After the Lull: Russia and the Arab World at a New Stage

30 july 2005

Vladimir Yevtushenkov is President of the Sistema Joint Stock Financial Corporation, a member of the Board and Chairman of the Industrial Policy Committee at the Russian Union of Industrialists and Entrepreneurs, the Chairman of the Russian-Arab Business Council, and a member of the Board of Trustees of Russia in Global Affairs.

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Resume: The scope of Russia’s potential partners in the Arab world has grown sizably after the ideological element vanished from Russian-Arab relations. Economic interests, together with all of the economic benefits that go with it, necessitate the establishment of contacts with all countries in the region that are ready to cooperate in practical terms.

The Middle East – a vast area with a huge population, abounding mineral wealth, and a multitude of political ‘wounds’ which aggravate global problems – is once again the focus of interest of the global powers. Issues related to security, terrorism and the increasing global energy demand are extremely topical there, and it seems only natural that the region became the subject of sweeping international initiatives in the past few years. The U.S., for example, sponsored a plan for the democratic realignment of the Greater Middle East (later reflected in the Group of Eight’s Wider Middle East initiative), while various UN projects aimed at stimulating development and eliminating poverty and inequality were also created. The present course of developments there has graphically demonstrated that not a single country, even a country as powerful as the U.S., can unilaterally solve the problems of that vital region.

THE PLIGHT OF SOVIET HERITAGE

Russia is far from being a detached observer in the Middle East; indeed, the influential country enjoys the respect of the people in this region. Soviet loans and technological aid have helped the Arab countries build key infrastructure and power engineering facilities, metallurgical plants, and defense production facilities, as well as to maintain well-equipped and well-trained armed forces.

Soviet specialists during the reign of President Gamal Abdel Nasser helped to build Egypt’s industrial facilities; these constitute the foundation of the country’s economy. The best known of these are the Aswan High Dam and the Helwan steelworks, as well as the aluminum factory in Naga Hammadi, the phosphate compound in Abu Tartur and the shipyard in Alexandria. Overall, there are approximately one hundred such Soviet-built facilities.

Algeria also received significant assistance from Moscow which gave that nation a head start in its energy sector, as well as in mining, metallurgy, machine-building, water management and other industries. The Soviet Union assisted the construction of steelworks in El Hadjar and Annaba, a thermal power plant in Jijel, the Alrar-Tin Fouye-Hassi Messaoud gas pipeline, a dam in Beni-Zid, etc.

Contracts were signed with Iraq for the construction of oilfields in its southern regions. The Soviet Union helped build the Al-Nasiriyah-Baghdad gas pipeline, the al-Yusifiya thermal power plant and a number of other facilities. However, the greater part of the contracts was frozen after the imposition of UN sanctions against Iraq in 1990.

In Libya, the Soviet Union built the Tajoura nuclear research center, high-voltage transmission lines and a gas pipeline. It also drilled about 130 commercial oil wells, carried out soil, geo-botanical and ecological studies on an area totaling 3.5 million hectares. It devised plans for developing that nation’s gas industry, high-voltage power grids and machine-building plants, and prepared a feasibility study for the second phase of the Misurata steelworks with an annual output capacity of 1.67 million tons of steel (with further increase of annual capacity to five million tons).

Industrial facilities built with Soviet assistance play a crucial role in the Syrian economy. They provide the country with 22 percent of its electricity, 27 percent of its crude oil and help it to irrigate more than 70,000 hectares of arid lands. The cascade of hydropower plants on the Euphrates, the Al-Baath and Tishrin hydropower complexes, about 1,500 kilometers of railroads, 3,700 kilometers of high-voltage transmission lines, irrigation and water supply installations, the Homs-Aleppo oil product pipeline, the Homs factory of nitrate fertilizers, and several vocational training centers were all built with the aid of Soviet government loans.

The Arab countries (Egypt, Syria, and Algeria) paid off their loans with consumer goods almost entirely produced by small private companies. These exports to the vast and stable Soviet market promoted the rise and strengthening of national manufacturers in those countries.

The Soviet Union traditionally imported Arab citruses, fruit, canned foods, and confectionery. Arab beauty products (Egypt’s Nefertiti and Climat perfume brands, for example, as well as cotton fabrics, and Syria’s door curtains, guipure, curtain lace, and a type of polyester known as crimplene) enjoyed stable demand in the Soviet Union.

The start of the dramatic transformations in the Soviet Union, however, brought all those processes to a halt. Russian leaders adopted new approaches in the administration of the state and economy after the disintegration of the Soviet Union and these predetermined the Kremlin’s desire to keep at a distance some of its traditional allies, which was especially conspicuous during the initial pro-Western euphoria. Political contradictions over the situation in the North Caucasus added to the estrangement of Arab countries in later years.

