External markets for goods and services are an important source of foreign exchange earnings to any national economy. If these markets are rich in natural resources, they become the scene of fierce competition, as is evidenced by developments in Libya.
The assessment of damage to Russian business in Libya should be focused on the loss of profit rather than direct financial losses.
External markets for goods and services are an important source of foreign exchange earnings to any national economy. If these markets are rich in natural resources, they become the scene of fierce competition, as is evidenced by developments in Libya.
In February 2011 in Benghazi the insurgents revolted against the regime of Libyan leader Colonel Muammar Gaddafi unleashing the Civil War. In the early hours of March 18, 2011 Russia abstained on the UN Security Council resolution 1973 on Libya. Instead of maintaining neutrality the NATO coalition actively supported the rebels in order to overthrow Gaddafi. The outcome of the Civil War is clear: Gaddafi has been replaced by the rebel National Transitional Council (NTC).
When a new government comes to power, especially if it was in opposition to the previous regime, investors’ risks surge. That is why it is only natural that we should be worried about the fate of the contracts signed by Russian companies with the Libyan side during the rule of al-Gaddafi.
It is noteworthy that during the negotiations the Libyans, as a rule, do not make specific proposals for the development of business relations. Protracted negotiations may not result in concluding a contract. Besides, in Libya there is no culture of protecting foreign investors’ assets. Therefore, Russian business community was not very much interested in Libya.
The first Russian companies which gained success on the Libyan market were "Tatneft" and "Gazprom". As a result of the second open tender in October 2005 "Tatneft" won the right to develop an oil block in the Ghadames, and in December 2006 - three more oil blocks in the Ghadames and Sirte basins.
The company's activity is regulated by the agreement on exploration and production sharing concluded between the "Tatneft" and the National Oil Corporation of Libya (Libyan National Oil Company - NOC) for 30 years.
To work in Libya, "Gazprom" has specially created a subsidiary company "Gazprom Libya B.V," which in December 2006 won the right to exploration and development of hydrocarbons in the license area No19(blocks 1-4) located on the Mediterranean Sea shelf [1]. In December 2007, "Gazprom Libya B.V" was the winner of the fourth open tender for gas exploration and development of hydrocarbons in the license area No 64 (blocks 1-3 in the Ghadames Oil and Gas Basin) [2] located 300 km south of Tripoli (http://gazprom.ru/production/projects/deposits/libya).
In December 2007 following the completion of asset swap deal with BASF “Gazprom” acquired a 49% stake in Libya's oil concessions C96 and C97. Agreements under these concessions will be effective up to 2026.
The stumbling block in the relations between the two countries until 2008 was the Libyan debt to Russia totaling $ 4.5 billion. During the first Russian president's visit to Libya on April 16-17, 2008, an intergovernmental agreement on trade, economic and financial relations was signed between Russia and Libya providing for the settlement of this issue. Under the agreement the Libyan side was required to reinvest its debt in return for Russian goods and services.
This measure gave a significant impetus to the development of business cooperation, especially in such areas as energy and construction of civil infrastructure.
Due to the agreement Russian companies were able to strengthen their position in Libya. On April 17, 2008 "Gazprom" and the National Oil Corporation of Libya signed a memorandum of cooperation under which the parties could explore the possibilities of implementing joint energy projects. On the initiative of “Gazprom” substantive talks with the Libyan leadership were planned to buy available volumes of Libyan hydrocarbons. However, mass media have not reported any agreements reached on this issue.
Moreover, “Gazprom” planned to buy from the Italian ENI a stake in the Libyan project «Elephant» for 178 million dollars (the deal was to be closed in the first quarter of 2011) [3]. The leadership of "Gazpromneft", a subsidiary of "Gazprom", insists that it is still interested in this project. Currently "Inter RAO EEC" seems to start showing interest in the Libyan energy projects [4].
It is worth mentioning that in 2008 the company "Lukoil Overseas" signed a memorandum of cooperation with the NOC, but so far no practical steps for the implementation of the provisions of this document have been made.
