Country Report 1St Quarter 1998 © the Economist Intelligence Unit Limited 1998

COUNTRY REPORT

Iraq

1st quarter 1998

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1998-99

9 Review 9 The political scene 13 Iraqi Kurdistan 15 Iraqi-UN relations 19 Economic policy and the economy 21 Oil and gas 23 Foreign trade and payments

25 Quarterly indicators and trade data

List of tables 9 Forecast summary 25 Quarterly indicators of economic activity 25 Trade with major partners

List of figures 9 Gross domestic product

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998

Iraq 3

January 27th 1998 Summary

1st quarter 1998

Outlook for 1998-99: Saddam Hussein’s latest confrontation with the UN has strengthened his domestic position, although he will continue to purge the middle and higher echelons of the Baath party and the security services. The regime’s relations with the UN will continue to be confrontational, creating interruptions in the supply of crude oil and humanitarian goods. An increase in the level of UN-sanctioned aid is a possibility, though there is no prospect of a full lifting of sanctions during the forecast period. Conditions in Iraqi Kurdistan will continue to deteriorate as outside powers intensify their involvement. The regime will step up its efforts to win regional Arab backing for a lifting of sanctions, but with limited success. Inflationary pressures will increase as the regime continues to finance its spending commitments by printing money.

The political scene: Saddam’s domestic position has been enhanced by the latest stand-off with the UN. But he has continued to pursue opponents, real or imagined, through purges directed at the security services and Baath party. The regime has announced that Saddam’s sons, Udai and Qusai, will head rival “alternative leaderships” should he be removed from power. This should split support for the two in the short term, further cementing Saddam’s position.

Iraqi Kurdistan: Fighting between the Patriotic Union of Kurdistan (PUK) and the Kurdish Democratic Party (KDP) has continued. The PUK has proffered a peace plan but it is unlikely to be accepted by the KDP, which, with the support of Turkey, has consolidated its recent military successes and is in no mood for compromise. Iran will attempt to stop the PUK from suffering any further losses, but is reluctant to be drawn too deeply into the fighting.

Iraq-UN relations: The regime remains at loggerheads with the UNSCOM inspectors. A military strike on Iraq was narrowly averted following its decision to expel the US members of the UNSCOM mission in late October. Russian mediation prompted Iraq to reverse its decision. However, relations between Iraq and the US remain tense and an early lifting of the sanctions regime is not expected. Nevertheless, the regime has recently agreed to a resumption of oil exports under the terms of the oil-for-food agreement.

Economic policy and the economy: Food and medicine supplies are still subject to bottlenecks, and malnutrition, especially among children, is becom- ing acute. The Central Bank has lifted certain restrictions on citizens holding hard currency. Agricultural production is likely to have dropped 26% in 1997.

Oil and gas: Crude-oil exports in the next two months could reach 1.3m b/d due to a sharp dip in prices. This will push production to the limits of capacity. The oil ministry plans to increase capacity to 4.3m b/d by 2000.

Foreign trade and payments: The UAE has continued to strengthen ties with Iraq. France has announced its intention to open a trade office in Baghdad.

Editor: Crispin Hawes All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 4 Iraq

Political structure

Official name Republic of Iraq

Form of state Arab socialist republic based on provisional constitution of 1968

Legislature National Assembly of 250 members, elected from 56 constituencies; last elections March 24th 1996

Head of state President, currently Saddam Hussein, elected by the Revolutionary Command Council (RCC), the highest national authority

Executive Cabinet chosen by the president, who regularly replaces individual ministers

Main political parties Arab Baath Socialist Party; Democratic Party of Kurdistan; Kurdistan Revolutionary Party. Opposition parties (illegal): Supreme Council for the Islamic Revolution in Iraq (SCIRI), comprising six Shia parties; seven Kurdish parties including the Kurdish Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK); Iraqi Communist Party; Democratic Gathering; Iraqi Socialist Party; Independent Nationals

Prime minister Saddam Hussein Deputy prime ministers Tariq Aziz Taha Yassin Ramadan Mohammed Hamza al-Zubaidi

Ministers & ministers of state Agriculture Abdullah Mohammed Saleh Culture & information Himam Abdel-Khaliq Abdel-Ghafur Defence General Sultan Hashim Ahmed Education Fahad Salim al-Shaqra Finance Hikmat Mezban Ibrahim Foreign affairs Mohammed Said Kazem al-Sahhaf Health Umid Midhat Mubarak Higher education & scientific research Abdel-Jabbar Tawfiq Mohammed Housing & reconstruction Maan Abdullah Sarsam Industry & minerals Adnan Abdel-Majid Jasim Interior Mohammed Zimam Abdel-Razzaq Irrigation Mahmoud Diyab al-Ahmed Justice Shabib Lazem al-Malki Labour & social affairs Abdel-Hamid Aziz Mohammed Saleh Military affairs General Abdel-Jabbar Khalil Shanshal Oil Amir Mohammed Rashid Trade Mohammed Mahdi Saleh

Speaker of the National Assembly Saadoun Hammadi

Central Bank governor Isam Rashid Huwaish

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Economic structure

Latest available figures

Economic indicatorsa 1993 1994 1995 1996 1997 Nominal GDP (ID m) 1,618 6,470 22,481 73,064 273,989 Real GDP growth (%) 0.0 0.0 –0.7 0.0 25.0 Consumer price inflation (av; %) 175.0 300.0 250.0 225.0 200.0 Population (m) 19.5 19.9 20.5 21.3 22.0 Merchandise exports fob ($ m) 750 771 814 1,482 5,540 Merchandise imports cif ($ m) –1,000 1,000 1,155 1,793 4,251 Current account ($ m) –250 –229 –438 –336 –541 Oil production (’000 b/d)b 480 530 550 580 1,142 Total external debt ($ bn) 97 101,184 107,185 112,986 119,295 Exchange rate (av; ID:$)b 0.311 0.311 0.311 0.311 0.311