As a result, Russia froze or severed economic relations with the Arab world after the events of 1991, and the huge potential of cooperation that had been built up in previous decades was shelved. The government abandoned trade with those countries, while private Russian businesses were unable to return to these traditional markets. Moreover, Russian businessmen had a lack of experience in dealing with the Arab business quarters, even in the traditional partner-countries. They neither knew the specificity of Arab nations nor had the required skills for doing business under local conditions. Thus, an entr’acte began in Russian-Arab relations which was to last for many years.

MORE THAN JUST ECONOMY

The Middle East plays a crucial global role. Located on the African and Eurasian continents, it has a territory of 14 million square kilometers and a population of approximately 300 million people. Arab countries have been showing annual growth rates of 3 to 6.4 percent over the past two decades, while they continue to boast an attractiveness for foreign partners. More importantly, in recent years a clear change has been spreading over the regional market.

Over the years, the general conviction prevailed that the Arab economies have always been, and would continue to be, based on oil. Undoubtedly, the oil industry remains the major field for business opportunities – as much as a source of political tensions. But in 2004, Saudi Arabia opened up more than 20 economic facilities in different branches – ranging from oil production to retail trade – for an inflow of foreign investment. The result was that the Russian fuel company, LUKoil, signed a concession agreement in March 2004 which gave it prospecting rights and geological works, as well as the opportunity to develop natural gas and gas condensate fields on an area of 30,000 square kilometers in the Rub Al-Khali desert. The agreement spans 40 years and is worth an estimated four billion dollars. LUKoil and Saudi Aramco Corp set up a joint venture, Luksar, to implement the project. They have 80 and 20 percent in the joint venture, respectively.

Markets of capitals and powerful financial centers are rising rapidly in the region. Bahrain, whose government seeks to turn the country into a major regional and international trading and financial center, has been particularly active in that sphere recently. Bahrain’s economy is number three in the world in terms of openness after Hong Kong and Singapore. There are no taxes on individual or corporate incomes in Bahrain. Furthermore, there are no restrictions on cash and profits that are taken out of the country, or on currency conversion. The imports of raw materials, prefabricated commodities or capitals to be used in local manufacturing are free of duties. The government permits the establishment of 100 percent foreign-owned companies and offers to them simple registration formalities.

Kuwait is the largest regional investment center. It has a developed local money market and its population has more finances in the bank than the populations of Saudi Arabia, Abu Dhabi and Qatar taken together. Kuwait makes long-term investments abroad, but the investor in such cases is the government, not private companies.

The tendency for economic liberalization, together with the process of globalization, has boosted the popularity of free economic zones in the Middle East and North Africa. Being a form of attracting foreign capital, including from Russia, such free zones have emerged in Syria, Jordan, Lebanon, the United Arab Emirates, Egypt, Tunisia, Morocco, Djibouti and Yemen.

The Jebel Ali free zone in Dubai is one of the most successful and attractive zones in the entire Arab world. The emirate’s stable legislation, perfectly developed communications and transport networks have made it possible to concentrate the offices of more than 2,000 companies from 97 countries in this special area. Jordan, too, has considerable experience with free economic zones. It has introduced special industrial areas – the latest-generation zones that draw the lion’s share of foreign capital. The creation of free economic zones is also underway in Bahrain, Qatar, and Kuwait.

Lebanon, whose banking sector has an extensive history, is of special interest. Earnings on oil exports have traditionally flown into Beirut, and Lebanon’s centuries-long trade and cultural relations with European and Arab states enabled it to make trade an important sector of its economy. Before the civil war of 1975 to 1990, Lebanon’s economy showed stable growth rates, while tough laws on banking information privacy attracted foreign cash to its local banks. The country was even described at the time as a “Middle Eastern Switzerland.” Corporations in the West and in Arab countries eagerly invited Lebanese managers to fill top positions.

Then war sent Lebanon backwards. Its economy lost $30 billion, while other Middle East countries were experiencing a boom. Business activity shifted from Beirut to other economic centers, yet Lebanese banking assets saw miraculous growth, as they had been pertinently invested in the U.S. and Europe right at the start of the war. Although Lebanon’s present debt stands at about 160 percent of its Gross Domestic Product, this fact does not seem to worry the nation or the world in the least. In 2002, the Financial Action Task Force on Money Laundering dropped Lebanon from its blacklist, while a total of eleven local banks are ranked among the 100 most successful Arab financial institutions. Political developments that followed the assassination of Prime Minister Rafiq al-Hariri cast certain doubts over future economic prospects, yet there is a hope that the country will overcome the current crisis; of course, stability is in the interests of the Lebanese economy and business community.

