War in Iraq:
What's at Stake for Russia?
Summary
Russia might be too internally fragile to survive a U.S.-led war
against Iraq without sliding into a deep crisis. At best, Moscow
will be weakened economically, politically and internationally;
at worst, the nation could suffer economic collapse and internal
instability that severs its status as a U.S. ally.
Analysis
This piece, the first in Stratfor's "Iraq War Stakes" series,
examines what is at stake for Russia in a U.S.-led war against
Iraq. Such a war probably would affect Russia more than any other
world power, with implications that could have a profound impact
on the post-bellum world order.
Prospects for Economic Collapse
Russia has much to lose and little to gain in the event of a
U.S.-led war against Iraq. For Moscow, virtually everything is at
stake: the nation's economic health, internal stability and
international standing and influence.
Oil is the blood of world economy, and this blood likely would
turn bad for Russia in the event of war. During the course of
military action, global oil prices would jump sharply and then
enter a deep and prolonged spiral, should the United States win
the war and establish control over the Iraqi oil industry --
which likely would mean soaring production levels. On the
surface, it would appear that Russia, a major oil exporter, would
benefit during the war and suffer afterward, but in reality the
nation likely would suffer both during and after the conflict.
Russian oil production is already at maximum levels, meaning that
domestic energy companies would not be able to boost production
significantly enough to take advantage of higher prices. In order
to benefit from a temporary wartime price hike, they would have
to increase exports by diminishing sales to Russian customers.
Moreover, the prices of Russian gasoline and other refined
products would skyrocket with the increased global price.
Therefore, the country could face both an internal supply
shortage and cosmic energy prices that would shut many Russian
citizens and businesses out of the market. We should not forget
that the Russian economy is correctly dubbed a "wild market" in
which everything is for sale for a profit. Moscow's attempts to
intervene in the market probably would fail: The country does not
have strategic petroleum reserves, an idea which is only in the
early stages of discussion.
Needless to say, an energy supply shortage or prohibitive prices,
or both, would severely hurt industry and citizens alike. Vast,
distant regions such as Siberia and the Russian Far East, which
already have experienced energy shortages for several consecutive
years, would be hardest-hit, possibly leading to the collapse of
regional economies and businesses. However, the national economy
as a whole would continue to limp along. Should a war in Iraq
continue for several months, however, the concomitant supply
shortages and high domestic gasoline prices could knock the
crutches out from under even the national economy.
Even the more probable scenario of a fairly rapid U.S. victory
will not allow Moscow to breathe easily. U.S. control over the
Iraqi oil industry would be a likely, if unintended, consequence
of military victory and would lead to much higher production
levels from Iraq. This is integral to Washington's strategic
interest: decreasing global oil prices to levels that would allow
a sustained U.S. economic recovery.
During his Nov. 22 visit to Russia, U.S. President George W. Bush
said Washington would protect Russia's economic interests in
Iraq, although Foreign Ministry sources say he did not elaborate
or give any guarantees. To protect Russian oil interests,
Washington would have to agree that Iraq's richest fields would
remain under Moscow's control following the overthrow of Hussein,
and it would have to block the expansion of U.S. energy majors
into the country.
It is important to note, however, that there is more at stake in
Iraq than Russia's oil concessions -- its oil-dependent economy
also would suffer, and Washington cannot protect Moscow from the
consequences of a price decline.
According to the Hong Kong-based Asia Times, some U.S. State
Department officials say Washington is seeking a crude price of
$13 per barrel. Mikhail Khodorkovsky, the head of Russian energy
giant Yukos, predicts that oil prices following an Iraq war would
be $14-$16 in the best-case scenario for Russia, $12-$14 in the
worst.
Washington's oil price strategy is distinctly at odds with that
of Moscow, whose federal budget for 2003 is predicated on prices
of roughly $24 to $25 per barrel.
Speaking in Houston recently, Russian Energy Minister Igor
Yusupov said the nation's economy still would be healthy if oil
prices dropped to $20 to $25 per barrel, and the budget even
could be maintained at current levels if prices fell to $20 to
$21, since Russia could make up the difference with higher oil
revenues stemming from the current "war premium." However, the
Kremlin would have to slash spending plans if prices fell below
$20 next spring or summer, Yusupov said.