January 26th 1998 ID0.311:$1 (official rate)

Origins of gross domestic product 1989 % of total Components of gross domestic product 1989 % of total Agriculture 5.1 Private consumption 56.1 Oil 61.3 Government consumption 32.9 Industry 11.6 Gross fixed capital formation 28.7 Services 22.0 Change in stocks –20.6 Total 100.0 Exports of goods & services 26.7 Imports of goods & services –23.8 Total 100.0

Principal exports 1989a $ bn Principal imports 1989a $ bn Crude oil 14.5 Civilian 5.0 Total incl others 14.6 Military 2.7 Total 7.7

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total Jordan 83.9 Jordan 48.7 Greece 5.1 Hungary 14.6 EU15 7.6 Switzerland 7.6 Germany 2.1 EU15 13.4 a EIU estimates. b Actual.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 6 Iraq

Outlook for 1998-99

Threats of military action By late January tensions between the regime and the international community, will not produce a particularly the US and the UK, had reached a crucial stage. Two US aircraft resolution— carriers were joined in the Persian Gulf by a UK carrier, and US officials were intent on convincing Iraq of the seriousness of the intent behind the deployment.

With US-Arab relations at a new low, a military strike would not endear the Washington administration to its regional allies. Any concession from the Iraqi regime to US pressure for a change in its behaviour will at best be shortlived and the obstruction of United Nations Special Commission (UNSCOM) activities will remain systematic. With no obvious alternative, Washington may try to cripple Iraq’s chemical and biological weapons programmes through a sustained air assault, possibly directed against President Saddam Hussein’s palaces.

—and the US will not The US government will continue to oppose a full lifting of sanctions, citing countenance a lifting of Baghdad’s continued obstruction of UN inspection activities. Under pressure sanctions— from its UN Security Council colleagues, the US government has begun to play down its previous insistence on the removal of Saddam Hussein from power before sanctions can be lifted. Nevertheless, this is largely a rhetorical adjust- ment, and the US will continue to emphasise the widest possible application of UN resolutions, including full compliance on weapons of mass destruction, and compensation for victims of the Gulf war. The Iraqi regime is unlikely to fulfil these obligations to the US’s satisfaction, and the sanctions will remain in place.

—while in Iraq, the status Whatever the result of the current diplomatic impasse—Iraqi acquiescence to quo will remain— demands on access to presidential palaces, or a joint US/UK military strike—the situation in Iraq will not fundamentally change. Iraqi interference in the activities of UNSCOM is expected to continue as a matter of routine. Although pursuing a policy of brinkmanship in its relations with the UN would seem to invite the risk of miscalculation and therefore military strikes, the actual risk to the Iraqi regime is minimal. The regime’s sole priority remains the retention of power, and its grip on the country will not be damaged by a US military strike, unless by chance such a strike resulted in senior fatalities. Even the US’s attempts to link the oil-for-food deal with compliance with weapons inspection will not induce a change in behaviour on the part of the regime. The third phase of the deal has begun, following UN acceptance of Iraq’s revisions to the existing distribution plan, but the Iraqi government will continue to regard the plan with scepticism, and further disruptions to the supply of Iraqi crude oil can be expected.

—and tensions will On a popular level, the latest round of conflict with the UN has enhanced the enhance Saddam Hussein’s standing of Saddam Hussein. Though impoverished, the majority of Iraqis position— continue to regard the US as the chief cause of their misery. Marginal improve- ments in the supply of food and medicine will keep popular frustration from boiling over. Meanwhile, key members of the military and bureaucracy continue to enjoy access to luxury consumer goods, largely thanks to revenue from smuggling, and this will ensure continued support for Saddam among the elite.

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—but he will leave Nevertheless, Saddam will continue to take great pains over his personal nothing to chance security: ministers and senior security personnel will be constantly reshuffled, while the higher echelons of the military and bureaucracy will periodically be purged. His sons, Udai and Qusai, will increasingly be played off against each other in a bid to limit their support bases.

Peace remains elusive in Fighting between rival Kurdish groups in the Kurdish-controlled north of Iraq Kurdish areas— has resumed and is likely to intensify as both Turkey and Iran become involved. The current phase of the conflict dates from early October 1997 when the Patriotic Union of Kurdistan (PUK), with Iranian assistance, launched an offensive against the Kurdish Democratic Party (KDP). The latter responded and, with the aid of Turkish air and armoured support, succeeded in pushing its rival back more or less to its original position. This will not be the end of the fighting, however. The PUK is frustrated by its lack of access to lucrative “customs” revenue and will again call on the support of Iran and the Turkish Kurdistan Workers’ Party (PKK) in its bid to regain the initiative (see The political scene). Iran seems unwilling to become too deeply involved, but the PKK is likely to be more receptive to the PUK’s calls.

—which suits the The resurgence of the internecine Kurdish conflict serves the purposes of the government Iraqi regime since it further undermines any chance of a successful offensive by opposition forces based in the north against the central government. In addition, the fighting will serve as a reminder to other Arab states that Iraq is in danger of being dismembered by non-Arab powers. This will reinforce Arab calls, at both a popular and an official level, to bring the Iraqi regime back into the collective Arab fold. By extension, this will mean a build-up of wider Arab pressure for a rescission of sanctions. The regime will seek to exploit this to the full, and further shuttle diplomacy from the deputy prime minister, Tariq Aziz, can be expected. Syria and Egypt will be courted, but relations with Saudi Arabia, and particularly Kuwait, will remain guarded.

