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Russia offers to ease Iraq debt for oil contracts

MOSCOW -- Russia is ready to forgive more than half of the $8 billion debt owed to it by Iraq in return for Baghdad's promise of favorable treatment for Russian oil companies as the country rebuilds, members of Iraq's Governing Council said yesterday after talks with Russian President Vladimir Putin.


Abdel Aziz Al Hakim, the current head of the US-appointed council, said Putin made "a generous promise" to reduce Iraq's debt by 65 percent to $3.5 billion. In return, companies from Russia -- including oil firms that signed multibillion-dollar contracts with Saddam Hussein's regime -- would be welcome to invest and work in Iraq, Hakim said after the Kremlin meeting.

Russian officials suggested that the amount Moscow writes off would be closely linked to the access Russian companies receive to participate in Iraq's reconstruction -- especially Russian oil companies that owned the rights to develop Iraq's vast oil fields.

"Russia said it is willing to consider the write-off of the rest of the debt if it receives beneficial treatment in terms of oil contracts," said Kurdish leader Jalal Talabani, a member of the first Iraqi delegation to visit Moscow since the US-led coalition toppled Hussein in April.

Putin's offer came four days after he agreed to start negotiations on reducing Baghdad's debt to Moscow following talks with President Bush's special envoy, former US secretary of state James Baker. As part of Washington's plan to kick-start Iraq's economy, Baker is trying to persuade Iraq's creditors to forgive some of its towering $120 billion debt.

Baker, in meetings last week with leaders from France, Germany, and Italy, received pledges of cooperation but no specific amounts of debt forgiveness for Iraq.

Russia is Iraq's largest creditor. But as a leading opponent of the US war to oust Hussein, Moscow has been stung by its exclusion from bidding on $18.6 billion in reconstruction contracts under Pentagon plans to allow only coalition members to participate.

"We have always developed ties with your nation," said Putin, adding that Russian companies were ready to invest up to $4 billion in Iraq. "We strongly hope that Russia will have good relations with the new leadership of Iraq."

Russia is unlikely to see any of the money moribund and war torn Iraq owes it anytime soon. And by the time Baghdad could afford to pay, that amount could be dwarfed by the potential billions in profits for Russian oil companies working in Iraq -- and therefore in tax revenues for the Russian government.

Deputy Foreign Minister Yuri Fedotov suggested after Putin's talks with Baker that the debt reduction could be linked to Russian companies' participation in Iraqi reconstruction, and whether any new Iraqi leadership would uphold contracts signed by Russian oil companies and Hussein's regime "left suspended" after the war.

"As far as debts are concerned, this problem was obviously also discussed," another Russian deputy foreign minister, Alexander Saltanov, said following yesterday's talks. "We are ready to consider this issue constructively, understanding the importance of easing the debt burden which the Iraqi people now face."

If Russia reduces Iraq's debt from $8 billion to $3.5 billion, it would essentially be forgiving the interest that has accrued since the 1991 breakup of the Soviet Union on $3.5 billion in credits the USSR gave Hussein in the 1980s, mostly to purchase military equipment.

Any reduction of Russia's debt would have to be worked out within the Paris Club, a group of 19 creditor nations that negotiates debt issues. Iraq owes Paris Club nations $40 billion of its $120 billion debt.

Similarly, any final agreements on Russia's old oil contracts will probably have to wait until a new Iraqi leadership is elected and the US transfers power, which Washington wants to see in mid-2004.

But state-run Russian Channel One said yesterday's talks already proved that "Russia is planning to strengthen its economic and political influence in Iraq."

Russian companies signed billions of dollars worth of contracts with Hussein to develop Iraq's petroleum reserves, the second largest in the world after Saudi Arabia. Their chances of ever fulfilling the agreements have been in limbo, in part because of Moscow's opposition to the war along with Germany and France. But Hakim said during a tour of Europe before arriving in Moscow that Iraq would welcome any country that wants to help it rebuild.

Russian Energy Minister Igor Yusufov said the Iraqi leadership and Putin had agreed to launch new talks on the status of the old oil contracts.

"The Iraqi side proposed to resume talks at the level of experts on Russian contracts which have already been signed," Yusufov said after the Kremlin talks. "This proposal was accepted by Russian President Vladimir Putin and he ordered the government to work in this direction."

The Iraqi delegation's visit appeared to boost the fortunes of Russian oil company LUKoil, which is trying to win back the rights it once owned to the huge West Qurna-2 oil field. Hussein's government tore up that $6 billion deal last year charging that LUKoil, anticipating the fall of the regime, was negotiating with the Iraqi opposition and the United States for guarantees to uphold the deal.

Hakim cited LUKoil as exactly what Iraq needed to help rebuild its devastated oil industry.

"This is a great company, which has been working a great deal and successfully in Iraq," Russian news agencies quoted Hakim as saying. "Today, when we must start developing our oil industry, LUKoil's experience could be of great benefit."

Wire service material was used in this report.

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