Constantine Pleshakov
The Japan Times
May 20, 2003

MOSCOW — It is a commonplace to say the war in Iraq was not only about former Iraqi leader Saddam Hussein but also about oil. No matter how dangerous Hussein’s regime was and how badly the White House needed an impressive victory for the 2004 elections, oil — as today’s key commodity — was very much on U.S. President George W. Bush’s mind when he commanded the attack on Iraq. Yet, for some countries, oil is practically the only part of the Iraqi equation they are interested in; Russia is a good example.

In 2002, Russia’s economy grew by 4 percent. This was much trumpeted by President Vladimir Putin and the media, but growth is mainly being fueled by increased oil and gas exports. Blessed with an abundance of “black and blue gold” — as oil and gas are known among Russian journalists — the nation can endure practically any kind of economic mismanagement.

Oil exports are paying Russia’s bills — from retired people’s pensions to Putin’s new opulent residences, and from modern tanks to St. Petersburg’s 300th anniversary festivities. However, the war in Iraq may change all that.

In 2002, Russia was the world’s No. 2 oil producer; Iraq came in 10th. Yet, in terms of oil reserves, Iraq is No. 3 with 112.5 billion barrels; Russia is No. 8 with 60 billion barrels. While Iraq remained an international pariah and traditional oil exporters like Saudi Arabia kept oil prices relatively high, Russia was dumping its oil on Western markets cheaply, thus raising important revenues for its struggling economy.

If postwar Iraq becomes a major oil producer, Saudi Arabia could lose lots of money, while Russia Inc. might go out of business altogether. A decline in oil exports could take the whole Russian economy down. A number of pessimistic experts in Moscow already predict another financial default in early 2004 — like the one the country experienced in 1998.

The first months of 2004 are going to be a crucial time for Putin, if not for Russia. In March 2004, he faces re-election. Right now he doesn’t have any competition, and victory seems guaranteed by his assertive nationalist rhetoric, the patriotic brouhaha and the nation’s newfound economic stability.

Yet the recent military parades on Red Square (replays of a belligerent Soviet tradition) and theatrical TV addresses are poor substitutes for a steady cash flow. If the Russian economy collapses one more time, Russian voters are likely to vote with their stomachs, not with their hearts, and Putin could find himself in big trouble.

The forecast for Iraqi oil exports remains cloudy. Iraq can become a major oil exporter only if patronized, if not temporarily governed, by the United States. Still, the American victory in Iraq is a fragile one. U.S. troops are being attacked by urban guerrillas and angry protesters all the time. Last week’s bombing of Western compounds in Saudi Arabia indicates that terrorist networks in the Middle East have not been uprooted, despite optimistic statements by American officials.

Washington recently decided to replace leading members of the U.S. governing team tasked with rebuilding Iraq, a move that has contributed to a general spirit of disillusionment and uncertainty following America’s victory. Iraqis cannot agree on a form of government either. The only leaders that seem to enjoy a modicum of popularity are clearly anti-Western, antisecular and antidemocratic. None of the erstwhile Iraqi exiles imported to their homeland by the U.S. appears charismatic enough to save the day. Iraq may well remain a country in turmoil for quite a while, or it may choose to become a xenophobic Islamic republic. Neither option augurs well for the export of significant amounts of oil to the West.

An unstable Iraq is both good and bad news for the Kremlin. If conditions in Iraq are such that it can be discarded as a competitor, what will become of the multibillion-dollar Iraqi debt owed to Russia and the contracts signed to develop new oil fields in Iraq?

True, the debt and contracts look problematic anyway, since any new Iraqi government will try to annul them on the grounds that it can’t be held responsible for the excesses of its former dictator. In diplomacy, though, compromise is always an option. If Iraq doesn’t get a stable government, there will be no diplomacy, no compromise and no solution whatsoever.

Meanwhile, the world’s mass media, overwhelmed by the dramas in the Middle East, have stopped reporting news from Central Asia even though, until recently, the region’s oil resources had been regarded as the biggest strategic resource for the West. The story of Central Asian oil is a mystery.

Shortly after the collapse of the Soviet Union in 1991, the leaders of Central Asian nations, supported by a number of big oil companies, proclaimed the Caspian Sea to be a new oil and gas treasure-trove. In fierce competition, American, British and Russian companies started exploring the new terrain. Each new pipeline made headline news, and countries like Kazakstan, Turkmenistan and Azerbaijan appeared as a fresh alternative to Middle Eastern as well as Russian oil resources.

Around 2000, the Caspian Sea oil rush began receding. According to some reports, actual oil resources had been grossly overrated, and transportation problems proved to be tougher than expected. Now, with Iraq and much of the Middle East in mayhem, debates about Caspian Sea oil will resurface. It is unclear what this will mean for Russia.

For the U.S., the Iraqi crisis is an issue of prestige, security, authority and, yes, revenues. For Russia, it is mostly an issue of money. The Russian wallet may be made of showy stuff (Red Square parades are not unlike expensive leather), but it is still very thin.