Iraq's Odious Debts

Debate Rages on Reconstructing Iraq

Catherine Belton
Moscow Times
April 14, 2003

World leaders gathered in Washington and St. Petersburg over the weekend to discuss the future of Iraq amid a growing standoff over whether the United Nations or the war coalition wins political and economic control of the fallen regime.

A U.S. call for a write-off of Iraqi debt got short shrift from President Vladimir Putin and his French and German counterparts as they met in St. Petersburg for a summit where they repeated calls for the United Nations to take up the reins, while finance ministers from the world’s leading industrialized nations met in Washington to discuss World Bank and International Monetary Fund aid for Iraq that had been bogged down over the UN’s role.

Putin bristled Friday in response to a speech late Thursday by hawkish U.S. Deputy Defense Secretary Paul Wolfowitz in which he called for France, Germany and Russia to contribute to the reconstruction of Iraq by agreeing to write off all or some of Iraq’s debts, while flatly saying the United Nations “can’t be in charge” of postwar Iraq.

“Some people shot, some people stole, and now someone has to pay for that,” Putin said in wry response to a reporter’s question about Wolfowitz’s debt proposal.
His remarks came after trilateral talks Friday evening in St. Petersburg’s Grand Hotel Europe with Jacques Chirac and Gerhard Schroeder, where each side stressed the need for the United Nations to take over postwar Iraq.

Putin did, however, say the debt proposal was “legitimate and understandable” and could be discussed at a Group of Eight summit planned for June in Evian, France.
Both Schroeder and Chirac said any debt proposals could not be discussed until a legitimate Iraqi government was in place.

Talk of how to deal with Iraq’s massive debt burden came as the G-8 finance ministers met in Washington to discuss plans for reconstructing Iraq. With Iraq’s oil patch, which contains the second-largest reserves in the world, now falling into the coalition forces’ hands and billions of dollars in reconstruction contracts up for grabs, debate is raging over whether the coalition or the United Nations should take control in Iraq. Until that debate is resolved, a legal vacuum over who has authorization to trade Iraqi oil could put the brakes on reconstruction plans.

While France, Germany and Russia have all called for Iraq to be controlled by the United Nations, leading U.S. officials including Secretary of State Colin Powell, National Security Advisor Condoleezza Rice and Wolfowitz have all poured cold water on the idea. President George W. Bush last week said the UN should play a “vital” role in Iraq but he did not give any further details.

For oil to begin flowing again out of Iraq and for the proceeds of oil sales to go toward reconstruction contracts, there may have to be new legal safeguards in place surrounding Iraq’s debt to protect that crude from being impounded by creditors. Iraq is estimated to owe between $62 billion and $120 billion to international creditors, and up to a further $300 billion to Kuwait and other Middle Eastern states as reparations for the 1991 Gulf War. It owes about $8 billion each to France and Russia, and $4.3 billion to Germany.

In addition to that legal tangle, for Iraq’s oil to be legally traded, the UN Security Council must vote to approve the lifting of sanctions imposed in 1990, a UN diplomat, contacted by telephone in New York, said Friday. France and Russia could threaten to use their veto power as permanent members of the Security Council to keep the embargo in order to win concessions from the United States over a greater role in Iraq, said Pavel Felgenhauer, an independent analyst.

“There appears to be government-sponsored attempts to blackmail the United States into making serious concessions using this nightmarish legal situation,” he said. “To a larger extent, they are trying to put constraints on U.S. action [by calling for UN control]. They want to reinstall the supremacy of the UN.”

The UN oil-for-food program was created in 1995 as a way to allow Iraq to engage in a restricted oil trade under the 1990 embargo with all the proceeds to be kept in a UN escrow account and to go toward food and civilian equipment. The program was modified by the Security Council soon after the outbreak of war to give priority to humanitarian supplies. That resolution expires May 12, but the oil-for-food program is due to continue until June 3. If there is no new vote to extend the program, it loses any legal force and leaves a legal vacuum with no party authorized to sell Iraqi oil, the UN official, speaking on condition of anonymity, confirmed Friday. Amid the legal uncertainty surrounding trade of Iraqi oil, 7 million barrels of Iraqi oil are now backed up at the Turkish port of Ceyhan, The Wall Street Journal reported last week. Although that is not a large amount of oil, it is a sign traders are steering clear while it is still uncertain who will have the legal right to trade the oil.

“There needs to be a new institution in place after this to safeguard oil sales from creditors,” Felgenhauer said. The United States, however, already seems to have set its sights on controlling any future agency, at least in the short term. Reuters cited unnamed sources as saying Friday that the United States plans to run the Iraqi oil industry until an interim authority can be formed to take over.

U. S. Vice President Dick Cheney called earlier last week for the creation of “an organization to oversee the functioning of their Oil Ministry.” That body “will be composed primarily of Iraqis. It may have international advisers from outside,” Reuters quoted him as saying. The news agency, however, also cited unnamed sources as saying the Defense Department is considering creating an advisory board of former U.S. oil executives to help run Iraq’s oil industry. The sources said a former chief executive of Shell Oil Co., Philip Carroll, had been tipped to head that board. The Defense Department and Cheney’s office were unavailable for comment Sunday. But while speculation circulates about U.S. plans to move in on the oil industry, the United States appeared to make one concession over the weekend over a UN role in rebuilding Iraq.

At the G-8 meeting of finance ministers in Washington, the United States agreed that IMF and World Bank aid for Iraq would come as part of a reconstruction plan to be endorsed by the UN, The Associated Press reported. Before the weekend meeting, U.S. officials had argued that IMF and World Bank aid could start as part of an American-led reconstruction program.

On the sidelines of that meeting, Finance Minister Alexei Kudrin told Russian television that Russia will not forgive Iraq’s debt. “No one has forgiven Russia’s debt, regardless of what kind of regime it was and regardless of the country’s clout,” Kudrin said. “For this reason, international law and our membership of the Paris Club of creditor nations will allow us to press for the repayment of our loans.” But in later remarks to Russian news agencies, he said it was “inevitable” Iraq’s debt would have to be restructured.

Also in Washington, Putin’s economic adviser Andrei Illarionov was attending the spring meetings of the World Bank and IMF and also played down the chances of Russia accepting a write-off. “I haven’t heard anybody seriously discussing the possibility of writing the Iraqi debt off,” he told Reuters. He said Russia’s position on the debt was that the issue should be discussed by the Paris Club but that did not mean it should be written down. But as Russia and the United States head into a potential standoff over the legal mire surrounding Iraq’s debts and oil revenues, analysts warned that Russia risked further reducing its chances of getting any role in Iraq by continuing to ruffle U.S. feathers.

While France and Germany have toned down their stance this week, Russia has continued to speak out strongly against the war. The House of Representatives last week approved an amendment to bar French, Russian, German and Syrian companies from gaining any reconstruction contracts in postwar Iraq. Although the Bush administration has said it does not support this move, and although it is not legally binding, it is a sign of how growing anti-Russian sentiment in the United States could make things difficult for Russia. And, already, officials on the coalition side in the United Nations are getting exasperated with Russia’s stance.

“The frustrating thing is that while the Russians are calling for the UN to play a central role, they are blocking any type of first step for a UN initiative to establish itself in a meaningful way in Iraq,” the UN diplomat said, citing Russian attempts to block UN Secretary-General Kofi Annan’s adviser from having contact with pro-coalition Iraqis. “If it continues to do this, the UN risks being left behind.”

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