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#7 - JRL 7135
Financial Times (UK)
April 8, 2003
Russian business feels the pinch as trade with Iraq halts
By Andrew Jack and Rafael Behr in Moscow

Russian businesses - among the largest beneficiaries of trade with Iraq before the war - have become some of the biggest losers in the last few weeks, with their present operations on hold and their future in the region uncertain.

Before the previous Gulf war in 1991, Iraq was Russia's biggest trading partner in the Middle East. Much of it was based on arms sales, which accounted for the bulk of the outstanding $8bn (7.5bn, 5.2bn) in debt owed to Moscow today. According to some estimates, trade between the two countries shrank eightfold between 1989 and 2003, from around $2bn to $252m, as a result of UN sanctions. Throughout that time Russian companies continued to negotiate non-military contracts, particularly in the machine-building and automotive sectors.

Russian companies were among the biggest beneficiaries of sales to Iraq through the UN oil-for-food programme. They also became among the largest intermediaries on sanctions-restricted Iraqi oil sales to finance those trades. With all such trade now halted, Yuri Shafranik, head of the Russia-Iraq Co-operation Committee, claims that the losses to Russia could be as high as $40bn - the value of a multi-year bilateral contract which was being negotiated with Iraq until last year.

There have also been negative spin-offs in the region. Aeroflot, the national air carrier, reported a modest increase in foreign passengers switching to it late last month, but said yesterday there had been a drop in total seats sold as a result of the Asian outbreak of pneumonia and uncertainties in the Middle East.

Potentially, Russian companies could prove competitive in the region, and their long-standing Iraqi expertise in sectors such as oil and electricity infrastructure make them attractive contenders even to a new regime. Russian battle-tested armaments could also find new buyers once sanctions are lifted.

Moscow has been spending much diplomatic energy in recent days on the demand that existing Russian contracts be respected in a post-Saddam Iraq, but many of the companies can only wait and see.

"There's nothing [the management] can do. They're not even trying. It's not their competence, they're not on that level," says an official at Tatneft, the Tatarstan-based oil company which has two contracts to extract from the Kirkuk fields in northern Iraq. "Tatneft is not Lukoil - it's a regional, provincial company."

Lukoil, Russia's second largest oil company, has more lobbying power. But in December, after Russia backed Security Council resolution 1441, Iraq said it was cancelling Lukoil's contracts to develop fields in West Qurna. That decision was cast into doubt by the subsequent retirement of the Iraqi minister responsible. Lukoil insists its Iraqi deal stands.

"The contract was signed and is still active by all international legal standards," a Lukoil spokesman said yesterday. "We are counting on the fact that it will be restored. Of course it might be restored only once sanctions are lifted and of course when military action is over. We cannot make hypotheses and predictions while there is a war going on and blood is being spilt."

Outside the oil industry there are also Russian contracts now in limbo. Apart from lost oil revenues, Tatneft is worried about the $2m worth of equipment invested in its Iraqi fields, and contracts worth between $920,000 and $1.5m to sell tyres to Iraq through daughter companies.

Kamaz, another Tatarstan-based company, supplies Iraq with trucks. In January this year, a delegation from the Ulianovsk Automotive Plant in Russia's Urals region went to Baghdad to negotiate the sale of jeeps to the Iraqi agriculture ministry.The Gorky Automobile Factory (GAZ) has an order for 5,000 Volga taxis from the Iraqi transport ministry. A plan to sell Gazelle light vans was overruled by the UN on the grounds they might have military applications.

"We are watching the situation. Our position maybe doesn't quite correspond to that of Mr Bush," says Vasily Sarychev, head of communications at GAZ. "Iraq as a country will still exist, and they will need cars."

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