None of these states are naturally pro-Iraq, but all are wary of Turkish designs and appreciate the logic of a strong Iraqi state as a counterweight to Ankara’s activities in the Kurdish areas. Nevertheless, any suspicion of a full-scale rapprochement between Iraq and either Syria or Iran can be safely discounted while Saddam Hussein remains in power, so entrenched are mutual suspicions.

Pressure will build for an The glaring deficiencies of the oil-for-food deal can no longer be ignored and expansion of the UN pressure will intensify for an expansion of the value of the present agreement. programme However, the pressure is unlikely to come from the regime itself, since it is unable to exert control over this revenue and therefore regards the continuation of the plan with relative equanimity. Moreover, the regime believes that an increase in aid is likely to ease calls for a full lifting of sanctions. The absence of regime pressure, coupled with US intransigence, means that an increase in the terms of the oil-for-food agreement is unlikely to occur before the end of 1998.

Iraq will have to Iraqi crude-oil exports will continue to fluctuate in line with world oil prices, pump oil— since a value rather than a volume target determines the level of these exports. With Brent currently trading at $16/barrel, Iraqi exports will need to average about 900,000 barrels/day (b/d) in order to meet the $2.14bn target. In 1997,

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 8 Iraq

when Brent averaged about $19.30/b, Iraq exported an average of just over 700,000 b/d.

—possibly as much as Actual Iraqi exports in the next two months could be as high as 1.3m b/d 1.3m b/d in the short term because the UN requires that half the money is earned in the first three months of the programme. Iraq’s demand for a new aid plan means that one month of that period has already passed. The increased output will have a depressing effect on an already slack oil market. However, Iraq’s fraught relations with the UN, and the possibility of further disruptions to Iraqi supply, will keep prices volatile.

Spending will focus on the Government spending will focus on rewarding key regime supporters and on oil sector keeping the armed forces and security forces content. What little investment spending there is will be directed at the oil sector, though the regime will continue to solicit foreign investment in the form of production-sharing agreements, for activation once sanctions are lifted. The regime will continue to favour those nations that are pressing for a lifting of sanctions. Hence, French, and particularly Russian, firms will win the lion’s share of these contracts.

Growth will slow— There will be some finance injected into the agricultural sector from the oil- for-food programme, but industry will continue to stagnate through lack of investment. Following an estimated expansion in GDP of some 25% in 1997, the EIU expects growth to slow to around 10% in 1998 and 8% in 1999. Although nominally high, these levels of growth are from such a low base that they do not signify any real recovery.

—and inflation will Inflation will remain serious in 1998-99. While the regime finances budget remain problematic deficits by printing money, even basic goods will remain in short supply, despite the oil-for-food deal. Any item that is not included in the government rationing system is subject to erratic but continuous price rises, purely as a function of supply constraints. This situation will be exacerbated by the removal from the rationing system of foodstuffs included under the oil-for-food programme. Meanwhile, the continuing downward slide of the Iraqi dinar’s real value will also contribute to the inflationary equation, as demand for dollars will remain strong, both for household savings and to fund imports. Although inflation rates are expected to be slightly lower than in 1995-97, we expect average annual rates well in excess of 100% in 1998-99.

Higher oil output— We have lowered our assumptions for the average International Energy Agency (IEA) import price for crude to $17.50/b in 1998 and $17.90/b in 1999, which will shore up expectations for export volumes as, under the terms of the oil- for-food deal, exports levels are determined by revenue rather than volume.

—provides the basis for a Iraq’s official trade account is expected to record a surplus in 1998-99 as exports trade surplus— under the programme will be boosted by exports of oil and petroleum products to Jordan under a separate deal, also approved by the UN. Jordan has agreed to import about 97,000 b/d and some further revenue will be generated through smuggled crude and refined products. With a lower crude price assumption, we expect total merchandise exports to reach some $6.1bn in 1998, rising to

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$8.5bn in 1999 as the oil-for-food programme expands. Most imports will be made under the UN-approved programme and are expected to total some $4.6bn in 1998, rising to $6.6bn in 1999.

—and a current-account Services payments should safely ensure that Iraq records a deficit on its current deficit account in both 1998 and 1999. Transit fees paid on crude exports made through the pipeline into Turkey, expenses incurred by UN programmes, Gross domestic product which are covered by the Iraqi government, and compensation payments will % change, year on year ensure annual deficits of around $600m in both years. Iraq Middle East & North Africa Forecast summary 30 ($ m unless otherwise indicated) 25 1996a 1997a 1998b 1999b 20 Real GDP (% change, year on year) 0 25 10 8 15 Consumer price inflation (av; %) 225 200 165 125 10 Merchandise exports fob 1,482 5,540 6,110 8,511 5 Merchandise imports cif 1,793 4,251 4,641 6,588 nil n/a 0 Current-account balance –336 –541 –569 –627 c c -5 Oil production (’000 b/d) 580 1,142 1,444 1,846 1995(a) 96(a) 97(a) 98(b) 99(b) Average exchange rated (ID:$) 1,160 1,498 1,600 1,658 (a) EIU estimates. (b) EIU forecasts. Sources: IMF, International Financial Statistics; EIU. a EIU estimates. b EIU forecasts. c Actual. d Average black-market rate.

Review

The political scene

Iraqis flock to defend the The latest conflict with the United Nations has further strengthened President palaces— Saddam Hussein’s domestic political position. Following the withdrawal of UN personnel from Iraq (see Iraqi-UN relations) and the build-up of US military forces in the Gulf in early November, hundreds of Iraqi citizens flooded to the president’s palaces in a bid to provide a “human shield” against a possible US attack.

—providing excellent PR Though the government largely choreographed these acts of devotion, the for the regime— publicity they generated will have bolstered Saddam’s domestic image. The president’s periodic acts of defiance continue to draw applause from the vast majority of Iraqis, who seem content to blame the US, rather than their own government, for their impoverishment.

