Iraq:  Using Oil Contracts to Break U.N. Sanctions
2300 GMT, 001110

Iraq has stopped selling crude oil to Russia’s LUKoil as punishment for the oil firm’s failure to develop an Iraqi oil field, said a LUKoil executive to The Associated Press on Nov. 8. LUKoil leads a consortium that signed a contract to develop Iraq’s Qurna oil field. Iraq threatens to nullify the contract, which will free up a lucrative prize for any oil company willing to bust U.N. sanctions. Even if unsuccessful, the strategy will result in increased opposition to the sanctions regime.

The U.N. sanctions, set in 1990 following Iraq’s invasion of Kuwait, bar investment in Iraq. To get the sanctions lifted, Iraq must cooperate with the U.N. Monitoring Verification and Inspection Commission for Iraq, which attempts to ensure Iraq has ceased producing weapons of mass destruction.

Iraq has recently made major strides in its efforts to rally support against the U.N. sanctions regime. Dozens of countries have flown “humanitarian flights” into Baghdad’s recently re-opened airport. Some, like France, Russia and Syria, have not notified the United Nations beforehand. While most flights do not technically violate the sanctions, their intent is to exhibit a general international consensus for suspending the sanctions. Iraq has also resumed internal flights, linking two cities in northern and southern Iraq that lie within the U.S. enforced no-fly zones.

Iraq’s latest strategy in destroying the sanctions is an attempt to find a company willing to undercut U.N. restrictions. Iraq stands ready to offer lucrative contracts, particularly Qurna, which recent seismic studies indicate has around 18 billion barrels of reserves. If successful, Iraq will have driven the final nail into the sanctions’ coffin.

Russia, France and China are Iraq’s key allies in the U.N. Security Council. In 1997, a LUKoil-led consortium signed a contract to develop the Qurna field. Under the deal Russia would spend up to $200 million toward developing the field, regardless of the U.N. trade sanctions, according to the Nov. 8 Moscow Times. Iraq insists Russia bring in drilling rigs and commence development, but Moscow now claims it has carried out all its obligations permitted by the sanctions. Despite Baghdad’s threats and pressures, Moscow has made clear it will abide by U.N. rules.

Moscow clearly worries it may be about to lose its contract on the lucrative oil field. Russian Foreign Minister Igor Ivanov confirmed that he would visit Iraq as part of his Middle East trip next week. Additionally, Ivanov will meet with Hans Blix, head of the U.N. Monitoring Verification and Inspection Commission for Iraq in Moscow on Nov. 10, undoubtedly to discuss lifting of sanctions.

Iraq, in addition to threatening to nullify Russia’s contract, recently stated it has found alternatives to LUKoil. Indeed, Iraq has offered Ukraine cooperation in long-term projects – including oil exploration and extraction – worth $15 billion, reported Ukrainian STB TV on Nov. 8. However, Moscow’s position on busting sanctions is clear and many Ukraine energy firms are Russian owned. Additionally, Kiev depends on Europe and the United States as ballast against the pull of Russian influence. Thus Moscow is not the most ideal candidate to break the sanctions.

Iraq is also fervently courting Europe, where waning support for U.N. sanctions is becoming a major issue. Iraq recently insisted its oil payments be in euros, not dollars. Iraq’s tactful move is good PR in Europe: It will likely bolster the euro, which recently dropped below the dollar and will also favor European suppliers over U.S. suppliers in competing for Iraqi contracts.

France, Iraq’s strongest ally in Europe, strongly opposes the sanctions, causing concern in the United Kingdom – Washington’s key ally against Iraq. France may contemplate busting the sanctions. In an apparently unprovoked attack on Nov. 7, U.K. Foreign Minister Peter Hain criticized France’s Iraq policy, calling it contemptible and destructive. He urged those tempted by what he called commercial gains or gesture politics to consider the possible damage to U.N. credibility, reported the BBC.