January 17, 2004
THE RECONSTRUCTION

Russia Sees Iraqi Debt Relief as Link to Oil, U.S. Aides Say

By CHRISTOPHER MARQUIS

New York Times

WASHINGTON, Jan. 16 — Russia is hoping to leverage its plans for debt relief for Iraq to win the revival of oil development projects signed under Saddam Hussein and suspended by the occupation authorities, Bush administration officials say.

The administration, which is formally taking a hands-off approach that would leave decisions on contracts to a future Iraqi government, is giving tentative approval to Moscow's approach, which could mean billions for Russian companies.

Iraqi debt relief is likely to come up when Secretary of State Colin L. Powell visits Moscow later this month. A week later, Aleksei L. Kudrin, Russia's deputy prime minister and finance minister, is expected to share plans, at a preparatory meeting in Florida for the year's Group of 8 summit meeting, to write off up to two-thirds of its debt in return for favorable treatment for Russian companies.

The discussions come as the administration is considering reversing its decision to bar Russia, France and Germany and other countries that opposed the war in Iraq from bidding on primary contracts.

Richard A. Boucher, the State Department spokesman, declined to elaborate Friday. "Circumstances might change," he said. "As we look at what other countries are doing there, the contracting could change as well."

The jockeying highlights the tenuous position of companies from Russia, France and elsewhere that entered into contracts while Iraq was under United Nations sanctions, in the anticipation that they would eventually be lifted.

Now those contracts are in limbo. An analysis by Deutsche Bank last year said that while occupation authorities "would no doubt like to tear up" these contracts, that would invite legal challenges. The analysis suggested establishing partnerships with companies from coalition countries.

Russia's biggest stake is a $3.7 billion 1997 contract signed by Lukoil, Russia's second biggest oil company, as part of a consortium to develop the West Qurna-2 oil field. The Iraqi authorities have said that the government severed the production-sharing agreement in 2002, and occupation officials later declared all such contracts suspended. But Lukoil hopes to renegotiate access to the field, which has reserves estimated as high as 15 billion barrels, oil analysts say.

Leonid Fedun, vice president of Lukoil, said this week that a top manager of the company had met with Iraqi officials before the new year. "I can only say that the situation is evolving optimistically," he said.

Russian firms have also suffered from the end of the United Nations' oil-for-food program in November. The companies profited from irrigation and energy projects, and provided equipment and food in return for Iraqi oil. Under the program, Russian companies took in nearly $3 billion, including $1.7 billion in contracts negotiated in the months before the war that are still playing out, according to State Department figures.

Russian companies felt another blow when the Bush administration announced last month that only nations that supported the war would be able to bid on contracts in the $18.6 billion reconstruction, a decision that is being reconsidered.

In recent weeks, Russian officials and oil executives have met with members of the Iraqi Governing Council, the interim body of leaders picked by the American-led occupation, and have proposed forgiving a large portion of nearly $8 billion in Soviet-era debt. Iraq's overall debt is estimated at more than $116 billion.

"At least so far, they're taking a positive approach on the Iraqi debt," a senior State Department official said last week, "although they obviously have broader commercial interests that they will — which they are articulating quite openly — that they hope will be satisfied at the same time."

President Vladimir V. Putin, who met at the Kremlin with Abdel Aziz al-Hakim of the Iraqi Governing Council, said Russian companies were prepared to invest $4 billion in Iraq. Moscow officials have declined to make donations to the rebuilding.

"Russian companies are ready to be active in Iraq," Mr. Putin said in remarks reported by the Interfax news agency. "We expect to have good relations with the new authorities of Iraq as well. We have always based our relations with Iraq on the idea that we are developing relations with the Iraqi people."

Mr. Hakim said last month that Mr. Putin had offered to erase several billion dollars in debt in return for favorable treatment for Russian companies.

A Russian Embassy official said diplomats from his country were in regular contact with American and Iraqi officials on the debt and investment issues, but denied there was a direct link between debt relief and Russian contracts.

"Debt relief in itself is in our economic interest," he said. "Certainly, we're interested in getting our companies back into Iraq," he added.

Erin E. Arvedlund contributed reporting from Moscow for this article.