—while smuggling gives However, Saddam will not rely on image alone to maintain his position. Crude substance to the image oil and related products continue to be smuggled abroad by the regime. This traffic passes mainly through Iran, Turkey and the Gulf. Though difficult to quantify, an estimated 37,000 barrels/day (b/d) of gasoil is currently being smuggled through Iranian territorial waters. The revenue generated by this activity is channelled towards the military and security services, and the political elite. The money is used to obtain luxury goods rather than satisfy basic needs.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 10 Iraq

In addition, claims have been made in the European press that the regime is also smuggling medicines, intended for the population, on to the black markets of neighbouring states, principally Jordan. It claims that the operation is worth “millions of pounds [sterling]” to the regime and is being directed by one of Saddam’s sons, Udai.

The regime wreaks its The tried and trusted tool of repression is also very much in evidence. Accord- revenge on alleged ing to Iraqi opposition sources, the regime is wreaking its revenge on those plotters— individuals it believes were involved in General Wafic Samurrai’s attempted coup in September 1997 (4th quarter 1997, page 7). The London-based Iraqi National Congress (INC), of which General Samurrai is a member, suggests that some 400 prisoners, including a brigadier and a colonel in the intelligence services, have been executed since the coup attempt. These claims were supported by the US State Department spokesman, James Foley, who estimated that “hundreds, if not thousands” of political detainees have been executed.

—and carries out a Concomitantly, the regime is engaging in a more systematic purge of bureau- “review” of the Baath cratic institutions. The latest target is the Baath party, which has been the party— subject of criticism from the president for some months (4th quarter 1997, page 9). Tapping into a widespread feeling of frustration, Saddam criticised corruption and division within the party and ordered a “review” of its operations. Accordingly, many middle-ranking and some senior members of the party have been replaced, particularly in southern areas.

This strategy has a populist element since any campaign against corruption, no matter how ineffectual, is generally welcomed by the public. More impor- tantly, it eliminates pockets of power and influence within the party apparatus, particularly in provincial areas, which may have been growing for some time.

—which reveals further One target of the recent review was Major-General Talib al-Saadoun, who conspiracies worked in the headquarters of the Baath party until his execution in early January. According to General Samurrai, General Saadoun, who comes from a large and somewhat restive southern Iraqi clan, was to be involved in a coup attempt conceived in Jordan by the Iraqi opposition. Unfortunately for General Saadoun, in mid-December the Iraqi intelligence services intercepted a letter from Jordan giving details of the plot. Ten unnamed colleagues of General Saadoun are also believed to have been executed. Some analysts believe that the Iraqi regime’s recent decision to execute four Jordanian students was designed as a warning to King Hussein of Jordan not to allow further opposition activities on his country’s soil (see below).

Saddam pits his sons Saddam’s desire to diminish alternative power centres appears to have been against each other— extended even to his close family. In late November Arab newspapers reported that the regime had established “two leaderships” under the respective chair- manship of Udai and Qusai Hussein, which would provide governance for the country in the event of their father’s death. The Saudi daily Al-Sharq Al-Awsat reported that: “Instructions have been issued to all Iraqi institutions and quar- ters, including Iraqi embassies, to follow the orders of the relevant alternative leadership should anything happen to the current leadership.” Intriguingly, no

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indication was given as to which of the two “alternative leaderships” should be followed.

This rather crude attempt at divide-and-rule underlines the extent of Saddam’s paranoia. By implying that both sons remain in the running for power in the future, rivalry between the two is likely to be enhanced. By the same token, the support that either one of them could muster at the moment is likely to be diminished.

—which is a blow This act also compounds the recent fall in the fortunes of Qusai Hussein. Follow- for Qusai ing the near-fatal attack on Udai in December 1996, Qusai’s political role was extended to the point where many observers believed he had secured the status of “heir-apparent”. But this latest incident, coupled with his removal from the head of the Special Republican Guard in September (4th quarter 1997, page 8) suggests that such observations were premature. This feeling was reinforced when Udai was appointed head of the 30,000-strong “Saddam’s fedayeen” security force in November.

Qusai nevertheless remains an important player; some Iraqi sources suggest that he will shortly be appointed as head of a “National Security”-type council. However, he now knows that his brother has not been removed from the pecking order.

Diplomatic activity sees The past quarter has seen intense Iraqi diplomatic activity as it attempts to Tariq Aziz welcomed in capitalise on its Arab neighbours’ sense of unease over US policy in the region Cairo and Damascus— and Turkey’s machinations in the north of Iraq.

Iraq’s success in this venture has been qualified. However, the deputy prime minister, Tariq Aziz, scored two important victories in quick succession when he was officially received in both Cairo and Damascus at the height of the recent stand-off with the US. Although Mr Aziz was not granted an audience with either Hosni Mubarak or Hafez al-Assad, his presence in two countries that fought to remove Iraqi forces from Kuwait in 1991 was an important diplomatic victory.

Mr Aziz’s visit to Syria was of particular significance as it marked the first public high-level encounter between the rival Baath-led regimes in Baghdad and Damascus for 17 years, setting the seal on the gradual rapprochement which has been taking place in recent months (4th quarter 1997, page 10).

—which underlines Syrian Nor was the Damascus visit of purely symbolic importance. Within 24 hours of concerns about Turkish concluding extensive discussions with Mr Aziz, the Syrian foreign minister, intentions— Farouq al-Shara, flew to Riyadh to deliver a letter from President Assad to King Fahd. Although the contents of the letter have not been officially revealed, Saudi sources suggest that they outlined Mr Assad’s proposals for the reintegra- tion of Iraq into the “Arab fold”. The same sources claim that Iraq acknow- ledges Kuwaiti sensibilities on this matter and is prepared to allow one key concession: determining the whereabouts of Kuwaiti prisoners of war.

