30.07.2005
After the Lull: Russia and the Arab World at a New Stage
№3 2005 July/September
Vladimir Yevtushenkov

Vladimir Yevtushenkov is Chairman of the Committee on Scientific-Technological Innovations and High Technologies under the Russian Chamber of Commerce and Industry.

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
 
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. It is important that they offer an appropriate array of
goods and services rather than merely wave catchy political
slogans.
 
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.