Some Russian Finance Ministry officials privately admitted to
Stratfor that nothing -- even writing off some Soviet-era debt,
which has been discussed with U.S. officials -- would save
Moscow's 2003 budget if prices fall below $20. Although national
economies can survive even if state budgets are ruined, provided
they have some fiscal reserves, this is hardly the case for
Russia, where the economy is already in crisis. Russian weekly
Argumenty i Facty, citing government experts, writes that the
lowest crude price Russia can sustain is $18 per barrel.
Assuming that Hussein does not torch Iraq's existing oil wells,
the country could double current production levels to 2 million
barrels per day in a matter of weeks or months -- depending upon
certain political scenarios -- and likely could reach 5 million
bpd within three to four years, Stratfor believes. If U.S.
actions in post-war Iraq take global oil prices down to $13, then
the Russian economy could slide into a much deeper and prolonged
crisis. Not only would there be no clear prospects for recovery,
but complete economic collapse could not be excluded either.
Impact on Energy Companies
An Iraq war would have several negative ramifications for the
Russian energy sector, particularly for oil companies.
First, the war would significantly reduce the value of their
assets, in some cases causing companies to operate at a loss.
Their share prices would drop accordingly. Second, the prospects
for selling Russian oil directly to the United States would be
diminished: Not only does the country currently supply very
little of U.S. energy needs, but its oil is also more expensive
to extract and to ship than that from the Middle East, and again,
the post-war market eventually could be flush with Iraqi
production. Third, any chances that Russian energy majors could
maintain influence in the Iraqi oil sector would be destroyed.
All Russian oil majors recognize a very real threat of losing
their market value should the United States and its energy majors
capitalize on victory in Iraq. Their response is to try to sell
large portions of stock before the war starts, seeking to
accumulate a nest egg to tide them through the rough aftermath of
war. Russian major TNK is trying desperately to sell a large
portion of its stock to BP, Shell and probably ExxonMobil and
TotalFinaElf, RusEnergy reports. BP executives recently held
talks with Yukos about acquiring a large amount of that company's
stock as well, according to the Wall Street Journal. Sibneft also
is considering such a move, Fortune has reported.
However, Western companies are in no hurry to acquire stock in
Russian energy firms, knowing full well that time is on their
side: After the Iraq war, it should be possible to buy shares of
Russian oil majors at a fraction of their current prices.
Moreover, Russian Energy Ministry sources say they fear that once
Russian energy companies lose value, U.S. energy giants will
acquire them outright -- snapping up key companies and leaving
others to go bankrupt. Acquisition by U.S. energy firms might be
a good thing for globalization and for Russian oil workers who
are picked up by the mergers -- but Russians are afraid that if
this happens, their country will lose not only energy security
but also sovereignty to the United States.
The future of Russian oil companies' concerns in Iraq also are at
stake in the potential war. Russian majors have lucrative
contracts in Iraq, all stemming from the special relationship
Moscow has maintained with the regime of Saddam Hussein. The
biggest of these is a $20 billion LUKoil contract to develop a
giant West Qurna oil field, where the Russian company has a 52.5
percent stake in a joint venture. Though LUKoil and other Russian
majors currently have profited little or moderately from deals
with Iraq, due to international sanctions, they have hoped to
seize huge revenues once the sanctions are lifted.
Russian oil majors -- including LUKoil, Tatneft, Zarubezhneft and
others involved in Iraq -- fear that if the Hussein regime is
toppled, U.S. companies will replace Russian firms as dominant
players in the Iraqi oil market. Though the Bush administration
denies seeking to dominate the post-war oil market in Iraq,
Russians and others have several reasons to doubt these claims.
First, it would be politically natural for U.S. companies to take
precedence in the oil market of a country led by a pro-U.S. or
even U.S.-appointed government. If the Japanese army were to take
over Baghdad, then Japanese oil companies would do the same.
Second, the statements of the pro-U.S. Iraqi opposition further
prove to Russians and others that the future of Iraqi oil belongs
to the United States. For instance, the Iraqi National Congress
(INC), Iraq's main opposition group favored by Washington,
recently stated -- not for the first time -- that a post-Hussein
government would review existing oilfield development deals with
French and Russian companies and could favor U.S. firms instead,
Reuters reported in October.