The Syrian regime’s willingness to behave as a go-between in this manner may be indicative of its concern over regional developments, rather than any rediscovery of Arab or Baath fraternalism. Mr Assad has become increasingly

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alarmed by the level of military co-operation between Turkey and Israel (a relationship underscored by recent naval manoeuvres in the eastern Mediterranean). His suspicions have been compounded by Turkey’s military adventurism in northern Iraq. Although Turkey insists that it is purely in pursuit of Kurdistan Workers’ Party (PKK) separatists, the Syrian government, displaying a tendency towards paranoia, sees darker forces at work (see Iraqi Kurdistan). Nevertheless, the Syrian regime will remain suspicious of its Iraqi Baath counter- part, and the personal rivalry between the two leaders will continue to bedevil Iraqi-Syrian relations.

—though the Gulf states Some of these fears are shared by other Arab states, but few are willing to will take more embrace Iraq as a bulwark against Turkey. Notwithstanding President Assad’s convincing— entreaties, Saudi Arabia is still mindful of Iraqi actions during the Gulf war and remains deeply sceptical of Saddam Hussein’s intentions. Furthermore, the Kuwaiti government remains implacable in its opposition to any rehabilitation of Saddam’s regime. As a result, the annual summit of the Gulf Co-operation Council (GCC), held in Kuwait on December 20th, issued an uncompromising final communiqué. The six-member organisation called on Iraq to “fulfil all UN Security Council resolutions without selection” and blamed Saddam Hussein for the continued suffering of the Iraqi people. No mention was made of an earlier proposal from Sheikh Zayed of the UAE that a GCC delegation be sent to Iraq to discuss outstanding issues. It remains to be seen whether the Iraqi offer on Kuwaiti prisoners of war will help soften the latter’s uncompromising stance.

—as will certain members Moreover, the Iraqi regime is not united in a desire to build fences with the likes of the regime of Saudi Arabia and Kuwait. Mr Aziz’s recent shuttle diplomacy was undermined in December by Iraq’s vice-president, Taha Yassin Ramadan, who criticised “certain Arab countries” which, he claimed, continued to behave as “American lackeys”. Mr Ramadan did not name names, but by singling out Qatar and the UAE for praise, listeners were left in little doubt that Saudi Arabia and Kuwait were the objects of his ire. Mr Ramadan’s agenda is partly a product of rivalry with Mr Aziz, though his outburst would not have been made without the tacit consent of Saddam Hussein. Iraqi bitterness over perceived Saudi and Kuwaiti intransigence runs deep, both within the regime and among the wider public. Consequently, diplomatic overtures towards these countries will be hesitant and are likely to involve an element of “threat” for some time to come.

Relations with Jordan Furthermore, the regime’s capacity for undermining its own hard work should suffer a blow— not be ignored. The foreign ministry has been struggling to mend fences with Jordan following the execution of four Jordanian students who were found guilty of smuggling vehicle spare parts into Iraq. The Jordanian government responded to the executions by expelling seven Iraqi diplomats and recalling its chargé d’affaires from Baghdad. Some analysts believe that the executions were intended as a warning to King Hussein not to allow Iraqi opposition activities in his country, and the king dismissed official Iraqi protestations that the court decision was merely a legal question, calling the sentences a “hideous crime”.

Iraq has made a series of overtures to Jordan, including commuting a death sentence against a fifth Jordanian accused of smuggling and promising the

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release of dozens of others languishing in Baghdad jails. In late December Iraq agreed to renew, and improve the terms of, its oil supply agreement with the kingdom (see Oil and gas).

The two countries’ relations will not have been enhanced by indications that an official Iraqi hand was behind the murder of the country’s deputy ambassador to Jordan, Hikmat al-Haju, and seven friends, in Amman on January 17th. The reasons for his death are not yet clear, but it is likely that the regime believed that he was either participating in, or not adequately attempting to prevent, Iraqi opposition activities in the kingdom. Saddam will undoubtedly have calculated that the murder of Mr al-Haju on Jordanian territory was hardly likely to help mend relations with King Hussein. But this only serves to underscore the fact that for the Iraqi leader, the elimination of any threat to his domestic powerbase will always take priority over diplomatic niceties.

—although Iraq recognises Despite King Hussein’s often critical attitude towards the Iraqi regime, and the value of strong links Saddam’s apparent disregard for diplomatic relations, the Iraqi president does with the kingdom recognise the value of maintaining links with Jordan. As a conduit for trade, Jordan has been usurped somewhat by revitalised routes from the Gulf; nevertheless, commercial relations remain strong and cannot easily be discarded. Moreover, there is considerable sympathy for Iraq’s plight among ordinary Jordanians. This is of significant propaganda value and Iraq will hope that its latest show of brutality has not destroyed this goodwill.

Relations with Iran Relations with Iran continue to improve, albeit slowly. At the Organisation of continue to improve— the Islamic Conference (OIC) meeting held in Tehran in mid-December, Mr Ramadan met the Iranian president, Mohammed Khatemi. According to Iranian state television, Mr Khatemi told Mr Ramadan: “We can create a bright future for the nations of Iran and Iraq based on the common points existing between the two countries.”

—though caution will The major “common point”, apart from shared antipathy from the US and a remain the watchword number of prisoners of war, is a fear of Kurdish separatism. However, this is unlikely to provide the basis for a sustainable alliance. Iranian suspicions of Saddam’s regime run far too deep for relations to become warm. Only ten years since the end of the Iran-Iraq war, popular antipathy towards the Baath regime in Iran remains sufficiently strong to render a genuine rapprochement inconceivable. Moreover, the new Iranian government is much keener to improve its relations with the West and the GCC countries than to ally itself with a pariah state.