Meanwhile, other regional countries face a host of difficult problems. As it is with the Russian economy, the economies of the Middle East are heavily dependent on the oil market situation. Arab states must address the same type of problems as Russia. They acknowledge the deficit of foreign investment and seek new markets for their commodities. Even Saudi Arabia was compelled recently to stop the outflow of cash and began speaking about the need to attract outside investment for some projects on its territory. Another point of concern for the Arab world is its modest economic growth. In Saudi Arabia, for example, the per capita GDP fell to $7,000 in 2004 from $28,000 in 1982.

Presently, opportunities for expanding economic cooperation with the Arab countries are opening up for Russia, predominantly in high technologies, banking services, the supply of metal products and industrial materials, and in the transfer of technological know-how, especially in the oil and gas industry.

There are other promising areas, like exploration drilling to tap subterranean reservoirs of fresh water, the distillation of seawater (since the shortage of fresh water may become the region’s biggest challenge over the medium term), and the petrochemical and metallurgical industries. Russia and the Arab countries have drafted joint projects to produce a long list of products which include chemical fertilizers, oil by-products, timber, leather, hunting accessories, fishing equipment, riverboats, motorboats, ships, cable fittings, fast-assembly wooden houses, cars, and other transport vehicles.

Defense cooperation with the Arab states also holds special promise, as it furnishes Russian defense manufacturers with highly profitable orders. Russia cannot compete with the West in terms of the amount of weaponry and technologies that are supplied to the Arab world, but a buildup of cooperation with Russia will help the Arabs diversify their arms acquisition sources, thus decreasing their dependence on imports from the U.S.

An acceleration of economic ties between Russia and the Arab world is of significant geopolitical importance. First, Russia is an internationally recognized co-sponsor of the Middle East peace process; its presence in the region is stable and conforms to the important state task of being a power center in a multipolar world. In this sense, President Vladimir Putin’s visit to the Middle East in April 2005 raised Russia’s prestige on the regional and global scale.

Secondly, Russia can play a unique role in defending the Arab nations’ interests on the international level, while helping to prevent particular attempts to push them to the sidelines of the modern world. Those attempts are often made under the pretext of fighting against “Islamic extremism.” It appears that certain quarters have a desire to respond to the rise of international terrorism with a new partitioning of the world – according to civilizational and religious lines of demarcation as opposed to ideologies as in the past. Most Arab states run the risk of falling into the category of “suspicious” countries which implies the possibility of actions being initiated against them, including direct military interference in their internal affairs.

It is no accident that America’s widening interventionist doctrines are arousing concerns even in the Gulf States, despite their traditional pro-Western orientation. In the situation where Washington’s policies are often arrogant and awkward, the idea of diversifying external relations in a bid to somewhat modify American pressure is becoming increasingly popular with the Arabs. Relations with Russia – still a major international player despite the weakening of its position in the 1990s – are gaining significance for the Arab countries from this perspective.

Russia remains a reliable partner for any nation that objects to unilateral decisions regarding force against another nation in violation of the UN Security Council. The Russians and Arabs have very close views on at least two issues. First, both sides recognize the importance of handing over total state power to the Iraqi people in order to maintain territorial integrity of and stability in that long-suffering country. Second, both countries advocate a just peace settlement to the Middle East conflict on the basis of the UN Security Council’s resolutions and the peace-for-land formula devised in Madrid.

And yet Moscow’s role in the Middle East will diminish and it will no longer play a part in regional policy unless it bolsters its influence there through appropriate economic activity. The Russian business community may throw its weight behind that effort by using the system of relationships now being established. Economic cooperation with all countries of the region without exception will enable Moscow to reaffirm its role as an efficient and friendly mediator between nations despite their differences.

Economic rapport with the Arabs must grow alongside a strengthening of mutual political ties. President Putin urged Russian businesses to increase trade with Arab states to a new level in the short term so that it would match the opportunities opened by public and political interstate relations at present.

OLD AND NEW PARTNERS

Egypt – where Russia enjoys trade to the tune of half a billion U.S. dollars and its volume is growing – plays a key role among Russia’s traditional partners in the Middle East. Communications and information technologies enjoy the best prospects for Russian-Egyptian cooperation. The fact that the recently appointed Prime Minister Ahmed Nazif held the post of Communications and IT Minister underscores the importance of these economic areas. While Nazif was in charge of these sectors they boasted a 34 percent growth over a period of five years.

