A convoy carrying Russian oil-drilling equipment arrived at the al Waheed border crossing recently and passed from Syria into Iraq en route to the northern Iraqi city of Kirkuk. About 50 Russian specialists will arrive soon to begin setting up to drill 45 wells.
For the Russian company Zarubezhneft, it's a small project, worth $8 million, and hardly the reason why its chief executive visits Baghdad every three months. The big payoff would be Iraq's decision to grant Zarubezhneft the rights to develop the massive Bin Umar oil field, a multibillion-dollar deal if the United Nations ever lifts sanctions.
Every day, Russian companies drill or ship as much Iraqi oil as they can under U.N. auspices and dream of the day they can do more. Almost everyone here seems to have a hand in the Iraqi pot, from engineering firms to machinery manufacturers to politicians. Even the Ministry of Emergency Situations, which is usually responding to floods and forest fires, has gotten into the game, setting up a subsidiary to trade Iraqi crude.
The depth of Russia's economic ties to Iraq, both actual and potential, poses a serious challenge to President Bush as he contemplates a military attack to overthrow Saddam Hussein's government. Russia supported the U.S. war in Afghanistan, but it has warned against any invasion of Iraq, its longtime ally.
"If there were a strike, it would put us in a very hard position," said Yuri Shafranik, a former Russian fuel and energy minister who heads a committee promoting Russian-Iraqi economic cooperation. "It would mean Russia's position was ignored and no one cared about Russia. For us, now as never before, these projects are very important."
The message from the Kremlin so far has been ambiguous. President Vladimir Putin has made much of his newfound friendship with Bush and has reined in the sort of bellicose, anti-American rhetoric that erupted in 1999 with the war against Serbs in Kosovo. But Putin tends carefully to Russian economic interests, and his government has confirmed that it will soon sign a long-term, $40 billion economic cooperation agreement with Iraq covering such areas as energy and transportation.
The Kremlin's haziness may signal an interest in striking a deal. Key political and corporate figures in both Washington and Moscow have floated ideas on how to guarantee Russia's economic interests in Iraq in a post-Hussein era. In exchange, Russia would mute its opposition to U.S. military action, if not support it outright.
"Some hard political decisions need to be made rather soon by the United States if the United States wants Russia to look at the whole situation with Iraq more favorably than it does now," said Mikhail Khodorkovsky, head of Yukos, Russia's second-largest oil company. "If America wants Russia to be a participant in solving the problem -- and I think Russia can play a big role here -- then the best way to go about doing this is to get Russia interested from an economic view. If we don't have any interests there, why bother getting mired there?"
Yet the rumblings of compromise have not led to any concrete agreements, at least not publicly.
"I can't imagine why this isn't a win-win situation if we were smart about this," Sen. Joseph R. Biden Jr. (D-Del.), chairman of the Foreign Relations Committee, said at a hearing in July. "But I don't get any sense that there's any movement on this by anybody in the administration."
Russia's interest in Iraq goes back to the Cold War era, when the Soviet Union cultivated client states in the Arab world. Over the years, thousands of Soviet specialists worked in Iraq, and Moscow sold Baghdad considerable weaponry. A large debt remains. Abbas Khalaf, Iraq's ambassador to Russia, put it at $7 billion and said that "Iraq is ready to pay these debts after the lifting of sanctions." In a recent conversation, Biden said, Putin said the debt totaled $11 billion.
Russia has also emerged in the past year or two as Iraq's largest trading partner under the U.N. oil-for-food program. In the six-month period ending in May, Russia purchased 90 million barrels of oil out of 226 million sold by Iraq, a deal worth roughly $1.8 billion, according to oil executives here. As of July 31, U.N. figures show that Russia had sold Iraq $4.18 billion in food, medicine and oil-industry equipment since the program began in late 1996, surpassing all other countries. "Almost all Russian companies work with us," Khalaf said.
The oil-for-food program allows Iraq to export some crude to companies such as the 10 or so Russian firms that then resell it in the United States, Europe and Asia. Most of the proceeds are reserved for humanitarian needs or infrastructure work in Iraq.
However, Iraqi crude sales have plunged lately, not even counting Hussein's brief suspension of exports last spring to pressure Israel and the United States. Russia blames the falling sales on a U.S.-imposed pricing system in which the final cost of oil purchased from Iraq is not set until after the sale, discouraging companies that want to know how much they are paying at the time of purchase.
U.N. officials maintain that Iraq has been charging a premium of 20 cents to 50 cents per barrel, most of which they deem an illegal kickback to Hussein's government. Russian companies, they believe, have been going along with the scheme.