Iraqi Kurdistan

Instability rules— The situation in northern Iraq remains extremely unstable following a renewal of hostilities between Massoud Barzani’s Kurdish Democratic Party (KDP) and Jalal Talabani’s Patriotic Union of Kurdistan (PUK) in October (4th quarter 1997, page 12). Although a cease-fire of sorts is being observed by the two groups, the prospects for a renewal of fighting remain high.

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—as Turkey bids to crush The recent conflict was largely inspired by Turkey’s desire to push the Kurdistan the PKK— Workers’ Party (PKK) away from the mountains on the Iraqi-Turkish border. To achieve this Turkey thrust some 8,000 troops, backed by armoured and air support, deep into Iraqi territory in September. At one stage, Turkish troops were reported to have penetrated some 200 km south of the border. Although there have been a number of similar operations in the past few years, none of these past incursions exceeded 50 km.

—with the help of One significant difference with previous conflagrations is the direct support the KDP— Turkey is giving the KDP. Initially, Turkey believed that the KDP could be used as a “policeman” in its battle with the PKK. However, the PKK is better equipped and better trained than the KDP, and Turkey has been sucked further into Iraqi territory in an effort to provide the KDP with adequate ground and air support.

—which has its own The picture has been complicated by the KDP’s bid to win back territory seized agenda by the PUK, which, in any case, is now being supported by the PKK. The PUK seized the opportunity created by the KDP’s distraction to launch a major northern thrust in October. This met with some success: the PUK was reported to have taken ground overlooking the key north-south supply route. Achieving control of this route is the ultimate prize for both groups since it guarantees some $2m per month in “taxes” from Turkish-Iraqi trade. The KDP’s monopoly on this trade—along with the long-standing personal and clan animosities between Mr Barzani and Mr Talabani—has been the major cause of friction between the two camps.

In November the KDP, backed by Turkish troops, launched a series of counter- attacks which succeeded in pushing the PUK back almost to its original position. With Iran entering the fray on the side of the PUK, the chances of a major escalation, possibly involving direct clashes between Turkish and Iranian troops, appeared high.

Peace calls are made— Some of the heat has been taken out of the situation by a call for peace from Mr Talabani on January 2nd. In a radio broadcast, he put forward a number of points aimed at “realising a comprehensive national reconciliation in the Kurdistan region”. Mr Talabani’s main proposal involves the establishment of a “transitional government”, involving both PUK and KDP members, which would have sole responsibility for the collection of tax and customs revenue.

—but the KDP is in no Mr Barzani has yet to respond directly to Mr Talabani’s proposals. Instead, he mood to compromise— issued his own “plan”, only one-and-a-half hours after Mr Talabani’s. This was largely a list of the KDP’s achievements over the previous year and lacked any concrete proposals for peace. Mr Barzani’s tenor is hardly surprising, given the strength of the KDP’s position. Having regained control of the supply routes, it has no incentive to bargain away its hard-won position.

—since it will be able to Turkey, which has come under strong pressure from a number of Arab states to call on a level of outside withdraw from the area, seems unwilling to leave the policing of the border support— area to the KDP. However, from its own perspective, a permanent military

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presence is undesirable. Hence, further support to the KDP, in the form of arms and training, is likely.

—which the PUK will be This in turn should enable the KDP to maintain its current superiority and the unable to match status quo is likely to survive for some months at least. The major uncertainty centres on Iran’s intentions. Should it decide to throw all its weight behind the PUK, the KDP might be permanently pushed back. However, as yet there is no indication that Iran wishes to become so deeply involved in Kurdish politics. Rather, it seems content merely to ensure that the PUK, which is a useful counterweight to its own Iraq-based dissidents, is protected from annihilation by a combined KDP-Turkish assault.

The chief protagonists are While protesting to the United Nations over the Turkish invasion (4th quarter invited to Baghdad— 1997, page 12), the Iraqi government has attempted to earn political capital from the situation. In late November the PUK and the KDP reportedly sent delegations to Baghdad for their first direct talks under government mediation since the Gulf war. The outcome of the talks has not been revealed, although it is believed that the two teams returned to Iraqi Kurdistan after agreeing to hold further talks in Baghdad at a later stage.

—though Saddam would Saddam Hussein has little real desire to bring about peace between the two prefer to see the fighting groups: the triumph of one group over the other would not suit his long-term continue— aim of regaining control over the area, and a state of permanent intra-Kurdish warfare would be welcome. Continued squabbling represents excellent propaganda for the value of central government control.

—for diplomatic as well as The fighting has also provided good propaganda opportunities at the regional domestic reasons level. Iraqi newspapers have been quick to highlight Turkey’s “American- Zionist”-inspired scheme which, according to the local Al-Qadisiyah, is “aimed at the Arab nations”. In fact, Turkey does not appear to have any designs on Iraq beyond the neutralisation of PKK bases in Iraqi territory. However, in the con- text of Turkey’s burgeoning military relationship with Israel, it is not surprising that Baghdad’s warnings have struck a chord with some Arab states (see The political scene). If Turkey’s military adventure facilitates even a partial diplomatic rehabilitation for Baghdad, Saddam will have cause to be satisfied.

Iraqi-UN relations

Relations remain on a The past quarter has seen yet another deterioration in relations between the downward spiral— Iraqi government and the UN Special Commission (UNSCOM). Recent tensions culminated in the expulsion of US members of the UNSCOM team, followed by the complete withdrawal of UNSCOM from Iraq. UNSCOM later returned, but Iraqi complaints about the national make-up of the inspection teams, combined with the issue of access to “sovereign” palaces, means that the threat of military action by the US remains considerable.

