Russia confirmed on Sunday it was set to sign a $40 billion economic and trade cooperation agreement with Iraq in a move that could complicate Washington's plans to topple Iraqi President Saddam Hussein.
A top Russian official confirmed the deal was being prepared despite concerns expressed by the Bush administration, which has made ousting Saddam a top priority and is seeking to build international support for a possible attack on Iraq.
"This document is being prepared," said Oleg Buklemeshev, an adviser to Prime Minister Mikhail Kasyanov, confirming a Washington Post report on the deal. "We do not know when it will be signed. When it is ready, it will be signed."
Buklemeshev said the five-year deal to cooperate in areas ranging from oil to electric energy and railroads would not violate U.N. sanctions imposed on Iraq after its 1990 invasion of Kuwait. "It is in line with current international agreements," he said.
Buklemeshev added the deal was "an umbrella document setting a framework for the development of economic ties between companies from the two countries."
But analysts in Moscow said the deal between the Soviet-era allies would have political, rather than financial consequences.
Russia has close economic ties with Iraq, which owes Moscow Soviet-era debt believed to be worth several billion dollars, and hopes to proceed with lucrative oil deals once sanctions against Baghdad are lifted.
But under U.N. resolutions, Iraq can currently sell only limited amounts of oil, using the cash to buy food and medicine.
While Russian firms are among the top buyers of Iraqi crude, buying annually oil worth $5 billion, most of their most promising deals remain frozen by U.N. sanctions. Russia's top oil firm LUKOIL signed a $4 billion deal in 1997, but has so far been unable to start work.
"Given that none of the major agreements signed in the past have been fully implemented, I would say this agreement will remain on paper," Vladislav Metnyov, an analyst with Renaissance Capital said. "The difficult political situation will also stop the deal being seriously implemented in the near future."
After the Washington Post published news of the planned Russia-Iraq deal on Saturday, U.S. officials, keen to sidestep a public clash with Moscow, said Russia should bear in mind its obligations under U.N. Security Council resolutions.
"We're confident Russia understands its obligations under U.N. Security Council resolutions and will abide by them," White House spokeswoman Claire Buchan said.
An agreement with Iraq, part of Mr. Bush's "axis of evil" of states accused of seeking weapons of mass destruction, could add to disagreements which have marred Moscow and Washington's friendship over the past months.
The two sides, which saw their relations blossom after the September 11 attacks, have already publicly disagreed over Moscow's plans to boost nuclear cooperation with Iran, also part of the "axis."
Washington says Iraq has been a threat since it invaded Kuwait, triggering the 1991 Gulf War.
Mr. Bush's plans to oust Saddam have sparked dissent even within his own political ranks, casting doubt on his capacity to muster enough domestic support to take action.
A deal between Moscow and Baghdad, heavy in political significance, could make it even harder for Washington to gather national and international sceptics behind an attack.
Moscow has said it will oppose any military action against Iraq, calling instead for new diplomatic efforts to eliminate fears over weapons of mass destruction.
Iraq has said it is "firmly resolved" to continue talks with the United Nations on letting U.N. weapons inspectors return to the country after being locked out for four years.
Their return is a key precondition to the suspending of sanctions, but Baghdad has yet to agree on ground rules for fresh inspections.