Iraq's Odious Debts

Division on rebuilding Iraq could slow down the process

Bob Davis, Alan Cullison and Farnaz Fassihi
Wall Street Journal
April 14, 2003

The reconstruction of Iraq moved to center stage in world politics, with the U.S. inviting its coalition partners into dialogue on the subject but pointedly excluding the countries that objected to and still resent the U.S. invasion.

President Bush invited Poland and Australia, which contributed troops to the war effort, to participate. No such invitation went to Russia, France and Germany, which held their own dialogue over the weekend in St. Petersburg, Russia. The U.S. says they can attend future meetings on rebuilding Iraq, to be hosted by Gen. Tommy Franks, as “observers.”

The widening trans-Atlantic schism over how to rebuild Iraq may make the nation-building process more complicated. And there is much to be done: In Iraq, looters continued to rampage — albeit at a diminished rate — Sunday storming the Al-Salam Presidential Palace on the western bank of the Tigris River in Baghdad. Schools remained closed, and the capital remained without electricity or running water.

About the only common international agenda on Iraq emerged in Washington, where finance ministers with the Group of Seven industrialized nations agreed that the International Monetary Fund and World Bank should start technical assessment of the scope of the Iraq rebuilding efforts. The G-7 includes the U.S., Britain, Canada, France, Germany, Japan and Italy.

Even there, though, discord followed. U.S. Treasury Secretary John Snow issued a statement that omitted discussion of a role for the United Nations, even though the official G-7 communiqu–π stressed the need for “a further U.N. Security Council resolution.” Mr. Snow said that the G-7 wording didn’t represent a new point of view or compromise by the U.S., but other countries pointedly seized on the importance of further U.N. action.

Deeper splits emerged among the financiers on a far more substantive issue, too: what to do about Iraq’s gargantuan foreign debt. Germany and Russia’s finance ministers made clear they have no intention of signing on to a U.S. proposal to consider forgiving Baghdad’s debt. “No one has forgiven Russia’s debt, regardless of what kind of regime it was and regardless of the country’s clout,” Russian Finance Minister Alexie Kudrin told Russian television. Germany’s central bank president, Ernst Welteke, noted that Iraq is a potentially rich nation because of its oil resources. Debt cancellation, he added, pointedly, is “only for very poor countries.”

On the ground in Iraq, such diplomatic wrangling seemed very far away. The U.S. Army Third Infantry Division’s Capt. Eric Murray, surveying the tatters around him about 40 miles south of Baghdad, urged his comrades to go easier on Iraqi prisoners of war. “We’re going to have to rebuild this country, and to convince these people that we’re not worse than Saddam Hussein,” said the captain, who works in civil affairs. “I’m keenly aware that the more destructive we are on this end, the more work there will be for me later on reconstruction.”

A few miles away in Nasiriyah, several dozen Iraqi teachers gathered by the looted building of the education department, waiting for someone to tell them what and when they could teach — and where. Iraqi schools were closed before the hostilities, and many of them were turned into military depots.

In Kirkuk Sunday, a dozen soldiers from the U.S.’s 173rd Airborne Brigade guarded the governor’s office, vacated by the Kurdish peshmerga, or guerrilla fighters. In a careful attempt to appear neutral in the volatile area, the American soldiers covered a Kurdish political unity sign. But it was clear to everyone who would be in charge. The minister of peshmerga, Shirdel Hawazi, said he ordered his fighters to withdraw to Sulaimaniyeh. “There’s nothing to worry about,” he said. “In a few days, the Americans will be the ones fully in control.”

That’s exactly what Russia, France and Germany are trying to avoid. At their meeting in St. Petersburg over the weekend, the leaders of the three countries that led the anti-war coalition reiterated that they expect the rebuilding of Iraq to be entrusted to the U.N.

“The task of restoring the political, economic and social system of Iraq is enormous,” French President Jacques Chirac told a news conference. “Only the [U.N.] has the legitimacy to do that.”

