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IRAQ WAR DOES NOT PAY DIVIDENDS TO RUSSIANS

Russian oil producers, pipelines and ports are certain to be badly hit if the United States forces a regime change in Iraq and, consequently, world oil prices fall sharply. And that’s only scratching the surface of the threat to the Russian economy from an American war on Iraq, and all that would follow.

Understanding this should be an antidote to a spate of recent reports in the Anglo-American press. These claim that, behind the curtain of the United Nations Security Council, the Russian government is negotiating a secret deal with the United States to trade Moscow’s concession for war to start, in exchange for Washington’s guarantee to secure Russian oil company concessions in Iraq, or to pay a matching indemnity. No matter how the value of Russia’s interests in Iraq may be summed up, and never mind how unreliable and unpredictable the Bush administration’s undertakings are understood to be, the cost of oil prices’ collapse to the Russian economy is certain to be greater than any promised indemnity.

The Russian parliament has so far failed to analyze and debate this. But already Russia’s oilmen have begun to admit it. Mikhail Khodorkovsky, the head of Yukos, the second largest of Russia’s oil producers, told an investor conference in New York last Friday that until now, oilfield and refinery output in Russia has been growing faster than the country’s transport infrastructure has been able to manage. This is why Yukos is publicly backing massive investment on new export routes to China, the Mediterranean through Croatia, and Murmansk, he said.

Asked what he thought may happen to those plans if the United States takes military action to topple Saddam Hussein, Khodorkovsky said his view is bearish, but that Yukos is prepared for a fall in oil prices to $14 per barrel. He claimed that Yukos could withstand even lower prices, but added that if there would be a sharp decline, spending on Russian oilfield development and on transport infrastructure would slow. Khodorkovsky didn’t say it, but LUKoil, the biggest of Russia’s oil producers, is much more vulnerable than Yukos.

A Russian foreign policymaker said this week in Moscow that he had been told by State Department officials recently that U.S. policy is to establish and hold an oil price of $13 per barrel. Everyone in the oil business understands that if this is true, and if the policy succeeds, the much-publicized monthly shipments of Russian oil to Houston, which began in July, are bound to stop abruptly; losses set in at around $20 per barrel.

If oil this cheap is indeed a U.S. objective, then a regime change in Iraq, possibly to be followed by regime change in Iran, and unremitting pressure on Saudi Arabia, look to be the means the Bush administration will pursue, overriding whatever coziness has developed between Presidents George Bush and Vladimir Putin.

It has been the achievement of Foreign Minister Igor Ivanov’s diplomatic career to have drawn out of the negotiating process with Washington these real threats to Russia’s strategic interests in what is unfolding. It bears remembering that in the decade of President Yeltsin’s rule, Yevgeny Primakov came close, both as foreign minister and then as prime minister, only to be ignored or dismissed at Washington’s insistence.

The immediate reason U.S. energy officials have been courting the Russian oil majors is that the Bush administration wants them to lobby the Kremlin for support of the attack on Iraq. The reason the Russian majors want to cozy up to the Americans is that they would like to list their shares on the New York Stock Exchange and sell off minority blocs of stock to U.S. investors, raising the share price to a multiple of the current level, and adding vastly to the wealth of Russians like Khodorkovsky, who control the companies.

TNK has been negotiating quietly to sell a billion-dollar stake to Chevron-Texaco among others. Yukos was planning to list in New York by December, but has now postponed the move. That relieves Khodorkovsky of some of the strain he might otherwise be feeling between his public relations objectives in New York and his appreciation of the realities in Moscow.

The Russian oil majors would also like to attract American funds for investments that are risky, and take longer than a year to pay back, such as new pipelines, refineries, oil ports, even tankers and the icebreakers to assist them.

As Khodorkovsky has now acknowledged, the post-Saddam oil price would destroy the rate of return for virtually all those projects, deterring all investment. The multiplier effect for the Russian steel, pipe, and machine-building industries would carry the negative impact deep into the heart of the economy.

For the time being, it is necessary to make hay while the sun shines. The major Russian outlets for oil exports say they are expanding as fast as they can. The St. Petersburg Oil Terminal, for example, the leading outlet for refined oil products, says it has expanded its throughput capacity by 33 percent this year, and is planning to double this again by 2005.

Transneft has begun laying new pipes for transporting double the volume of crude oil that Primorsk, the new crude oil outlet in the Leningrad region, can export. These are costly but necessary measures for the oil economy to grow in the future. But they won’t suffice; nothing will suffice, if Bush drives Saddam and the oil price into the ground.