RUSSIAN OIL AND THE IRAQI FACTOR

By Sergei Kolchin

World oil prices have a considerable–if not decisive–influence both on the progress of the Russian economy as a whole and on its prospects for development. The government’s optimistic forecasts for 2002-03 with regard to foreign debt payments and maintaining progressive economic growth are based to a large extent on the assumption that world fuel prices will remain favorable for Russia. But these expectations greatly depend not only on the state of affairs in Russia’s oil and gas sector, but also on a number of external factors, the most notable of which is the presence of Iraq on the world oil market.

Iraq’s oil card represents the joker in the complex game being played out on the world oil market. Let us look at two examples that illustrate this. In December 2000 reports that an Iraqi tanker had begun preparations to handle oil had a more profound effect on oil prices than all of OPEC’s previous measures to reduce production. In the first week of December alone oil prices fell by US$6 per barrel. But Iraq’s June 2 announcement that it was pulling out of the “oil for food” program, in response to the UN’s decision to renew sanctions against Iraq, had the opposite effect. Oil prices immediately jumped to US$30 per barrel. The UN measures were initiated by Britain and the United States, though they did propose to soften the sanctions: There would only be a ban on the import of goods relating to the defense industry. It was also proposed to allow commercial airline flights to and from Iraq on condition that border controls around Iraq were tightened. This last measure reflects concerns in the United States and among its allies that Iraqi oil is leaking onto the world’s markets illegally through Jordan, Syria and Turkey, circumventing agreed restrictions, and that Iraq is illegally importing goods in the other direction. In global terms, the Americans believe–though they have not directly said as much–that the Iraqi factor is being used by oil exporting countries (in an unspoken alliance with Saddam Hussein’s regime) to put pressure on oil importers.

Let us examine some figures to assess how important Iraq’s role is in the world oil market. Iraq’s oil reserves are the second largest in the world, second only to Saudi Arabia. At the start of 2001 current proven oil reserves in the country totaled 15.2 billion tons, or some 11 percent of world reserves. Given the current relatively low level of production, these reserves will last Iraq for approximately 120 years (cumulative production at the start of this year amounted to 3.2 billion tons). Iraq leads other oil-producing states in the level of production supported by its reserves. Moreover, Iraqi oil fields are particularly noted for the high output of the wells–often as much as 2,000-4,000 tons of oil per day, while in the Kirkuk oil field output reaches 14,200 tons per day, the highest in the world. On top of this, Iraqi oil fields are equipped with a good transport infrastructure. The five main oil pipelines, with a combined length of around 6,000 kilometers, are capable of transporting over 250 million tons of oil per year.

All of this makes Iraq one of the key players in the international oil market. On the one hand, the prolonged embargo following the Kuwait affair has complicated the economic situation within the country, but on the other hand it has allowed Iraq to develop a hidden potential for putting pressure on world energy consumption processes. Analysts from the Arab Petroleum Research Center estimate that just one year after the lifting of the embargo Iraq will be able to attain the level of oil exports it enjoyed before the war, and in two years will increase exports to 145 million tons. Iraq’s oil ministry follows the same parameters, though its forecasts are slightly less optimistic. Clearly a flood of Iraqi oil onto the market would be capable of fundamentally altering the situation.

It is therefore worth considering Russia’s interests as related to the question of Iraqi oil. In our opinion these interests are far from clear-cut.

