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April 18, 2008

The Real World: Putin in Libya

By

Russian President Vladimir Putin began a two-day visit to Libya on April 16, the first by a Russian president to the formerly shunned country. The event was hailed by Libya's veteran leader Moammar Gadhafi as "historic, strategic and very important." Gadhafi further stated "…given that we are both producers of gas and oil, we will work together to defend our interests."

Energy deals and proposals featured prominently during Putin's visit. Libya is believed to hold the largest oil reserves in Africa, having also the fourth largest reserves of natural gas.

Reportedly, Gadhafi told Putin that he favors the idea of a gas OPEC, a notion that Russia appears to share with Iran and Venezuela, and which one day may do to the liquefied natural gas (LNG) market what OPEC has done to oil. Furthermore, the two leaders discussed cooperation in the field of nuclear energy. Policy makers in Washington are fuming and biting their nails - "bad Vlad" is apparently outfoxing them yet again.

The Russian state gas monopoly Gazprom has reached an agreement with Libya's National Oil Corporation to establish a joint venture on the exploration, production, transportation and sale of oil and gas. The two companies are working on a memorandum of understanding to define cooperation parameters.

Gazprom's CEO Alexei Miller, accompanying Putin, expressed his company's interest in participating in LNG projects together with the Libyans, and in building a gas pipeline from Libya to Italy. After Tripoli, Putin is heading to Sardinia, where he will meet his good friend Silvio Berlusconi, who is likely to become the next Italian prime minister. Guess what they are going to talk about?

Before Putin's trip to Libya, Gazprom was working hard to increase its presence in North Africa. It has acquired three gas projects there since 2007, after the Italian energy company Eni, Gazprom's strategic partner, agreed to swap some of its Libyan gas assets in the Russian company's favor. In Libya, Eni controls 50 percent of the Green Stream gas pipeline linking Libyan fields to Sicily, over one-third of shares in the Elephant oil field, and an LNG facility in central Libya - all these are attractive to Gazprom, which is dreaming of becoming the world's No. 1 energy company in terms of capitalization, and а global supermajor.

Putin's visit has resulted in the signing of 10 declarations, including intergovernmental agreements on investments, trade and financial relations, and a military-cooperation agreement. Commercial contracts included one for $3.5 billion for the state monopoly Russian Railways (RZD) to build a 500 kilometer rail line in Libya between the cities of Sirte and Benghazi, and possibly a $2 billion to $4 billion Russian deal to sell the Libyans modern arms. These could include 12 of the latest Su-35 multirole fighters (or Su-30MK2 according to other reports); a dozen MiG-29 SMT fighters; S-300 PMU-2 long-range surface-to-air missiles, Tor-M2E short-range SAM systems, military helicopters, submarines, warships, and army equipment. As a part of the arms sales package, Russia would also supply the Libyan military with spare parts and maintenance for the Soviet-made equipment still in its inventory.

Putin and other Russian policy makers dream of regaining their influence in the Middle East, control that was lost with the collapse of the Soviet Union. Before the USSR's demise, Libya was a major trading partner of the Soviet state, with which it had an annual turnover of $1 billion, five times more than today. More importantly, Moscow was Tripoli's main arms supplier. The Soviet Union sold Gadhafi about $10 billion in weapons. Also, the Soviet navy had in Libya an air station for its maritime patrol aircraft and port access ports for its ships.

During the 1990s, the Russian Federation would not sell arms to Libya in order not to violate the U.N. embargo imposed on Libya for Gadhafi's involvement in terrorist activities. The embargo and international sanctions were lifted in 2003, after Libya agreed to eliminate its weapons of mass destruction program and acknowledged responsibility for the 1988 Lockerbie bombing of a Pan Am airliner.

There was, however, a major stumbling block preventing the resumption of Russia's lucrative arms contracts with Libya after 2003: the lack of agreement on the size of Libya's debt to the Soviet Union. Tripoli claimed that in fact Russia owed it about $100 million in military contracts never fulfilled due to international sanctions, while Russia insisted that the Libyan debt was a whopping $4.5 billion.

To solve the problem, the Kremlin offered Gadhafi an arrangement utilized before with Syria and Algeria to win back Russia's role as a major arms supplier and regain its past influence in the region. After discounting the sum Libya argued it was owed by Russia, the Kremlin agreed to erase the remaining $4.5 billion Libyan debt. As Russian Finance Minister Alexei Kudrin put it, "those [Soviet] loans were purely military ones. Russia will write them off in exchange for multibillion dollar contracts for Russian companies."

Toward the end of 2005, Moscow agreed to erase 70 percent of Syria's Soviet debt, reducing it from $13.4 billion down to $3.6 billion. This agreement coincided with Russia's resumption of military-technical cooperation with Damascus. Advanced fighter jets, SAM systems, and even possibly Iskander-E short-range ballistic missiles (despite denials by the Kremlin) are some of the weapons Russia is believed to be exporting to Syria. Damascus also allowed Russia to refurbish the old Soviet naval facilities in Tartus and Ladakiye, symbolizing the return of the Mediterranean Squadron to its old hunting grounds.

Similarly, back in March 2006 the Kremlin agreed to write off Algeria's $4.7 billion debt to the USSR in connection with Putin's visit and in exchange for new arms purchases. In the largest arms deal of Russian history, Algiers agreed to buy $7.7 billion in weapons, including fighters, jet trainers, anti-aircraft missile systems, and tanks.

Additionally, Gazprom agreed with the Algerian state energy company Sonatrach to cooperate in the production of oil and LNG in Algeria. In May 2007 Algeria agreed to buy two Russian submarines for $400 million.

In a similar scheme, Russia agreed this February to forgive 93 percent of Iraq's debt of $12.9 billion to Russia. The remaining $900 million debt will be repaid in 17 years. In exchange, Moscow has requested access for Russian energy companies, including Lukoil, to some of the country's oil and gas deposits.

Lukoil is particularly interested in the giant West Qurna-2 field it received in 1997 from Saddam. The plan is that Russian corporations will become involved in the reconstruction of Iraq's energy and electricity, which infrastructure the Soviets built in the 1960s and 1970s.

Even if the Cold War may be over, the Russian bear is back in the sands of the Middle East and North Africa, more hungry and agile than ever. Western leaders had better beware.

Ariel Cohen, Ph.D., is senior research fellow in the Russian and Eurasian Studies and International Energy Security at the Heritage Foundation. Dr. Lajos Szaszdi has contributed to the production of this article.

First Appeared in the Middle East Times

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