Egypt has launched an energetic Smart Village project which is planned to be a technology park with state-of-the-art equipment and housing infrastructure, where the leading IT producers will locate their offices. Companies which choose to locate their offices in the village will receive tax privileges for ten years and enjoy simplified registration procedures at Egypt’s government departments. The leading Egyptian IT companies (Alcatel Egypt, Al Ahly Telecom and others) have already purchased the land for their offices in the Smart Village. Russian companies, too, are planning to settle there. A definite advantage of locating here derives from the relative youthfulness of the Egyptian national market. Being young, it is capable of being flexible to situational changes while enjoying much broader resources. More importantly, prices in Egypt are much lower than in the United Arab Emirates, for example, and hence production costs are less expensive.

Lebanon is another good example of a country where Russia is re-establishing historical contacts while developing new ones. Incentives to bilateral trade and investment, as well as assistance to the rise of close partner ties between private businesses, are important elements of Russian-Lebanese relations. But Lebanon gives greater focus to cooperation with Russia in the oil industry. Its government has repeatedly emphasized that it would welcome Russia’s engagement in the construction of oil and gas pipelines across its territory. Moreover, the Lebanese have an interest in inviting Russian experts to participate in the construction of irrigation systems and dams.

Saudi Arabia is a very special case. For half a century, the Saudi kingdom and Russia have stared at each other across a barrier of hostility, and Moscow had little reason to hope for gaining positions there.

First, Russia had no political positions in Saudi Arabia during the most recent periods of history. The Saudi rulers had vivid memories of the Soviet Union’s hostility toward their country. While the Russians typically associate Saudi Arabia with radical Islamism, which now threatens Russia in the North Caucasus, the Saudis have a very derogatory opinion of the Russian government’s actions there. Secondly, the Saudi elite and society have traditionally looked toward the West and are simply not ready yet to work with other partners.

Such barriers mostly have a political nature, and ways to get over them to form an atmosphere of trust can be found in the realm of economics. Experts will typically point to the energy sector and arms trade as the major potential areas for Russian-Saudi cooperation, but one should not forget the sectors where investment pays back more quickly – real estate, construction, trade, securities, and transport infrastructures.

The experience Russia has gained in certain high-tech areas, including gas liquefaction, the construction of pipelines, and re-gasification may come in handy in Saudi Arabia. On their part, the Saudis are ready to invest in the Russian aerospace industry. Finally, in the defense sector, the Saudi army is equipped with U.S. and West European weapons, but Riyadh seems to be closely watching Russian-made combat helicopters. In light of the aforementioned, the first Russian-Saudi economic forum held in Moscow in July 2003 had real historic significance.

RUSSIAN-ARAB BUSINESS COUNCIL: MISSION AND ACHIEVEMENTS

The level of trade and defense cooperation between the Soviet Union and the Arab countries was measured in billions of U.S. dollars before 1991, but this amount was ensured exclusively by government agencies and control levers, while cooperation was driven by political calculus and Cold War logic. The current phase of Russian-Arab cooperation, however, pushes to the forefront the partnerships between government agencies and corporations.

The task of balancing Russia’s trade and economic relations with the huge politically fragmented and economically variegated Arab world, while lending support to its regeneration, was entrusted to the recently established Russian-Arab Business Council (RABC). On the Russian side the Council was co-founded by the Chamber of Commerce and Industry.

The RABC rapidly won the status of an active and respected coordinator of Russian-Arab business cooperation. To a large degree, this was established by the high reputation that the Arab peoples have for Dr Yevgeny Primakov, President of Russia’s Chamber of Commerce and Industry. His subtle knowledge of the region is widely recognized.

On the Arab side, the co-founder is the General Union of Chambers of Commerce, Industry and Agriculture of 22 countries. Its members are the chief executives and representatives of national chambers of commerce and industry and important businessmen. Russia’s Sistema Joint Stock Financial Corporation is also playing a key role in the RABC. The Council’s main job is to create joint committees entrusted with implementing specific projects between Russia and Arab member countries, establishing direct contacts between Russian and Arab businesses, and stimulating innovative activity.

Over the eighteen months since its foundation, the RABC has earned the reputation of an efficient instrument of building business relations and a center for collecting, analyzing and disseminating commercial information both sides may need. An Arab or Russian businessman can receive consultation and find a reliable business partner in the RABC. The council has helped to set up three bilateral committees for Russian-Egyptian, Russian-Syrian and Russian-Lebanese cooperation. Similar joint committees are in the offing. Their activity will help regulate relations between business people and determine the most promising spheres of operations in each country.

The results of the RABC’s operations, and the noticeable growth of business contacts it has stimulated, inspires hope that the protracted lull in Russian-Arab relations has come to an end. The RABC gives this cooperation a chance to attain a new quality, free of ideological barriers and marked by productive interaction between business and government. In the business sphere, novel information technologies and the services sector should play the central role. This will allow Russia and its Arab partners to rid themselves of the oil dependent stereotype of their economies and help adapt them to the high-tech-dominated environment of the 21st century.

Last updated 30 july 2005, 17:24

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