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. Last Updated: 07/27/2016

Russia Ill-Placed to Benefit From Iraqi Deals

BAGHDAD, Iraq -- Iraq is expected to get spare parts for its oil industry under the United Nations oil-for-food program soon, but Russian companies appear unlikely to benefit.

The equipment, yet to be assembled and delivered, will be used in Iraq to upgrade its oil infrastructure, enabling it to produce and export more crude, thus generating greater revenues, said George Somerwill, a spokesman with the UN Office of the Humanitarian Coordinator for Iraq, last week.

Even if Russian firms win contracts to supply the spare parts, the equipment needed is generally made outside Russia, Russian industry sources said in Baghdad.

Iraqi-based staff of Russian firms acknowledge that equipment for the oil industry made in Russia is often low in quality and high in price compared with Western-manufactured machinery. Some staff went even further, saying that in many cases, Russian-made equipment is outdated.

Moreover, despite the Soviet Union's large-scale activity in Iraq in the late 1980s, most of Iraq's oil infrastructure is fitted with equipment made outside Russia, Russian businessmen said in Baghdad.

Therefore, although the Russian government is pushing for the development of trade ties with Baghdad, it will be difficult for Russian firms to meet the market on technical issues, even if UN sanctions are not taken into account.

Iraqi merchants say it is difficult to work with Russian partners. "If you deal with Russia - it's a gamble," one Iraqi trader operating under the oil-for-food program said. "Most business [in Iraq] is not from Russia."

The problems of dealing with Russian partners are made worse by the Russian banking system, made uncertain by last year 's financial crisis.

"I had to put millions of dollars into Singapore accounts, because the bank system there [in Russia] is crazy," an angry Baghdad merchant of Russian origin who imports to Iraq said. "I lost $200,000 in Dialog Bank and they gave me only 20 percent back."

Last week, Fuel and Energy Minister Viktor Kalyuzhny visited Baghdad to lobby for Russian firms in Iraq. He also had a two-hour meeting with Iraqi leader Saddam Hussein and handed him a personal greeting from President Boris Yeltsin.

During the meeting, Hussein confirmed Iraq's intentions to continue various joint projects with Russia. The Iraqi president stressed that he personally viewed Russia in the light of the relations developed long ago with the Soviet Union and that continue in the present, Al-Iraq newspaper reported.

"Russia is a strategic partner of Iraq," Iraqi Oil Minister Amer Rasheed said last week. "About 40 percent of Iraq's total crude export is handled by Russian oil companies, and Russian firms secured contracts worth [a total of] $400 million in the [previous] fifth phase [of the oil-for-food program]."

Russian oil traders make much-needed money on commissions for lifting Iraqi crude. Therefore, the companies are trying to hold on to their niche in Iraq and, with it, prospects of potential oil projects and consequent export revenues from their southern neighbor.

"Crude is very cheap to produce in Iraq and it's close to the market," a Baghdad-based Russian oil company representative said last week.

In an attempt to keep business going in Iraq, oil executives also use political means to demonstrate their loyalty to Baghdad. LUKoil, Zarubezhneft, Mashinoimport and some other companies' representatives have recently formed a committee on international cultural, scientific and business cooperation with Iraq.

"The whole business here is very politicized," an oil company representative based in Baghdad said. "Someone, somewhere just has to sneeze and then your whole business is finished."

Iraqi Deputy Oil Minister Taha Hmood said the UN Sanctions Committee had delayed contracts for oil-industry spare parts signed under the fourth and fifth phases of the oil-for-food program. Of deals totaling $600 million, only about 10 percent of the contracted equipment has been delivered to Iraq.

Iraqi authorities also claim that contracts worth $101.2 million from the sixth phase are on hold, but the program's semiannual period does not end until Nov. 21.

The UN said the technical procedures for the oil-industry spare parts was naturally slow; under the contracts, engineers have to travel to Iraq, survey the site and then assemble the necessary equipment at their home firms. All together, the process of signing a contract and delivering the spare parts takes about a year, Somerwill said.

Oil equipment has been allowed under the terms of the oil-for-food program only since the fourth phase. "Therefore, Iraq stands about a year away from the time when physical contracts were secured. Thus, the equipment is due to arrive soon," Somerwill said.

UN Secretary-General Kofi Annan in his two latest quarterly reports stressed the urgent need in Iraq for spare parts for its aged oil industry. "They are pumping at tremendous environmental cost, spoiling their deposits," Somerwill said.

Since 1996, Iraq has been authorized to export its crude at semiannual phases under the oil-for-food program. The oil revenues are accumulated at Banque Nationale de Paris in New York.

Thirty percent of the revenue goes to compensate Kuwait, which Iraq invaded during a war in 1990. Sixty-six percent returns to Iraq in the form of equipment and humanitarian goods. About 2.8 percent is used to cover UN expenses on facilitating the program.

Iraq was allowed to sell crude worth $2.1 billion during the first three phases. The cap was later lifted to $5.26 billion over the next three periods.

But since world oil prices have shot up this year, the UN expects Iraq to reach the limit by Friday.

Thus, the Security Council agreed on Monday to raise the allowed revenues quota for Iraq to $8.3 billion for the sixth phase. Iraq is expected to generate $7.2 billion by the end of the current period.

During the sixth phase, Iraq has exported 268.1 million barrels of crude, with estimated revenues of $4.9 billion as of Oct. 1, the UN reported Wednesday.