To sum up, before the introduction of new sanctions against Tripoli, Russian energy companies "Gazprom" and "Tatneft" worked successfully in the Libyan market.
In addition to energy projects, Russian companies were a success in construction. In particular, OAO "Foreign Economic Association" Technopromexport” laid 651 km of power lines.
The companies’ interest in strengthening their positions in Libya and in the whole region is evidenced by the establishment of the enterprise “LAPTECHNO-POWER” jointly with the foundation "Libyan-African Investment Portfolio". It was assumed that this organization would realize projects for the development of energy infrastructure in several African states.
In 2008 OAO "Russian Railways" signed a contract for the construction of the 554-km long railway Sirte - Benghazi worth 2.2 billion Euros.
Preliminary estimates of potential losses of Russian companies caused by the civil war and the rise to power of the new regime in Libya may not be accurate, in particular because of the confidential nature of information on the price of certain contracts. All comments on this matter can be divided into optimistic and pessimistic ones.
Experts-optimists usually advance the following arguments:
- "Gazprom"’s operational profit losses in Libya were offset by growing prices for hydrocarbons and the opportunity to supply natural gas to Italy;
- losses of construction companies, for example, “Zarubezhstroytehnologiya", a subsidiary of OAO "Russian Railways", were negligible, since the force majeure risks had been insured.
Their opponents assess possible losses of Russian companies in Libya at 20 billion dollars, with account taken of the fact that in 2010-2013 Russia was to become the largest supplier of military equipment to Libya. The sum of all the contracts totaled billions of U.S. dollars, and it seems unlikely now that Russian manufacturers will ever earn that kind of money ().
Given the arguments on both sides, the logical conclusion is that as a result of the overthrow of Qaddafi’s regime in Libya Russia has lost quite a few opportunities: 1) development of numerous hydrocarbon fields, 2) arms supply, and 3) implementation of large-scale construction projects.
Besides, according to conservative estimates, total losses will exceed 4.7 billion dollars due to the write-off of the most part of the Libyan debt as well as lost investments by Russian companies. To illustrate, the "Tatneft" alone has invested $ 260 million in its Libyan projects, with its losses estimated at $ 200 million.
However, paradoxically, it is protracted and tedious negotiations of previous years with the Libyan side that saved several Russian companies from making broader investments in the Libyan economy.
So while assessing the damage to Russian business one should focus not so much on direct financial losses as the loss of profits as a result of suspended projects and agreements.
Most Russian companies will not be able to recover their position in Libya, despite Russia's recognition of the legitimate authority of the NTC. The thing is that financial assistance provided by Western countries and some Arab states will strengthen protectionism on the Libyan market. It is to be expected that special privileges of the new Libyan regime will be accorded to American and European (primarily French and British) companies. Under these conditions, their Russian competitors (OAO "Stroytransgaz”, ZAO "Monolitspetsstroy", etc.) will be driven off the Libyan market. Realizing this, the leadership of "Tatneft" has doubts that the company will be able to resume its work in Libya. One exception might be "Gazprom" which seems to have close relations with the Russian leadership. However, even its operations in Libya are likely to be limited in view of Western efforts to weaken the EU's dependence on supplies of the Russian natural monopoly.
Statements of intentions to protect Russian interests in Libya made by the Russian leadership inspire optimism however cautious. Russian companies seem to have reason to hope for government support of exports of domestic goods and services to Libya. This would somewhat weaken the West’s competitive edge. However, the bulk of construction contracts that might be offered to Russian companies would be in the non-energy sphere.
1. License area No19 -- 300 billion cubic meters of gas, the share of "Gazprom" Group -- 10%.
2. License area No64 -- 20 million tons of oil, the share of "Gazprom"Group -- 9.8%.
3. Po nayeszhenoi koleye (Well-Trodden Track) / / Neftegazovaya vertical (Oil and Gas Vertical), 2011, May No 08 (261). p.21.
4. RBC Daily, 2011. 11.07. No 120 (1164). p.5.