One firm that has been singled out lately is Emercom, founded by the Ministry of Emergency Situations under close Putin ally Sergei Shoigu. Emercom has become a recent Iraqi favorite; last year Baghdad awarded it two contracts to trade 20 million and 15 million barrels of oil. On July 11, Emercom signed two contracts for a total of 12 million barrels, according to a confidential U.N. document obtained last month.
According to U.N. officials, Iraq was charging a premium of 20 cents per barrel at the time of the Emercom deal. Western diplomats consider a 5-cent premium legitimate and anything else an illegal surcharge for Hussein. By that reasoning, the recent Emercom contracts were worth $1.8 million in illegal surcharges.
An Emercom spokeswoman said the firm's contracts with Iraq "comply with U.N. rules and regulations." She said the firm acts only as an agent of oil companies and denied that the company paid any bribes.
As important as the everyday trade is, the real money for Russia in Iraq is still in the ground. Iraq has the world's second-richest oil deposits, waiting for experienced prospectors to tap them.
"That's why everyone is dreaming of projects there," said Shafranik, the former energy minister, who heads the government-controlled Soyuzneftegaz energy company. "Everyone wants to make money. But there are underwater currents and these currents are trying to take us to a certain destination."
The largest long-term development deal involves Lukoil, Russia's biggest oil company. Lukoil signed a 23-year contract in 1997 entitling it to lead a consortium that would develop part of the West Qurna field in southern Iraq. Lukoil would be entitled to extract 667 million metric tons of oil and put the value of the deal at close to $20 billion. "This is a gigantic project," said Leonid Fedun, a vice president and part owner of Lukoil.
But the project has remained frozen under U.N. sanctions, and relations between Iraq and Lukoil have soured. Iraqi officials have pressured Lukoil to begin work at West Qurna despite the sanctions, but the Russians have refused. In retaliation, Iraq cut Lukoil out of the oil-for-food sales.
"We're very much frustrated and any oil man would be frustrated if he could not work in developing oil fields," said Fedun. "But we're not politicians and we can't make decisions on this kind of thing."
For long-term development, Iraq lately has turned to Zarubezhneft, a state-owned oil company that has worked in the Arab country for more than three decades. Frustrated with France for continuing to support U.N. sanctions, Khalaf said Hussein's government recently decided to strip the development rights to the Bin Umar oil field held by France's TotalFinaElf and give them instead to Zarubezhneft. The company could extract 3.3 billion barrels of oil from Bin Umar.
Nikolai Tokarev, general director of Zarubezhneft, said he is still considering what to do. "They made an offer, and of course we became very interested because it's a unique oil field," Tokarev said. "But we understand very well that full-scale work at the oil field will depend on lots of political factors."
Other companies have sealed smaller deals. Slavneft, another state-controlled firm, signed a contract last year to develop the Luhais field in southern Iraq with 490 million barrels of oil. In June, Sibur, a subsidiary of the natural gas monopoly Gazprom, agreed to develop a gas field in southern Iraq. And a partnership of three oil companies, Tatneft, Rosneft and Zarubezhneft, has an agreement to develop another field at West Qurna after sanctions are lifted.
For Russia, the big question is what happens to such deals if the United States goes to war to topple Hussein. Some executives maintain their contracts should remain valid, but many are hedging their bets, cultivating alternative, lower-ranking figures in Iraq in hopes that they will remain even if the top echelon is replaced.
Ariel Cohen, a scholar at the Heritage Foundation in Washington, proposed in an April article that the Bush administration support the contractual rights of Russian companies to Iraqi oil fields to win Moscow's acquiescence to a U.S. war. He also suggested the United States support repayment of Soviet debt by a post-Hussein government or broker a debt swap that would reduce Russia's own obligations to the Paris Club of creditor nations by a like amount.
The idea resonates in some quarters of Capitol Hill. "This is an economic imperative for Russia, and we have to do more than just protest" ties to Iraq, Rep. Henry J. Hyde (R-Ill.), chairman of the House International Relations Committee, said in an interview after a recent meeting with Russian officials here. "We have to make it worth their while or at least come close to that."
Russian companies such as Lukoil, Yukos and Gazprom have put out feelers for an alternative in which U.S. and Russian energy companies would form consortia for joint post-Hussein development.
"We understand perfectly well that America cannot give any guarantees," said Khodorkovsky, the Yukos magnate. "At the same time, if there were sufficient political will, then if there were consortia formed between Russian and American companies before all of this happened . . . it would provide a sufficient level of guarantees for Russian companies and Russia as a whole."
Correspondent Susan B. Glasser in Moscow and special correspondent Colum Lynch at the United Nations contributed to this report.