On the one hand, it is well known that Iraq owes Russia some US$6-7 billion for earlier shipments (mainly of arms). Before the introduction of sanctions Iraq was one of the Soviet Union’s main trading partners–and was solvent too. The volume of mutual trade in 1989 was US$2 billion. Previous trade levels have naturally not yet been attained, but in 2000 the volume of trade between Russia and Iraq was over US$1.2 billion. According to Iraqi estimates (cited by the Iraqi ambassador to Russia, M. Al-Duri) Russia has lost about US$30 billion of revenue because of the sanctions. Although Russian companies did well buying Iraqi oil as part of the above-mentioned oil for food program (they received about one-third of all Iraqi oil exports), more advanced programs–above all cooperation on investment–have been frozen for the time being. For example, in 1997 Lukoil signed a contract with Iraq to participate in developing the Zapadnaya Kurna oil field–a project worth some US$4 billion. Because of the sanctions, Iraq says it intends to terminate the contract. More recently, Slavneft has been unsuccessful in its attempts to sign a contract on Iraq’s large Subba oil field, development of which has also been postponed because of the general political situation surrounding Iraq. It has been estimated that Russian oil companies could produce some 20 million tons of oil per year in Iraq. All this prompts certain political forces in Russia to demand the immediate and comprehensive lifting of international sanctions against Iraq.

However, the other side of the coin is that curbing Iraqi oil exports, as noted, leads to an increase in oil prices. Here Russia gains considerably from the existing situation. Mikhail Delyagin, director of the Institute of Globalization, notes that every additional dollar in the price of a barrel of oil brings the Russian budget an extra US$300 million in revenue. This cannot be simply written off.

In 1996, disagreements over the lifting of the trade embargo on Iraq eventually led to an increase in world oil prices from US$17 per barrel at the start of the year to US$22-25 in the latter half of the year. It is estimated that OPEC countries received US$26 billion more than they were expecting that year because of the changes. It is easy to conclude that Russia also gained more from this than Iraq could have paid her had sanctions been lifted. The situation was repeated in 2000-2001, when the oil deficit on the world market and the correspondingly high energy prices–which helped Russia out hugely–could easily have been disrupted by an influx of Iraqi oil.

It is difficult to assess the precise balance of Russia’s interests in the question of unhindered access to the world market for Iraqi oil. But our calculations suggest that the gain from high oil prices against the backdrop of the embargo does outweigh any benefits to be had from the potential opening up of the Iraqi economy. Particularly because Russian interests here, though they are clearly defined, do not fully coincide with Iraq’s. The calculations of Iraq’s leaders with regard to investment are focused not on Russia, but on other potential investors. But for now political rhetoric holds sway, according to which Iraq relies on Russia to support its demands, and Russia confirms this support, while recognizing the ambiguity of her position. Russian President Vladimir Putin’s message to a meeting of Arab heads of state in Amman in March 2001 states: “It is essential to do everything possible to put an end to the suffering of the Iraqi people and to return life to normal for them.” Recently the Committee for Cooperation between Russia and Iraq and a large group of State Duma deputies proposed blocking the Anglo-American initiative to renew sanctions against Iraq, and eventually the Russian government did adopt this position in the UN Security Council. At the same time, Russia is rather vague in its statements on specific ways of removing or partially lifting the oil embargo on Iraq, reflecting the mentioned ambiguity in Russia’s interests in solving the Iraqi oil question. This is not peculiar to Russia. It is a dilemma facing the entire community of oil exporters, from Saudi Arabia to Norway.

In our opinion, for Russia the optimal solution to the dilemma would be to participate in creating long-term projects for cooperation with Iraq, which would help compensate for the negative consequences of changes in oil prices because of the appearance of Iraqi oil on the world market, which will certainly happen sooner or later. But it should also be borne in mind that Iraq has its own interests which differ from Russia’s for a whole range of reasons, and that it will undoubtedly pursue these if there is the slightest change in the external political situation (Iraq currently needs Russia as an ally in the battle to have sanctions lifted, but after that it is inevitable that other, stronger players will appear on the Iraqi oil market in the guise of huge multinational oil companies). The situation is unlikely to remain in equilibrium for long; it depends greatly on the domestic political situation in Iraq and the balance of forces between oil exporters and importers on the world market. For now, it is important that Russia takes full advantage of the benefits which it gained at the turn of the 21st century as a result of the increase in world oil prices, brought about to no small degree by the Iraqi situation.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.