Vladimir Putin issued the strongest criticism of U.S. maneuvers. The Russian president said the war had undermined the U.N. and international law as a whole, and pointed out the U.S. failed to find weapons of mass destruction in Iraq, which he said was the only possible justification for the conflict. “Even in the most acute moment of the fight for its survival, the Iraqi regime did not use such means [weapons of mass destruction],” Mr. Putin said. “If in the last moment of its existence, it did not use them, it means they do not exist. Or they were in such condition they could not be used. That raises the question of the expediency of the whole action.”

Mr. Putin said reconstruction in Iraq should follow the model established in Afghanistan, which was supported by Russia: First there should be an international conference organized by the U.N., then an interim administration responsible for preparing elections, and finally the elections themselves.

The Russian leader’s continued criticism is likely a sign of heightened anxiety in Moscow that the U. S., emboldened by its success in Iraq, could go on a binge of regime-toppling in order to install governments more friendly to the West. Mr. Putin, who dominated a news conference held by the leaders, cautioned against what he called “the export of capitalist, democratic revolution.”

At the G-7 and IMF/World Bank meetings in Washington, the plan was to show that on economic matters, at least, the U.S. and its Iraq-war adversaries could work together. “The IMF and World Bank will assist, under the auspices of the U.N., so that Iraq can return to the international community,” French Finance Minister Francis Mer told reporters.

The fight over Iraq’s debt soon will take center stage. Iraq may be the world’s most heavily indebted nation, compared with the size of its economy. Paying off that debt could cripple the country for years to come. The Saddam Hussein regime simply ignored the debt, but a new government looking to establish commercial credit arrangements around the world would be under immense pressure to pay off Baghdad’s obligations.

Estimates of its foreign debt range from $60 billion to more than $130 billion. On top of that, Iraq owes $27 billion in war reparations from the first Persian Gulf War, while an additional $200 billion has yet to be adjudicated by a U.N. commission set up to resolve Gulf War claims. Iran also may assert $100 billion in claims against Baghdad dating from the nine-year Iran-Iraq war. Tehran hasn’t made such claims yet because it was clear that Iraq wouldn’t make payment.

The G-7 agreed only that “it is important to address the debt issue” and said it was “looking forward to the early engagement of the Paris Club.” An IMF communiqu–π later echoed that language. The Paris Club is an informal arrangement of creditor countries, which restructures government debt. Such restructuring may entail stretching out the time for payments, deferring some payments, or reducing interest charges — but not cancelling debt.

The Russian and German positions are colored by the burdens placed on Moscow after the collapse of the Soviet Union in 1991. Russia agreed to accept all of the Soviet Union’s $80 billion or so in debt, and also its assets — Soviet embassies, gold stocks and loans made to other nations. Paris Club members restructured the Soviet debt and Russia is still making payments on it.

Iraq owes Russia $12 billion, according to the Center for Strategic and International Studies, without accounting for interest. And Moscow has been a very tough bargainer with debtors. Ernesto Hernandez-Cata, a former senior IMF official, said Russia would insist on repayment from Ethiopia, Nicaragua and other impoverished nations whose previous government had run up heavy debts to the Soviet Union. Sometimes, Moscow would use the IMF in those efforts. “The Ethiopians would say, ‘It’s disgusting; this was money given to the old regime to kill us.’ ” Mr. Hernandez-Cata said. “We had to tell the Ethiopians that you’ve got to negotiate with Russia” or the IMF couldn’t approve loans to Ethiopia.

In one measure of the bizarreness of Iraq’s financial situation, the U.N. last week approved payment of $864 million for war claims from the first Gulf War, paid for by earlier sales of Iraqi petroleum. The payments came as the Saddam Hussein government was collapsing. Under the U. N.’s oil-for-food program, 25% of the revenue from Iraqi petroleum sales made under the U.N. program are paid out in compensation for the Iraqi invasion of Kuwait. More than half of the recent payment is earmarked for the Kuwaiti government.

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