#11 - RW 260
RFE/RL Newsline
June 4, 2003
RUSSIAN CONTRACTS IN IRAQ: FORGIVE OR FORGET?
By Daniel Kimmage

World punditry's sound bite of the moment is "Punish France, ignore Germany, forgive Russia." Attributed to U.S. national security adviser Condoleezza Rice, the phrase is said to be the blueprint for the United States' postwar policy toward its three most prominent prewar critics. The current brouhaha over the contract to develop Iraq's vast West Qurna oil field indicates that, at least as far as Russia is concerned, forgiveness is a tricky business.

West Qurna is one of Iraq's tastier morsels. According to data published in "Vedomosti" on 2 June, the field contains reserves of 8 billion-10 billion barrels of oil. A 1997 production-sharing agreement gave Russia's LUKoil a 68.5 percent stake in the field (with 3.25 percent stakes each for compatriots Mashinoimport and Zarubezhneft). The agreement, which ran through 2020, envisaged investments of $6 billion into the field's development. According to a report in "Kommersant" on 27 May, the contract would have brought the three Russian companies $70 billion worth of oil. UN sanctions rendered the contract stillborn.

Iraq canceled the contract with LUKoil in December, initially alleging that the company had failed to meet its obligations. LUKoil pointed indignantly to UN sanctions that prohibited work on the project. Subsequent reports indicated that Saddam Hussein's regime really intended to punish LUKoil for behind-the-scenes talks with the United States aimed at securing the company a role in a post-Saddam Iraq. Throughout, LUKoil insisted that unilateral termination represented a violation of the contract's terms and promised to pursue the matter through international arbitration. War temporarily quelled the controversy.

The issue resurfaced on 26 May, when Thamir al-Ghadban, Iraq's U.S.-appointed oil minister, told the BBC that LUKoil had "already lost" its contract to develop West Qurna. With their company suddenly in the unenviable position of a suitor spurned by both Hussein and his successors, LUKoil representatives went on an verbal offensive. "Kommersant" reported spokesman Dmitrii Dolgov's official reaction the next day: "We do not consider the remarks by Thamir al-Ghadban the official position of the legitimate government of Iraq. We will conduct negotiations about the future of the oil field only with lawfully elected authorities." LUKoil Vice President Leonid Fedun went farther, threatening legal action in the event of the contract's cancellation: "We'll arrest tankers with Iraqi oil through the arbitration court in Geneva. LUKoil will present claims for $20 billion in lost profits."

Coming on the heels of Russia's 22 May vote for a U.S.-backed UN resolution to end sanctions against Iraq, al-Ghadban's comments prompted a gloomy 27 May editorial in "Vedomosti." "Russia has lost the diplomatic Iraqi campaign once and for all," the editors began. They went on to conclude: "The bargaining failed: the resolution passed, and the U.S. position has hardly changed. The fate of the debt, it's true, may still be decided within the Paris Club of creditors, but the contracts will be canceled."

LUKoil kept pressing its case. On 30 May, Interfax quoted an anonymous source in the company as saying that the lifting of sanctions on 22 May had kicked off a 100-day period in which LUKoil would begin fulfilling the terms of its West Qurna contract.

On 1 June, a U.S. State Department representative told a briefing in St. Petersburg, temporarily at the center of world attention for its 300th anniversary celebration, that al-Ghadban's comments had been "incorrectly cited," Prime-TASS reported the same day. The official explained that a decision on West Qurna would have to wait for a government to emerge in Baghdad. Until then, all contracts would be frozen.

By 2 June, LUKoil Vice President Leonid Fedun had switched from litigation to negotiation. "We are in consultation with the occupying power," he told journalists at an investment conference, "The Moscow Times" reported the next day. According to Fedun, Russian Foreign Minister Igor Ivanov was making LUKoil's case to U.S. officials in the course of high-level contacts in St. Petersburg and Evian, France.

The two highest levels of contact were coy when queried about Qurna. According to the White House transcript (http://www.whitehouse.gov), U.S. President George W. Bush responded to a question about Iraqi oil and Russian companies at a 1 June joint press conference in St. Petersburg as follows: "And as to the energy sector, the Iraqi people will make the decision which is in their best interest." Not to be outdone, Russian President Vladimir Putin parried: "We don't rule out that our companies will work there. That will depend on the situation that emerges in Iraq."

West Qurna is not the only Russian oil contract in Iraq, just the biggest and best known. "Nefte Compass" reported on 28 May that other contracts include: Mashinoimport ($77 million), Slavneft ($21.2 million), Zarubezhneft ($8.3 million), Tatneft ($4.8 million), and Stroitransgaz ($33.5 million and $150 million). According to "Nefte Compass," representatives of LUKoil, Zarubezhneft, and Stroitransgaz plan to accompany a group of Russian diplomats to Baghdad in early June to discuss the fate of the contracts.

Under Saddam Hussein, Baghdad made lavish promises to Russian companies; Moscow responded with occasionally sympathetic rhetoric. With UN sanctions preventing real movement on the juiciest contracts, the billions remained shimmering on the horizon as the two capitals bartered promises for rhetoric in a verbal tit-for-tat that did not, in the end, amount to much.

With Hussein gone and UN sanctions a thing of the past, the development of West Qurna is now a real possibility. That said, LUKoil's future in Iraq remains shrouded in uncertainty. What seems clearer in the back-and-forth of the past week is that even if the pundits are right about postwar forgiveness for prewar obstreperousness, forgiveness might not come easy.

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