Iraq uses dollar diplomacy to counter U.S.-led campaign

F By Evelyn Iritani

for a country operating under strict economic sanctions and the threat of war, Iraq is an awfully busy place. Ships carrying tons of Australian wheat and Vietnamese rice unload their cargo every week in the port of Umm al Qasr. France’s giant Alcatel telecom company is working on a $76 million project to repair the country’s telephone system, heavily damaged during the Persian Gulf War.

In the face of last week’s arms-control ultimatum from the United Nations and warnings that Washington is ready to use force, the government of Saddam Hussein is fighting back with old-fashioned dollar diplomacy. Using the billions it is allowed to spend under the oil-for-food program administered by the United Nations, the Iraqi regime is conspicuously doling out lucrative contracts in hopes of undermining the U.S.-led campaign to oust it from power, according to business professionals and Middle East experts.

Those efforts were on full display at the 35th annual Baghdad International Fair, which ended Sunday with Iraqi Trade Minister Mohammed Mehdi Saleh’s announcement that his government had signed more than 20 oil-for-food contracts worth $500 million with Saudi Arabia, Iran, the United Arab Emirates, France and Spain. The 10-day trade fair attracted 1,600 companies representing 49 countries, most from the Middle East and Europe, according to the official Iraqi media.

Earlier, the Iraqis had declared the government’s intention to also reward Germany with contracts in exchange for its opposition to the U.S. campaign.

“Iraqi-German relations have witnessed a notable improvement after the firm positive stand of Germany in rejecting the launching of a military attack against Iraq by the U.S.,” the government-run newspaper Al Iraq stated in an article on the trade fair. “Accordingly, President Saddam Hussein has ordered to give priority to German companies to enter the Iraqi market.”

But with politics and business so closely intertwined, companies and countries are keenly aware that they could fall out of favor under a new regime.

Years of war and the trade sanctions imposed by the United Nations in 1990 have forced Iraq to operate on the sidelines of the global economy. However, even a shackled Iraqi government offers attractive opportunities for companies angling for a piece of the oil-for-food program. Established in 1995, that program allows Iraq to sell oil and use the money to buy humanitarian goods such as grains and vegetable oils, medical supplies and machinery. The United Nations must approve those contracts and can deny a sale if it does not fit the program’s humanitarian goals.

In the past six years, Iraq has received more than $56 billion in oil revenue, and signed contracts for an estimated $36 billion worth of food and other supplies, under the program, according to the Coalition for International Justice, a Washington-based human-rights group that just released a report on Saddam’s legal and illegal revenue sources. The coalition says Saddam and his close associates took in more than $2 billion this year from illegal sales of oil to Syria and kickbacks and smuggling tied to the U.N. humanitarian program.

The single biggest customer for Iraqi oil has been the United States. From January to August of this year, Iraq was America’s sixth-largest supplier, providing 525,000 barrels of oil a day, or 4.6 percent of total U.S. imports, according to the American Petroleum Institute. Refineries in Texas and California, which make their purchases largely through European traders, like Iraqi crude because it is a low-sulfur product that is cheaper to process, according to oil experts.

The Iraqi government has been quite open about using its economic clout for political gain. Iraq, the leading customer of U.S. wheat and long-grain rice in the 1980s, is now the top purchaser of wheat from Australia and rice from Vietnam. France and Russia, considered crucial counterweights to the United States in the U.N. Security Council, were the largest recipients of contracts in the early years of the U.N. program, according to U.N. documents. More recently, many of Iraq’s neighbors–Egypt, Jordan, Tunisia, Syria and the United Arab Emirates –have seen their share of contracts increase dramatically.

Although Cargill Inc. and a handful of other U.S. companies were awarded contracts for agricultural exports early in the U.N. program, the United States and Britain, its staunchest ally in the campaign to disarm Saddam, have largely been frozen out of any oil-for-food contracts in recent years.

Some foreign executives have voiced concerns that U.S. companies would be given an unfair advantage in a post-Saddam economy run by a government beholden to the United States. Those fears are particularly noticeable in the oil industry, which is anxious to get access to Iraq’s vast reserves, second only to Saudi Arabia’s.

As of last month, Iraq had negotiated contracts for future oil exploration worth as much as $38 billion with companies from Russia, China and France, according to Deutsche Bank. But little progress has been made on those contracts because of the U.N. sanctions, and there is skepticism that they will all pan out, according to a U.S. Department of Energy report on Iraq.

Assessing Iraq’s economic clout is difficult because of the lack of independent data and the high level of under-the-table activity. Iraq is known for announcing large trade and investment deals with great fanfare for propaganda purposes, but they often don’t materialize and would be difficult to pursue legally with sanctions in place, according to Middle East experts.

But there is no question that the economic fallout of a regime change in Iraq would be the greatest for its neighbors, who have been the biggest recipients of Saddam’s legal and illegal largess. In the past two years, the Iraqi government has signed 11 free-trade agreements, most of them with countries in the Middle East.

Last year, Syria signed a free-trade agreement with Iraq, and the London-based Saudi newspaper Al Hayat recently announced that Iraq had signed $700 million in joint industrial projects with Syria. Iraq is also believed to be earning as much as $100 million a month in illegal revenue from oil shipped through Syria, according to the U.S. Department of Energy.

Jordan’s King Abdullah II is vulnerable. Iraq is Jordan’s top trading partner and the source of $600 million in U.N.-approved oil a year, half of which is sold at a discount and the other half paid in barter. Jordanian companies also do about $400 million a year in business under the U.N. oil-for-food program. But the United States is Jordan’s No. 2 trading partner and provides the government with approximately $400 million in aid a year.

But Western diplomats in Amman said a new government in Baghdad would be expected to maintain strong economic ties with Jordan. Such an important U.S. ally in the Middle East would not be allowed to flounder, said Patrick Clawson, deputy director for the Washington Institute for Near East Policy, a Washington think tank. “At the end of the day, the U.S. will find a way to help Jordan through its difficulties,” he said.