialog, a Moscow-based investment company. He told RFE/RL that, theoretically, LUKoil still has a chance of seeing its West Qurna deal succeed. "There is a Russian saying: 'Hope dies last.' As long as international law is valid -- I mean international laws in commercial relations -- and if these norms are applied to this contract, LUKoil will have some ground to defend its rights. However, no one can say for sure how likely it is that LUKoil will have this contract reaffirmed. But the company will not agree to give it up without a fight," he said.

The contract is worth fighting for. West Qurna is estimated to hold some 15 billion barrels of oil -- one of Iraq's largest reserves.

Laza Kekis is an analyst at the Economic Intelligence Unit in London. He said LUKoil's chances of securing the West Qurna deal are very slim, adding it is clear that priority will go to U.S. or British companies. "I think it's very difficult to disagree that Russia will certainly not be a major player in any reconstruction effort. That's already been made quite plain. And we even have U.S. congressional provisos that Russia and other countries that did not support the war should be excluded," Kekis said.

An amendment to the supplementary budget law adopted on 4 April by the U.S. House of Representatives prohibits France, Germany, Russia, and Syria from taking part in U.S.-funded reconstruction projects in Iraq. The proposed measure even bars the four countries from receiving information about the projects. However, it remains unclear if the Senate will approve the amendment or if the exploitation of oil fields will be considered U.S.-funded reconstruction.

At the same time, some observers have questioned whether LUKoil has sufficient resources to develop the field. "The Wall Street Journal" this week reported that developing West Qurna will cost some $6 billion in investment -- a sum LUKoil cannot manage on its own.

Mikhail Maliutin is an adviser to the Russian Union of Industrialists and Entrepreneurs. He told RFE/RL that LUKoil's West Qurna ambitions are only a "daydream," and that neither LUKoil nor Russia overall will be able to defend its interests in postwar Iraq. "[Russia] is like a little girl who puts on lipstick and tries to act like an adult. This comparison perfectly illustrates [how Russia will] present its economic interests in [postwar Iraq,]" Maliutin said.

There is also doubt over whether Russia will ever be compensated for Iraq's $8 billion debt. Nesterov from Troika Dialog said the debt accumulated during the 1980s, when the Soviet Union was Iraq's main weapons provider. "[Iraq] is in debt for Russian equipment, trucks, and -- I am sure -- military equipment. I don't know the details, but Iraq was a country that traded with the former Soviet Union -- there was some kind of strategic partnership -- the trade was done in huge volumes. And, as I said, trucks, various equipment, oil producing equipment, military equipment and, of course, some other items [were sold to Iraq,]" he said.

But yesterday, U.S. Deputy Defense Secretary Paul Wolfowitz suggested Russia and France should both pardon old Iraqi debts as a gesture toward helping the country rebuild. Russian officials today rejected the suggestion, saying there is no reason why Russia should write off Iraq's debt.

It will be hard for a new Iraqi government to repay outstanding debts. Some Western energy analysts say it will take at least two or three years for Iraq to boost oil production levels to 3.5 million barrels a day. Before the current war, Iraq was producing about 2.5 million barrels a day.

Kekis of the Economist Intelligence Unit said Russia cannot expect to begin receiving payback from Iraq anytime soon. "Estimates vary, but [Iraq's] total debt is at least $140 billion. And it's really very difficult to believe that that -- along with a similar, if not larger, amount in outstanding reparations to Kuwait -- [would be something] any Iraqi government would be able to meet. So we can expect some debt write-off -- at least a large part of that debt, at least more than half," Kekis said.

Estimates of Iraq's debt vary even among experts from the same organization. Hania Farhan, the head of the Economist Intelligence Unit's Middle East section, told RFE/RL that aside from reparation costs, the total Iraqi debt is near $100 billion. This figure includes some $35 billion in debt to Gulf region countries as well as $8 billion to France.