#5
The Globe and Mail (Canada)
April 10, 2003
Iraq puts chill on U.S.-Russia relationship
By MICHAEL DEN TANDT

Of all the geopolitical ripples that followed the Sept. 11 terrorist attacks, few seemed more important or potentially durable than the new strategic energy alliance between Russia and the United States. Russia is the world's largest producer of crude oil, accounting for an estimated eight million barrels a day, and desperately craves hard currency and technical know-how. The United States imports more crude than any other nation on Earth, about 60 per cent of its needs, and has money and savvy to spare.

This nexus of capacity and demand, combined with a strong political desire in both countries to banish the last vestiges of the Cold War -- while at the same time countering the threats of Islamic fundamentalism and nuclear proliferation -- made the match seem heaven-sent.

But a relationship built on energy economics has foundered on the same. In this, as in so many other things, Iraq has been the flashpoint.

Just a few months ago, the emerging Russian-American alliance seemed firm and destined to grow stronger. Last May, U.S. President George W. Bush and his Russian counterpart, Vladimir Putin, signed a joint declaration on a "new strategic framework" for the relationship. In July, came the first-ever delivery of Russian crude to the United States. In October, the first-ever Russian-U.S. commercial energy summit was held in Houston.

On Oct. 26, it's worth noting, Russian troops stormed a Moscow theatre held by Chechen guerrillas, killing at least 117 hostages and all the guerrillas, many apparently by summary execution. The United States pointedly declined to criticize Russian tactics.

In late November, presidents Bush and Putin met again. They trumpeted growing co-operation between the U.S. Department of Energy, the Ministry of Energy of Russia, the U.S. Department of Commerce and the Ministry of Economic Development and Trade of Russia. And they hailed a proposal to build a deep-water port in Murmansk, intended to ease the flow of Russian oil to Western markets.

But then came Iraq. In the lead up to war last month, Russia set itself squarely in the Franco-German camp, effectively blocking a United Nations resolution authorizing war. Mr. Putin repeatedly hammered Mr. Bush's policy of pre-emptive invasion. In the first days of the war, the United States alleged that Russia was selling guided missiles, jamming devices and night-vision goggles to Iraq, which the Russians angrily denied. In the blink of an eye, it seemed just like old times.

The first and most obvious reason is Iraq's Soviet-era debt to Russia, estimated at $8-billion (U.S.), which the Russians fear won't be honoured by a new government. Second, there's Lukoil, Russia's largest oil company, which has -- or had -- a $3.5-billion deal with Saddam Hussein's regime to develop Iraq's massive Western Kurna oil field. Although Russia is strenuously lobbying the United States to ensure that both debt and oil contracts are honoured, the outcome is uncertain.

But there's more to the rift than that. The nut of it is utility. With Iraq, home to the world's second-largest reserves of easily accessible oil, in the United States' back pocket, Russian energy exploitation suddenly becomes far less important. And the inherent drawbacks of Russian energy, as well as a fundamental conflict of interests over price, become impossible to ignore.

To begin with, Russia needs and wants oil prices to stay high. David Victor and Nadejda Victor, writing in the current issue of Foreign Affairs, estimate that each $1 decrease in the price-per-barrel translates into a billion-dollar loss for Russia's state budget. A price collapse would devastate Russia's fragile economy. Meantime, the United States needs crude prices to drop, and quickly, to avert recession.

Russia's energy riches, unlike those in the Persian Gulf, are remote, the two scholars note. The centre of the country's oil industry is in Siberia, 3,200 kilometres by pipeline from Western Europe. New pipelines to the Adriatic and Baltic seas, as well as China and the Pacific Rim, will cost billions to develop. Likewise, Russia's ports are badly outdated.

Furthermore, investment in Russia is still notoriously risky. British Petroleum put half a billion dollars into Russia's Sidanco in the early 1990s, only to lose most of it in a bankruptcy. Tax laws are byzantine and changeable. A fledgling mechanism for so-called "production-sharing agreements," designed to provide stability for foreign investors, has yet to find its footing.

Faced with a choice of investing in Russia or the new Iraq, therefore, international energy firms will leap toward Iraq.

The goal of the new U.S.-Russian economic partnership -- to have Russia provide 10 per cent of U.S. foreign energy needs by 2010 -- was always modest. (Canada contributes nearly twice that now.) Today, even 10 per cent seems hopelessly optimistic. The truth is that, on the day victory is formally declared in Iraq, Russia's copious energy assets drop off the U.S. radar screen.

Small wonder then that Mr. Putin opposed the war. Or that he and Mr. Bush are no longer best friends.

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