#7 - JRL 7234
San Francisco Chronicle
June 22, 2003
Pragmatic Russian leader patches up spat with U.S.
Putin eyes economic development, oil contracts with Iraq
Anna Badkhen, Chronicle Staff Writer

Moscow -- Just weeks ago, nothing seemed to delight the Kremlin more than snubbing its Cold War-era archenemy, the United States.

Russian President Vladimir Putin made scathing remarks as he questioned the existence of weapons of mass destruction in Iraq, and the U.S.-Russia rift over the war -- a war that Putin flatly called a "mistake" -- threatened to set back by a decade the relations between the two countries.

Yet as the Bush administration comes under scrutiny in the United States over whether it misled the public about Iraq's arsenal before the war, Putin seems to have dropped the issue. The Russian leader mentions his recent falling-out with Washington only in passing, describing it as an issue the two countries have put behind them.

"The situation around Iraq was a serious test for the Russian-American relations. . . . We emerged from this situation with minimal losses," Putin said at a Friday news conference in the Kremlin.

This is Putin's pragmatism on view, says Yuri Fyodorov, a Moscow-based analyst. The Russian leader regards improving his country's rundown economy as his top priority in the months before March's presidential election, Fyodorov said, and Putin finds it more expedient to maintain friendly relations with President Bush than to cut his country out of any potential deal involving oil development or infrastructure rebuilding in postwar Iraq.

"It is not advantageous for Russia to rub it in that the U.S. . . . made a mistake," said Fyodorov, deputy director of the Moscow-based Institute for Applied International Research. "We made up with George W. Bush. Why rock the boat?"

As U.S. administrators move to revive Iraq's oil industry, Moscow is worried that a new Iraqi administration may decide not to honor contracts that Russian oil companies signed with Saddam Hussein's government to develop new oil fields in Iraq, opting instead to give the best deals to American and British firms.

Before the United States and its junior partners invaded Iraq, analysts estimated that the long-term value of Russia's economic relationship with Hussein's government -- chiefly lucrative oil contracts, many granted as political favors -- was as high as $40 billion, a fortune for a country whose annual national budget is less than $70 billion. But the United States and Britain gave Russia only vague assurances before fighting began that it was not going to lose its contracts in postwar Iraq.

Lukoil, Russia's second-largest oil producer, announced last month that it intended to begin developing Iraq's West Qurna oil field, for which it says it had signed a contract with Hussein, as soon as September. Lukoil said it would challenge any attempts to throw out its deal in international courts.

Russian firms also hold $4 billion in contracts under the U.N. oil-for-food program, and it is unclear whether sanctions-free, post-Hussein Iraq will honor those deals.

Under deals made with the now-toppled regime, Iraq owes Russia $8 billion, mostly for arms sales in the late 1980s, and the Kremlin expects to receive its share of Iraq's total foreign debt of $380 billion. Russia belongs to the so-called Paris Club, which renegotiates government debt of countries in default.

The Bush administration contends that to speed up Iraq's recovery, creditors should relieve Baghdad of much of its obligations. The Kremlin, which is reluctant to forgive the debt, will need Washington's goodwill to recover the money Iraq owes.

"There will be talks about Iraq's debt. Why anger Americans when there is money to be made?" noted Alexander Pikayev, a Moscow expert at the Carnegie Endowment for International Peace in Washington.

Even more important than Iraq's debt or Moscow's oil contracts is the question of stability of world oil prices, says Ivan Safranchuk, head of the Moscow office of the Washington-based Center for Defense Information.

High oil prices triggered by the war have given a kick-start to Russia's economy -- which already was enjoying the highest rate of growth in the post- Soviet era -- by increasing the growth rate this year to more than 7.1 percent.

Russia is the world's second-largest oil exporter and a major oil producer on its own soil, and its economy relies heavily on international oil prices.

Russia has other economic issues that it hopes good relations with America will help. Putin's top priority is opening the Russian market for Western investment and trade, and he wants Bush to help get Congress to remove the 1974 Jackson-Vanik amendment, which curbed trade with the Soviet Union because of its refusal to allow Jewish emigration.

The U.S. Senate and the Duma, the lower house of the Russian parliament, last month ratified the Strategic Offensive Reductions Treaty, a landmark pact that requires both countries to slash their arsenals of deployed nuclear weapons by about two-thirds over the next decade.

"It would be an imprudent and shortsighted step on Russia's part to fall out with the only existing superpower," Alexei Pushkov, producer of the analytical Postscriptum program on Russian television, wrote in Russia's Argumenty I Fakty daily. "It is more expedient for Russia to try to exert influence on the U.S. policy 'from within.' "