The crisis at first sharpened and then softened divisions on the Security Council between Russia, France and China, which would like an early lifting of sanctions, and the US and the UK, which continue to insist that Iraq is nowhere

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near meeting the requirements of Security Council Resolution 986. However, fundamental differences between the two camps remain substantial.

—aggravated by the Tensions between UNSCOM and the Iraqi government were severely aggravated UNSCOM executive by the publication in October 1997 of his debut report on progress in disman- director’s debut report— tling Iraq’s nuclear, chemical, biological and ballistic weapons programmes by UNSCOM’s executive director, Richard Butler (4th quarter 1997, page 13). The Iraqi government, while not expecting Mr Butler to grant it a clean bill of health, had hoped that his report would concentrate on the considerable progress made in dismantling its chemical and ballistic weapons programmes.

—which is scathing of Disappointingly for Iraq, however, while admitting that progress had been Iraqi intentions— made, the overall tenor of Mr Butler’s report was highly critical. His analysis of Iraq’s sixth “Full, Final and Complete Disclosure” was scathing. It failed to give “a remotely credible account” of their biological weapons programme, he said. Overall, Mr Butler felt that UNSCOM had been the victim of “long-term deception”.

—and prompts the US to Under the terms of Resolution 1115, adopted in June 1997, a more positive seek fresh sanctions report would have allowed the Security Council to resume reviewing the Iraqi sanctions every two months: it suspended such reviews in June because of the confrontations with the UNSCOM team. Instead, the report prompted the US government to attempt to impose fresh sanctions on Iraq. However, a UK-sponsored proposal, which sought to impose a travel ban on Iraqi military, security and defence industry personnel to other countries, met with a stiff response from Russia and France, which suggested that Iraq should have been accorded more credit for the progress it had made in its weapons of mass destruction disposal. The French ambassador went so far as to suggest that the nuclear file on Iraq should be closed.

After lengthy talks, the council agreed on a compromise resolution (1134) which stated UNSCOM’s “firm intention” to impose a travel ban on Iraqi officials should Mr Butler’s next report fail to confirm Iraqi co-operation. The resolution also insisted that the council could again be called into session to consider a travel ban whenever Iraqi obstruction of UNSCOM activities became unacceptable. However, in a sign of growing disunity, Egypt, Russia, France, China and Kenya all abstained from the motion.

Iraq’s expulsion of US These members of the Security Council fell back into line when Iraq unexpect- UNSCOM personnel— edly decided to expel the US element of UNSCOM’s personnel on October 29th. Iraq cited the infringement of sovereignty associated with Mr Butler’s intention to inspect presidential palaces for biological agents, and the domin- ation of the team by US personnel. In addition, it bemoaned the slow pace of the inspection process, and demanded that the Security Council move to the full lifting of sanctions in accordance with paragraph 22 of Resolution 687. The decision prompted Mr Butler to suspend UNSCOM operations in Iraq and withdraw his personnel from the country, leaving only a skeleton staff. In addition, the Iraqi move restored some cohesion to the UN Security Council, which was unanimous in its condemnation of the decision.

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—inspires a more The deployment of the US aircraft carrier Nimitz in the Gulf suggested that a dramatic move military strike on Iraq was imminent. According to information circulating among US and European military experts in the region, the US joint chiefs were prepared to launch a systematic bombing campaign lasting several weeks, tar- geting carefully selected Iraqi military, political and economic installations “of major material and moral value”. In Iraq, meanwhile, thousands of citizens descended on presidential palaces and other sites, apparently spontaneously, to offer themselves as “human shields”.

Russia convinces Iraq to Then, on November 21st, Iraq backed down, saying that it would allow back down— UNSCOM inspectors, including the US contingent, to return to Iraq immed- iately. At the UN, the Iraqi ambassador, Nizar Hamdoun, gave credit to Russian involvement, denying that the US military build-up in the Gulf had played a role in Iraq’s decision to back down. He said that, thanks to Russia, Iraq was now satisfied it had got “a better hearing all over the world” of its grievances about the inspection programme. Russia denied that it had offered any conces- sions, although Russian diplomats admitted that they had assured the Iraqis that they would continue to press for an early lifting of sanctions.

—and holds out the It also appears that Russia has convinced Iraq that the US’s insistence on the promise of an early lifting removal of Saddam Hussein before sanctions could be lifted will be dropped. of sanctions— Indeed, a subtle indication of this change of emphasis was delivered by the US secretary of state, Madeleine Albright, in December when she admitted that a debate “of some kind” on how and when to lift sanctions was now likely. As recently as March 1997, Mrs Albright had insisted that the embargo should stay in place until Saddam goes.

—but there are no Although the Iraqi government can consider this a major achievement, the US guarantees administration believes that Iraq is unlikely to meet all relevant resolutions while Saddam Hussein remains in power. It is also likely that, in extremis, Washington will invoke those paragraphs in Resolution 687 pertaining to human rights to ensure that the embargo remains in place.

UNSCOM’s headquarters Although Russian mediation averted the immediate prospect of a military strike, suffers a rocket attack— relations between Iraq and UNSCOM remain strained. This was underscored on January 2nd when the UNSCOM headquarters in Baghdad came under attack from rocket-propelled grenades. Damage to the headquarters was slight, and the identity of the assailants remains a mystery. The Iraqi government condemned the attack, blaming it on “hostile parties who aim at destroying relations between Iraq and the Special Commission”, and vowed to step up security around the building. The Baghdad offices of the World Health Organisation suffered a similar attack in October. At the time, the Iraqi authorities claimed that the assailants were Iranian, although no arrests were made (4th quarter 1997, page 14).

