#2 - JRL 7021
Worldoil.com
January 2003
Vol. 224 No. 1
Oil, foreign policy and handguns in Moscow
JACQUES SAPIR, CONTRIBUTING EDITOR, FSU
Jacques Sapir is Professor of Economics at EHESS-Paris and at the Higher School of Economics in Moscow. He is a regular contributor to this column.

Expectations about a possible Middle Eastern war are preoccupying the Russian oil and gas market. This is not unreasonable. After all, Russian oil companies have been deeply involved in the UN's oil-for-food program in Iraq. They account for at least 35% of Iraqi oil exports. Iraq's $7-billion debt to Russia, is a large piece of cake that many "mice" are looking for in Moscow. Still, despite all the talk about Russian inroads into the U.S. oil market, Moscow's mood remains gloomy.

One can understand that some Russian companies are very uneasy about a possible U.S. war against Iraq. The fact that trade once flourished between both countries is fairly well known. It is also well known that this trade is still important, even with the embargo. Remember -les affaires sont les affaires (business as usual). It is obvious that Russian companies fear that they may be ousted from the Middle East.

Still, there could be a political angle. The head of state-owned oil company Zarubezhneft, Nikolai Tokarev, went public about alleged U.S. pressures against Russian companies operating in Iraq. If we are to believe him, U.S. companies, backed by the U.S. State Department, are telling Russian firms, "Join us in funding the Iraqi opposition, or you will lose everything after the war."

This could be true, or it could just be lies. The fact that Zarubezhneft is state-owned, and that no other oil company's director has gone public so far, adds some interesting dimensions. You can find people in Moscow ready to say that whatever the depth of Russian-U.S. friendship - not to mention the perception of President Vladimir Putin's soul through George W. Bush's eyes - when it comes to basics, Putin is ready to fire Tokarev.

Ironically, this is a nasty play on words. Some years back, Tokarev was the brand name of a pistol used regularly by KGB officers. Thus, Tokarev's interview in Vremya Novosty on Dec. 10 could be a not-too-subtle warning to Washington, or it might just be a reaction from a concerned oil executive. However, gambling on the latter could be very unproductive.

The political angle should not be forgotten. President Putin has probably no sympathy for Saddam Hussein, if only because the Iraqi dictator acted foolishly, and Putin does not bear fools kindly. Yes, to have a stupid dictator sent to hell is one thing. On the other hand, to have the "hyperpower" (the U.S.) launch a war on its own and try to rewrite the Middle Eastern map is another.

Actually the whole region is close enough to either Russian or CIS borders. Moreover, Russian decision-makers feel that Iraq may just be Stage One in the Bush process; Stage Two being Iran. If so, then we are in a completely different game. Iran is an important ally for Russia.

Circumventing the UN Security Council is also seen as a direct threat to Russia's national interest. If Moscow appeared much less vocal than Paris in defending the Security Council's status, the goal was the same. For many reasons, Russia was not ready to take the lead in confronting Washington. Instead, Putin was happy enough to let an eager French President Jacques Chirac do so.

An interesting offshoot of this situation is how to assess the actual status of Russian oil companies. As explained on this page last June, Russia's economy was much less rosy in 2002 than in 2001. Data available by early December 2002 are confirming the growth slowdown. Investment, for the first time, increased at a slower rate than GDP.

There is nothing dramatic, yet. A lot of countries would be happy with 3.5% growth. But, for Russia, coming after post-crash, high growth, the situation is disquieting. Worse yet, the country is entering a new electoral cycle. General elections are due for December 2003, and the presidential race follows by spring 2004. Putin's government will be hard-pressed, if the economy does not improve quickly.

More often, Russians feel estranged from their socioeconomic environment. Last November, a very interesting poll, conducted by the All-Russia Center for the Study of Public Opinion, showed that 23% of respondents would "actively support" the Bolsheviks, if the revolution happened now. Another 20% would give "some support."

Although no revolution is in the offing, the poll is consistent with growing dissatisfaction among Russians. So far, no opposition party has ridden this wave of opinion. Putin and his allies have regularly defeated the main opposition force, the Communist Party of the Russian Federation (KPRF). This can be traced, at least partially, to the sheer incompetence of KPRF leadership. If its leader, Guennady Zyuganov, is to be replaced by KPRF rising star Serguey Glazev, results could be different. Glazov is a young, bright economist who is well respected.

In such a context, there could be strong pressure to implement some form of state control on oil and gas, to use export revenues for a more active, public investment policy. High oil prices could make the situation less difficult for privatized oil companies, because bargaining with the government about more export taxes would become easier.

Therefore, Russian companies have no interest in a quick solution to the Iraqi crisis. How compatible this is with state interest is still to be seen. However, the government believes that no solution would be better than a shining U.S. victory. So, who knows, maybe Putin will not need to dismiss Tokarev after all.