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Russia Losing Libya, But Maybe Winning Norway

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Russian oil companies will suffer from their government's support for Qaddafi.

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"We have lost Libya completely." That trenchant sound bite came not from Col. Muammar Qaddafi or one of his belligerent children. The source was a certain Aram Shegunts, director general of the Russia-Libya Business Council.

Qaddafi was pretty good to Russia. With Anglo-American oil majors barred from Libya by economic sanctions, the colonel ceded multi-billion dollar drilling contracts to state-connected Russian oil companies like Gazprom Neft and Tatneft. The Kremlin repaid him with dogged support when civil war broke out in his country this spring.

Prime Minister Vladimir Putin compared the North Atlantic Treaty Organization forces supporting the anti-Qaddafi rebels to medieval Christian crusaders. Russian state TV reverted to full Orwell mode, portraying the bloody Libyan tyrant as a plucky patriot besieged by the heartless minions of imperialism. Now Russian commerce looks set to pay the price for this pigheaded policy. It turns out the victorious rebels already have an oil company called AGOCO (commit that one to memory), and the company has a spokesman who told Reuters: "We don't have a problem with Western countries, but we may have some political issues with Russia, China and Brazil."

Compare the Kremlin's inept handling of the Libyan crisis with the wilier line pursued by Italy, Qaddafi's best friend in Western Europe. Silvio Berlusconi's government managed to play good cop and bad cop serially, offering to mediate early in the conflict but lining up with its NATO allies when push came to shove. As a result, Italian energy giant Eni (E) is poised to reassume its leading role in Libya, and its shares jumped 7% in two days after the rebels entered Tripoli.

Russians take their foreign policy seriously, too seriously at times. The apogee of Soviet education was the Moscow State Institute of International Relations, or MGIMO, and a diplomat Socialist society's most prestigious job. Putin's Russia has repeatedly harmed itself with an itch to throw around weight it no longer has. Its overreaction to its provocative neighbor Georgia in 2008 -- countering Georgian incursions into a disputed border province with a full-blown armored invasion of Georgia proper -- lowered Russia's international moral standing. (It was already low enough.) The idea that Moscow could counterbalance the united might of NATO in Libya was simple delusion.

But Putin has also had some substantial, if quieter, foreign policy successes. The most important has been discovering China and the rest of the world to Russia's east and south after predecessor Boris Yeltsin's sometimes subservient fixation on the West. Putin has steadily nurtured trade relations with Beijing, which now stand on the cusp of huge, multi-decade energy supply agreements. (They have been on that cusp for a while, as both sides love to haggle.) Russia built a new gas pipeline to Turkey on Putin's watch, formalizing a relationship that has grown organically closer as Russian tourists flood their southern neighbor's beaches.

Putin has also served his country's long-term interests by pushing physically and diplomatically to secure the Arctic, the vast, petroleum-rich frontier that must be a key to Russia's economic power once the relatively hospitable West Siberian fields are exhausted. Efforts here range from the patriotic-theatrical -- Russian submarines leaving a titanium flag in the seabed beneath the North Pole -- to the eminently practical, state oil company Rosneft's search for a strategic global partner in Arctic shelf exploration. (A proposed deal with BP (BP) blew up on opposition from the British company's existing Russian joint venture, TNK-BP, but Rosneft looks bent on a replacement.)

Moscow's persistent ties with rogue regimes have also paid off sometimes politically when, as in the case of Iran, it has stepped away from its hard line far enough to play intermediary.

All these positive steps have borne tentative fruit over the past week, offsetting at least a bit the apparent Russian debacle in Libya. In the Arctic, Norway's energy ministry quietly noted that it had cleared its first Russian oil company, Lukoil), to bid for concessions on its ocean shelf. A Lukoil spokesman said the commercial breakthrough grew from a diplomatic one: Last year Russia and Norway ended a 40-year (!) disagreement and drew a boundary between the countries' zones in the far-northern Barents Sea.

Russia's Ostpolitik and coziness with outre leaders also yielded some prospective benefits this weekend when North Korean leader Kim Jong-Il made one of his rare sorties abroad, traveling by secret train to an undisclosed location in Eastern Siberia to meet Russian President Dmitry Medvedev. The subtext of this sub rosa summit, according to a New York Times dispatch from Seoul, was Pyongyang considering a longstanding proposal to build a Russian gas pipeline across its territory and down the peninsula to energy-hungry South Korea. While they are at it, the South Koreans could also use some excess transshipped electricity from East Siberia's huge hydropower plants.

In short, Russia looks poised between two alternative futures in world affairs. It could develop into a potent non-aligned force in a world increasingly wary of an American-Chinese power duopoly, a sort of Switzerland with vital mineral resources to sell (and a few missiles just in case). Or it could lose itself in dreams of resurrected superpower status, overspending on a morally decrepit military and opposing the civilized world for the heck of it. Hopefully the "complete loss" of its interests in Libya will help Moscow make the right choice.
No positions in stocks mentioned.

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