Third, there is some evidence that the Bush administration
already is working with the Iraqi opposition to shape the future
of the nation's oil industry following the ouster of Hussein. The
U.S. State Department has scheduled an early December meeting
with Iraqi opposition members, who likely would oversee the
industry following the war, to discuss plans for the oil and gas
sector. State Department officials want to create an Iraqi oil
and natural gas working group of between 12 and 20 members,
including both Iraqi opposition and U.S. officials, according to
the Financial Times.
U.S. energy majors reportedly have been working with the Iraqi
opposition; some U.S. oil companies have had contact with INC
leader Ahmad Chalabi, according to the Financial Times.
In addition, Russian oil companies probably could not compete
successfully for whatever bids a post-Hussein government in
Baghdad makes available, due to their own financial and
technological limitations. Moscow and other governments also fear
that a pro-U.S. government in Iraq would favor U.S. companies
over those of other countries.
Geopolitical Positions Worldwide Threatened
Russia's international influence likely would be strongly
diminished as well following a war in Iraq. Most important, the
security situation could deteriorate along southern Russia's vast
borders with Muslim-majority regions. In the likely event of a
U.S. victory, Russia would be bombarded with accusations from the
Islamic world that it enabled such a victory -- first, by
betraying Moscow's traditional partnership with Iraq and not
standing firmly enough to block the attack, and second, by
depriving Iraq of modern weapons capable of repulsing the U.S.
offensive.
It is one thing for Russia to support the U.S. war against al
Qaeda -- something many Islamic governments also do -- but quite
another to support, however halfheartedly, a U.S. military effort
against Iraq. The Islamic world's perception of Moscow's stance
would alienate not only radicals, but mainstream Muslims as well.
Moreover, it would be easier for Muslims to blame and retaliate
against a weakened Russia than the much stronger United States.
Iraq's Hussein already appears to have issued a veiled threat to
Moscow, telling the Kremlin it faces consequences unless it
"takes the Chechens' cause into account."
Russia long has been battling Islamist militants, both Russian-
and foreign-born, with Chechnya serving as the main battlefield.
Moscow's quiet acquiescence to U.S. war plans potentially could
draw mainstream Muslims and some of their governments into the
radicals' long-term offensive against the country. That means
that financial, logistical and recruiting support for Islamist
militant groups could grow significantly. It also is possible
that new northern Caucasus fronts in the battle against Russia --
in places other than Chechnya -- might be opened, and attacks on
strategic and civilian targets in Russia proper could increase.
The Kremlin's so-called "betrayal" of Iraq would not be the only
factor at play in such a trend, but it certainly would feed into
that trend.
On a larger scale, Russia stands to lose whatever international
prominence it still has following a U.S.-led war against Iraq.
The nation never managed to regain the international standing the
Soviet Union shared with the United States during the Cold War;
nevertheless, Russia still enjoys significant influence in the
Middle East. Washington has used Moscow as a diplomatic proxy in
moderating the policies of several nation-states that oppose the
United States -- such as Syria, Iran, Libya, Lebanon and Yemen --
until recently. And Arab regimes have used it in a similar
capacity concerning U.S. policies in the Middle East. In
addition, military-technical assistance given to many Middle
Eastern countries has brought cold, hard cash to the Kremlin. And
both the United States and Arab states have been content for
Russia to play the role of intermediary in the Israeli-Arab
conflict -- something that Washington's close alliance with
Israel renders it unable to do.
A U.S. victory in Iraq might change all of these things
overnight, possibly to the point that Russia is expelled from the
Middle East political scene altogether. Not only would the Muslim
world see Russia as a tool of the United States and traitor to
the current Iraqi regime -- thus destroying Moscow's political
clout -- but Washington's burgeoning influence in the region also
would leave Russia without a role to play in U.S.-Arab relations.
