As U.S. Companies Bail-out of Iraq, Russians Set to Bail-in’; Secretary Rumsfeld Warns Investment May Flee Russia

(Washington, D.C.): Russia’s recently announced $40 billion deal with Iraq stands in stark contrast to the prudent business decisions being executed by U.S. and other foreign companies that increasingly view ties to Iraq as not worth the financial-, reputational- and, in some cases, security-related risks evident in continuing operations in that country.

According to a Washington Post article of August 20, U.S. imports of Iraqi oil under the U.N.-sanctioned oil-for-food program have dropped by some 80%-90% over the past five months. Asian companies are also reportedly beginning to search out new sources of oil due to the anticipated unreliability of Iraqi government-controlled suppliers in the stormy period ahead. Curiously, it is into this maelstrom that Russia has decided to commit to a massive trade agreement with Baghdad — exposing itself and its business entities to the very risks that U.S. oil companies prudently seem determined to avoid.

Rumsfeld Asks Why Invest in Russia?

In commenting on the Russia-Iraq deal at a town hall meeting at Fort Hood on August 21, Secretary of Defense Donald Rumsfeld emphasized the importance of Russia’s efforts to “connect with the West and be seen as an environment that’s hospitable to investment.” Secretary Rumsfeld rightfully questioned, however, whether Russia’s efforts to establish this kind of investor-friendly image will not be seriously undermined by its efforts to establish economic partnerships with odious terrorist-sponsoring governments like that of Iraq. As he put it:

To the extent that Russia decides that it wants to parade its relationships with countries like Iraq and Iran and Syria and Cuba and North Korea, it sends a signal out across the globe that that is what Russia thinks is a good thing to do, to deal with terrorist states, to have them as their relationship-developers….It hurts them, because people all across the globe, business people can make a decision where do they want to put a plant? Where do they want to invest? Where do they want to have a relationship?

Indeed, in this scenario, Russia exposes itself to double jeopardy: It is attracting political and financial risk that prudent international investors are increasingly reluctant to accept, while alienating potential investors with its effort to curry favor Soviet-style with pariah state clients.

The Price of Duplicity

In addition to the cynicism displayed by maintaining strong ties with the brutal Baghdad regime, there are also a variety of security-related risks that can damage business relationships when operating in a country that has consistently sought ways of circumventing U.N. sanctions in order to pursue the development of weapons of mass destruction programs. In that connection, another reason for the exodus of Western companies from Iraq — over and above the looming threat of military conflict — has been a new rule put in place regarding the UN-approved oil- for-food program. This rule has been designed to counteract Saddam Hussein’s penchant for extracting illegal surcharges on oil exports and using them, as he has for years, to line his pockets and finance his weapons of mass destruction programs, support for terrorism, etc.

Under the new rule, importers are prevented from knowing the price of Iraqi oil per barrel until after they have taken possession of it. Its implementation has had the effect not only of thwarting Saddam’s intricate surcharge schemes; the new rule has also served to estrange from Iraq even international oil firms with a high tolerance for dealing with corrupt, tyrannical regimes. The result, however, has also been to diminish the amount of money flowing to the UN’s oil-for-food program — adding further urgency to the need to bring about an early end to the Iraqi regime.

One can only hope that the departure of Western oil firms has also been influenced by the number of stories that have emerged regarding the Iraqi government’s exploitation of even the most benign oil-for- food purchases for military purposes. These have included dump trucks — as Secretary Rumsfeld observed on August 21 — that have their back ends removed and replaced by artillery and rocket pieces and the use of refrigerated trucks, ostensibly purchased for food transport purposes, as mobile biological weapons manufacturing facilities. These examples vividly demonstrate how Iraq’s malevolent activities compromise its supposed commercial business environment.

The Bottom Line

Presumably, it is these factors that are weighing on the minds of those companies choosing to discontinue significant business with Iraq. As the Kremlin has done time and time again in the past, the Russian government — via its willingness to take on board these kinds of inordinate risks — appears determined to sour the prudent investor’s evaluation of the Russian economy and business/political climate.

Although Iraq doubtless expects to gain once again both economically and politically from its Russian friends, Moscow is likely underestimating the debilitating costs associated with its large-scale engagement strategy. As Donald Rumsfeld put it so well: “To the extent [Russia] is saying to the world that, in fact, they want to be known as close personal friends of Saddam Hussein and Fidel Castro and Kim Jong Il and those folks, it sends a signal that is harmful to [the Russians].” Mr. Rumsfeld is to be commended for underscoring what should be a potent disincentive to Moscow proceeding with its reckless endangerment of its own interests — to say nothing of the rest of the world.