3/11/03
By ALAN CULLISON Staff Reporter of THE WALL STREET JOURNAL
MOSCOW -- Russia's resistance to a U.S.-led invasion of Iraq is a sign that the diplomacy of dependency of the 1990s might have run its course here. After recovering from a decade of post-Soviet shrinkage and collapse, Moscow is awash in cash and not so easily plied by the West's economic handouts.
With a United Nations vote nearing that could lead to war in Iraq, the opposing camps led by the U.S. and France have focused their intense lobbying on a handful of undecided Security Council members. U.S. diplomats said they were concentrating on Angola, Guinea and Chile. U.S. National Security Adviser Condoleezza Rice, has openly suggested that the Bush administration might offer financial aid to key nations in exchange for support, saying: "We're talking to people about their interests."
Until recently, such talk would have fallen on receptive ears here. Western purse strings were a factor Russia had to consider when forming its foreign and even domestic agendas through most of the 1990s. With its economy in a shambles, Moscow feared punitive rulings from the Paris and London Club groups of creditors, who held billions of dollars in Soviet-era debt. It also relied on the largess of the World Bank and International Monetary Fund to plug budget gaps.
The West's economic leverage didn't always contain the rants of unpredictable former President Boris Yeltsin in the 1990s, but it did play a role at crucial junctures. Mr. Yeltsin was keenly interested in Russia becoming part of the Group of Seven economic powers. When the North Atlantic Treaty Organization bombed Yugoslavia in 1999, IMF aid was seen as an important incentive that kept Russia's often-symbolic support of the Yugoslavian government from turning into active defense.
The alchemy of Russia's financial relations has changed quite a bit since then: President Vladimir Putin put a halt to IMF borrowing after becoming president in early 2000, when a recovery in world oil prices gave Moscow some financial relief. Mideast uncertainties, which have prompted a rise in oil prices, have only buttressed the Kremlin's finances further. Russia, the second-largest oil producer in the world, is now cash-rich, and the government had been using its huge budget surpluses to pay down the national debt.
Last week, the day after Russia declared along with France and Germany its firm opposition to a U.N. resolution authorizing force against Iraq, the Russian government posted an announcement on its Web site that it intended to repay IMF loans next year ahead of schedule. Last winter, the Kremlin announced it was ending the work of the Peace Corps in Russia, a move officials attributed to rising self-confidence -- and a feeling that Russia didn't need aid from groups such as the Peace Corps, whose mission is to assist developing countries.
"They haven't been on their knees for some time," said a senior U.S. diplomat in Moscow. The U.S. has tried to steer clear of any outright offers of economic incentives in exchange for Russian support of an invasion of Iraq, the diplomat said, adding that the Russian government has made it clear it isn't interested in such offers.
Russia does have some interests to protect in Iraq: Saddam Hussein has promised Russian companies in recent years the chance to develop more than 25 billion barrels of oil in Iraqi fields. The Russian government, meanwhile, would like Iraq to repay Soviet-era debts that totaled $8 billion (&euro ;7.26 billion) when Iraq stopped paying them in the early 1990s.
To the extent that economic enticements by Western governments enter into Mr. Putin's thinking on Iraq today, it isn't clear that Washington can offer more than France or Germany. Germany is one of Russia's largest trading partners, and Russia's biggest company, the state-controlled natural-gas company Gazprom, funnels most of its gas exports to Europe. Russia has long pestered the West for help in gaining entry to the World Trade Organization so Russian goods could get easier access to Western markets. But entry requires help from a number of countries besides the U.S.
Meanwhile, Russia has indicated it is more worried about the world price of oil than oil contracts or the Soviet-era debt, the U.S. diplomat said. Russia derives one-third of its federal revenue from oil and gas -- if the U.S. does invade Iraq and increases oil production dramatically, it could be a big shock to the federal budget.
"While $8 billion isn't peanuts, it is dwarfed when you think about a possible fall in the oil price," the diplomat said.
The U.S. has told Russia it won't let oil prices crash if it gets control of Iraqi oil fields. Industry analysts assume that when the turmoil in the Middle East dies down prices will fall from their current levels, in the high $30s, toward the longer-term average of around $20.
The Kremlin already has amassed a lofty financial cushion to contain the effects of any fall in the oil price. The government calculated its 2003 budget based on an average oil price of $21.50 a barrel, and for every dollar that the oil price has risen above the budget calculation, the Russian federal budget has received about $1 billion in extra annual revenue. Russia has been stashing away the excess, and in the past four months central bank reserves have risen by $6.3 billion, to $53.1 billion at the end of February.
"The Russian economy is, I would say, prepared for this situation, including in the budget sphere," Finance Minister Alexei Kudrin told Russian state television.
Moscow's position contrasts sharply with that of Turkey, which has been scrambling in recent days to reverse the rejection of a U.S. proposal to place 60,000 troops there in return for as much as $15 billion in aid. Turkey's financial markets plummeted last week after its parliament rejected a plan to take the troops.
Russian equity and debt have all the while rallied powerfully during the past several weeks, despite a world-wide downturn in financial markets that investors blame on war jitters. While the high price of oil has helped lift Russian assets higher, analysts say the rally is also a payoff for several years of economic reforms that have made Russia an enticing investment opportunity. In February, BP PLC announced it would make the largest foreign-equity investment ever in Russia, paying about $6.75 billion in cash and stock for a 50% stake in a new venture that would become the country's third-largest oil producer.
Analysts hailed the BP deal as a sign that Russia is stable enough for major Western companies to make significant direct investments. The deal represents about 1-1/2 times the total foreign direct investment that Russia attracted last year. Investors are betting the country's sovereign debt, priced as junk after the 1998 financial blowout, will attain investment grade next year.
"The most important thing for Russia now is private investment -- not aid from any foreign government," said Roland Nash, head of research at Renaissance Capital investment bank in Moscow. "Right now the private investment is coming in, so they don't need handouts."
Write to Alan Cullison at alan.cullison at wsj.com