Putin to Talk Gas and Arms in Libya

President Vladimir Putin will become the first Russian leader to visit Libya when he arrives in the country Wednesday at the invitation of its leader, Moammar Gadhafi, the Kremlin said in a statement Monday.

Less than a month before he leaves office, Putin will fly to the North African country for two days of talks likely to be dominated by discussions on energy cooperation, debt negotiations and a potential major arms deal.

The Kremlin did not give details of what Putin would be discussing, but last month he told State Duma deputies that a possible visit to Libya was in the pipeline to iron out a "financial problem" with the country.

Last week Gazprom said it was in talks with its Italian partner, Eni, about a potential asset swap involving projects in Libya. The announcement followed a meeting between Eni chief executive Paolo Scaroni and Gazprom head Alexei Miller with Putin in Moscow and heightened EU fears over its increasing dependency on Russian gas supplies.

A spokesman for Gazprom could not say Monday whether Putin would be discussing further involvement for the state-run company in Libya. The spokesman said he did not yet know if Gazprom officials would be accompanying Putin.

Until 2003 Libya was an international pariah, following 11 years of United Nations sanctions, imposed partly in connection with the 1988 bombing of a Pan American airliner over Lockerbie in Scotland. Ties with the international community have been gradually renewed since then, following Gadhafi's agreement to end the country's nuclear arms program.

Recent moves by Libya to open up to foreign investment have made the country very attractive for Russian energy firms and heightened international competition for the country's natural resources, said Valery Nesterov, an oil and gas analyst at Troika Dialog.

Following an auction late last year, Libya handed Gazprom the much-coveted rights to explore in a prospective gas block in the southwest of the country.

The diplomatic overtures toward Libya also fit in with broader Russian attempts to forge closer ties with North African states, including Egypt and Algeria, Nesterov said.

Putin's visit comes just after Ukraine announced on Sunday that state energy firm Naftogaz Ukrainy had won an agreement to start pumping oil in Libya, following a visit by Ukrainian President Viktor Yushchenko to the country last week.

Naftogaz has won back the rights to a Libyan field that it previously held in 2003, Yushchenko said in an interview with Ukrainian television Sunday. Yushchenko said he would discuss the potential construction of an oil refinery in Libya when Gadhafi pays a return visit to Ukraine later this year.

Despite recent talk of the creation of an OPEC-style cartel for the world's gas producers, Nesterov said Russia would first need the cooperation of the bigger producers such as Iran and Algeria.

Beyond advances in energy cooperation, Putin's visit could also see Russia sealing a deal to sell over $2.5 billion of arms to bolster Libya's aging weapons stockpile, Interfax reported Monday, citing a defense-industry source.

The wide-ranging deal would include anti-aircraft systems, MiG and Sukhoi fighter jets, helicopters, submarines and warships, Interfax reported, without saying where it got the information.

In the early 1980s Libya was a major buyer of Soviet weaponry, but since the Soviet collapse and the imposition of UN sanctions against Gadhafi's regime, the arms trade between the countries has dried up.

Despite this, 90 percent of the weapons used by the Libyan armed forces are Soviet-made, and the new deal could include the modernization of these arms, Interfax reported.

A spokesman for state arms exporter Rosoboronexport refused to comment on the issue Monday, and could not say if company officials would be accompanying Putin. The Federal Service for Military and Technical Cooperation did not respond to written questions.

The potential arms deal has been in the pipeline for over two years, and Libya would be seeking an arms-for-debt structure similar to that brokered by neighboring Algeria in an $8 billion deal in 2006, said Ruslan Pukhov, an analyst at the Center for Analysis of Strategies and Technologies.

"The scheme is the same as for Algeria -- we cut the Soviet debt and they agree to buy Russian arms," Pukhov said.

While European weapons manufacturers, including aeronautics giant EADS, have sought to break into the Libyan market over the past few years, the country could prove a vital customer for certain Russian weapon systems, Pukhov said.

Russia's federal budget for 2007 put Libya's debt at $3.5 billion as of the beginning of 2006.

Speaking in Washington on Sunday, Deputy Finance Minister Dmitry Pankin said Russia would this week ask Libya to clear its Soviet-era debt but refused to set a deadline for concluding negotiations.

"It is difficult to say right now. No agreement has been reached, and the positions remain uncoordinated," Pankin said, Interfax reported.