The looming war against Iraq would not be the first conflict in
that country to hurt Russia. The 1991 Persian Gulf War, in which
Soviet leader Mikhail Gorbachev sided with the United States,
signaled the end of the Soviet Union as a superpower. This time,
major powers again have looked to Moscow to lead resistance to
the U.S. war effort, since Russian interests will be the most
hurt among the global powers -- but the Kremlin has offered only
passive resistance to Washington. Avoiding a confrontation with
the United States might be a wise choice for Moscow, but other
world powers see this behavior as a sign that Russia is ceasing
to matter in its own right. Following a war in Iraq, the world's
important players are unlikely to take Russia's position into
account on any major international issue.
The European Union already has been frustrated by Russian
President Vladimir Putin, since he unexpectedly dropped his
opposition to Washington's scrapping of the Anti-Ballistic
Missile Treaty -- a measure Europeans viewed as essential for
checking Washington's global ambitions. The EU had hoped, since
the breakup of the Soviet Union, that Russia would take its cues
from Brussels rather than from Washington, but that has not
happened so far. The likely U.S. victory in Iraq and Russia's
inability to stop the war or extract any meaningful concessions
from Washington will further diminish Russia's weight in European
eyes. Brussels likely would cease to consider Russia an equal or
reliable partner that could support Europe's international
agenda.
China also could take a similar attitude. Beijing has set an
example of how to stand firm in defense of one's national
interests vis-a-vis the United States without sliding into a
direct confrontation with the world's only superpower. Russia
seems to have leapt from one extreme -- confrontation with the
United States during the Soviet era -- to the opposite, an
inability to make any use of its junior ally status. Like Europe
and others, China might view Russia following the Iraq war as a
country that lacks an independent foreign policy, and treat it
accordingly.
Internal Stability at Risk
All of these factors -- economic deterioration, security threats
and loss of international standing -- could have a severe impact
on Russia's internal stability. In the event of a post-bellum oil
price-slump, Russian citizens might see their last means of
survival slipping away -- and begin demanding the resignation of
their government and the president they see as unable to improve
the situation he was responsible for creating.
To ensure their own dominance, parts of the Russian political and
business elite then could seek alternatives to Putin and,
possibly, to his openly pro-U.S. course. It is difficult to say
which political forces might capitalize on the negative
consequences of an Iraq war, but such attempts could be expected
from every spectrum of the political opposition -- from liberals
who are more pro-Western than Putin, to communists, or even to
parts of the Putin administration who want to abandon his ship
before it sinks.
At that point, the military's role in politics would become
vital. Putin's popularity is already much lower with the army
than with the general public because some generals and likely a
majority of officers and soldiers perceive him as surrendering
the nation's dignity and unable to defeat Chechen militants.
Retired or active-duty officers might answer the calls from the
populace and some political forces to take up arms and help
change the regime.
New Islamist attacks throughout Russia -- encouraged by Russia's
role in the U.S. war effort against Iraq and subsequent "bad"
reputation in the Muslim world -- also could complicate matters
for Moscow in the aftermath of war. If Putin's government is
unable to resolve the economic and social crises and possible
political crisis following the Iraq war, then a change in his
government and possible change of regime could not be excluded
from the worst-case scenario.
Conclusion
Stratfor does not at this point predict unmitigated disaster for
Russia in the event of a U.S.-Iraqi war, but we do believe that,
internally, Russia is probably the weakest of the current U.S.
allies, and that it might be the first to collapse in the worst-
case post-war scenario. Russia risks falling into systemic
crisis, while Washington risks seeing a valuable ally become a
potential enemy. Putin is desperate to remain in power and is
begging for Washington's understanding, but it remains to be seen
what, if anything, Washington would be willing or able to do to
shore up his regime.
For Putin, the ideal reward for his pro-Western course and
alliance on the Iraq issue would be for his country to become a
junior but respected U.S. ally, much like France or Germany --
or, even better, a special ally such as Israel. Such treatment
for Russia probably would help to avert the negative consequences
of a war in Iraq. But Washington appears unwilling -- and cannot
afford -- to supply Russia with the same kind of aid it gives to
Israel, amounting to $3 billion in military aid alone. Nor would
an economically and socially weakened Russia command the respect
that Washington shows to western European powers, despite their
many quarrels.
STRATFOR.
Shit,if the israeli's can blackmail the US by threatening nuclear war in
the middle east...
