Russian And US Economies
Want Opposite Outcome In Iraq Power and Interest News Report

( - With his fate presumably in the hands of the Bush administration, Saddam Hussein is doing what he does best: surviving.
The Iraqi leader, realizing that American intervention could bring his rule to an end, has been winning friends in Western Europe and Russia by offering large, generous oil deals to powerful countries who are in a position to make a U.S. invasion more difficult.
Iraq has 110 billion barrels of oil reserves, second largest only to Saudi Arabia. Iraq's granting of large oil deals to politically important countries is cutting American companies out.
While U.N. sanctions do not allow foreign companies to invest in Iraqi oilfields, companies are still allowed to enter into deals with Iraq that will go into effect once the sanctions have been lifted.
Worried about losing market share, American oil companies are pushing the Bush administration to remove Saddam from power. By removing Saddam from power, the new U.S. supported regime will give the most lucrative oil deals to American oil firms rather than European and Russian firms.
Such potential following a U.S. invasion of Iraq is a concern for those currently doing business with Saddam Hussein's regime, and it is perhaps because of this that the Bush administration has offered both Russia and France a piece of the pie once the theoretical regime change is complete. But might it be more profitable for these two countries and others if there is no invasion? These are the questions given more than a cursory thought or two across Europe and Asia.
In the last month, major oil companies in France, Italy, Spain, Turkey, China, and India have entered into oil deals with Hussein.
Russia, the most important power that could speak out against the invasion, has been granted tremendous deals by the Iraqi government. LUKoil, the largest Russian oil company, has signed a multi-billion dollar oil production deal with Mr. Hussein, giving it a majority stake in West Qurna, a gigantic Iraqi field holding over 11 billion barrels of oil.
LUKoil CEO Vagit Alekperov is putting pressure on Moscow to hold Washington back. LUKoil has said it has had no assurances from Washington or the Iraqi National Congress - the possible Iraqi replacement regime - that its oil interests would be safe should Saddam be removed from power.
Mikhail Khodorkovsky, chief of Russia's Yukos oil company, predicts that removing Mr. Hussein from power would drop oil prices down to $15 to $20 a barrel, from around $30.00 where it has been hovering lately. According to Khodorkovsky, Iraqi oil output should more than double within three years of Saddam Hussein's removal. This would increase Iraqi oil output to 5 million barrels a day (Russia's current output).
Last week, Khodorkovsky told Reuters news service that "It's difficult to say what influences the Russian position in the Security Council, but I can say with certainty that Russia's interests in Iraq are economic, not political."
Such truths are well known in Washington. In April 2002, the U.S. Energy Department's Energy Information Administration noted: "Crude oil exports are a key source of income for Russia, as revenues from exports provide approximately 25 percent of the Russian government's income. Just a $1-per-barrel price increase for Russia's Urals Blend benchmark brings in almost $1 billion in extra earnings. Likewise, however, a $1-per barrel decrease in the oil price is a significant blow to Russia's budget."
Because of this, Russia is taking precautions. Desperate to improve its flailing economy, Russia is quickly trying to meet an Asian demand in the oil market. Yukos is looking to start immediate production of a new pipeline from Russia's Angarsk region to Daqing in China. Currently, Yukos already trades 27,000 barrels per day (bpd) via railway with China. But once the new pipeline is created, it will have an initial capacity of 400,000 bpd.
The pipeline has the possibility of creating large revenues for Russia, but Russia is under the gun; if the United States invades Iraq and sets up a new government, it will only be a short time before the U.S. is able to help Iraq begin exporting large quantities of oil again. These exports will drop the oil prices greatly and Russia's oil profits will dwindle due to more supply in the market.
This drop in oil prices is what the Bush administration is banking on. However, as long as the Bush administration remains undecided, the world economy will remain volatile. Already, crude oil prices have increased 50 percent this year due to investor fears that an Iraqi invasion would disrupt oil supplies. A disruption of oil supplies in the Middle East, which provides one third of all world oil, would cause oil prices to skyrocket. This would put further strain on the global economy at a time when it is already weak.
The Bush administration must carefully weigh the economic costs and benefits that an Iraqi invasion will bring, including the uncertainty inherent in and bred by such global military endeavors. The worst possible outcome for the Bush administration would be if the invasion failed for either military or political reasons. This would cause a great strain on oil prices sending the economy sharply downward.
Erich Marquardt drafted this report; Matthew Riemer contributed.
[The Power and Interest News Report (PINR) is an analysis-based publication that seeks to, as objectively as possible, provide insight into various conflicts, regions and points of interest around the globe. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. PINR seeks to inform rather than persuade; it is currently a project of This report may be reproduced, reprinted or broadcast provided that any such reproduction identifies the original source, All comments should be directed to]


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