—while Iraq continues to Meanwhile, Iraq continues to insist that it will not allow weapons inspectors deny it access to access to palaces and other “sovereign” sites. The UN is equally adamant that “sovereign” sites— UNSCOM must enjoy unfettered access to all such sites. This point was under- lined on November 26th by the US defence secretary, William Cohen, who

claimed that Iraq was still concealing large stockpiles of two nerve agents, anthrax and VX, along with other biological agents. Mr Cohen claimed that the Iraqis may have as much as 200 tonnes of VX, theoretically enough to kill the world’s population. He also indicated that Washington’s military option remained alive, and that if activated it would be more than a token gesture.

—and complains of bias in The other sticking-point concerns the national make-up of the UNSCOM in- the national make-up of spectorate and in particular the presence of a former US Marines captain, Scott inspection teams— Ritter, in one of the inspection teams. The regime claims that Mr Ritter is a spy and has demanded his removal from UNSCOM, while simultaneously denying him access to military sites. This elicited an uncompromising response from the UN on January 14th. A Security Council statement “deplored” the Iraqi action and its “subsequent failure to fulfil its obligations” by providing inspectors with “full, unconditional and immediate access to all sites”.

—but Iraq’s interference Indeed, even France’s attitude to the regime appears to be hardening and it may have gone too far may be that Iraq has overstepped the mark. On January 15th a French foreign ministry spokeswoman described the decision to ban Mr Ritter’s team as “unacceptable” and suggested that the UN statement was justified. The stake that French firms have in Iraq’s upstream oil sector may give it an incentive to see sanctions lifted, but France also values its permanent seat on the Security Council. As such, it will not wish to see the authority of the organisation challenged to such a degree.

The third phase of the Noticeably more progress has been made on the oil-for-food front, although oil-for-food deal here too the path has been far from smooth. On January 6th the UN secretary- eventually begins— general, Kofi Annan, approved Iraq’s revisions to a plan for the distribution of food and medicine under the third phase of the UN-sponsored oil-for-food programme. Having secured this approval, Iraq’s oil minister, Amir Rashid, said that his country would be ready to resume exports within a few days. By mid-January, Mr Rashid said that his country had begun loading oil for export at its Mina al-Bakr terminal in the Gulf (see Oil and gas).

—following a lengthy The oil-for-food plan was renewed by the UN for a third six-month period on delay December 4th (Resolution 1143). Simultaneously, the Security Council agreed to consider changes to the procedures and monetary value of the oil sales during the first quarter of 1998. This did not satisfy Baghdad however, which promptly suspended its oil exports, amid accusations that the US was deliberately delaying the approval of humanitarian contracts by the UN Sanctions Committee.

Mr Annan calls for an The UN secretary-general has called for an increase in the size of the oil- increase in aid— for-food deal following his visit to Iraq in mid-January. In December Mr Annan described the amount of aid delivered under the current $2.14bn, six-month ceiling as “insufficient to address, even as a temporary measure, all the humanitarian needs of the Iraqi people”.

—but the proposition is France and Russia are understood to have asked that the amount be doubled likely to meet resistance— to $4bn per 180 days, although Mr Annan has refused to be drawn on a specific figure. However, two key parties do not seem particularly interested in

increasing the amount of aid: the US and Iraq. The US administration fears that such an increase will simply release more funds for the regime to reward its own supporters. Thus, in comments to the press in November, Mrs Albright said that Washington might be willing to consider an expansion of the oil-for-food deal, but only if Iraq began co-operating with UNSCOM activities. By linking the issues of oil-for-food and weapons compliance, the US has effectively undermined the chances of an early increase in the amount of aid, regardless of anything Mr Annan might say. Baghdad shows no sign of co-operating with UNSCOM to the requisite degree, and an increase in aid is therefore unlikely in the short term.

—and disinterest from Iraq Iraq’s continued obstruction of UNSCOM activities demonstrates its own am- bivalence towards the oil-for-food deal. The regime sees some value in the programme in so far as it releases government resources that had previously been used to buy basic supplies for the population. However, it is also aware that an increase in aid might dampen humanitarian pressure for an end to sanctions.

These attitudes do not necessarily preclude an increase in the oil-for-food plan. Pressure for an increase, dressed in the language of humanitarian concern, will come from Russia and France. These countries will seek to assure the Iraqi regime that such an increase would not rule out a full lifting of sanctions. Indeed, they are likely to argue that an increase would represent a further crack in the US’s hardline stance.

Economic policy and the economy

Sanctions continue The country remains crippled by the effects of sanctions; only a small amount to bite— of the money generated by the UN oil-for-food programme is allocated to improving conditions for the country’s productive sectors. The humanitarian picture remains grim, with UN supplies of food, and particularly medicine, sporadic and prone to bottlenecks.

—while policy fuels These shortages have contributed to inflationary pressures, which have also inflation been fuelled by government policy. The government does not have sufficient resources to cover all its expenditure and, in tandem with the sale of state assets, has resorted to printing money to cover the fiscal deficit.

The value of the dinar is According to research by the UN Office of the Humanitarian Co-ordinator in largely determined by Iraq, the primary determinant of the stability of the Iraqi dinar is no longer progress on oil-for-food confrontations over weapons inspection or remarks by senior US officials, but progress in the implementation of the oil-for-food deal. As such, the imminent start-up of the third phase of the oil-for-food deal suggests that the dinar will strengthen slightly against the dollar. The unofficial value of the dinar is currently ID1,500:$1. Nevertheless, the dinar will continue to come under pressure in the medium term. Most Iraqis prefer to keep their meagre savings in dollars, while businessmen require dollars for imported inputs.

Saddam eases pressure on Despite these fairly depressing fundamentals, Saddam Hussein sounded upbeat the private sector— about economic prospects at a cabinet meeting on December 14th. The

president expressed satisfaction that the private sector was “now in conformity with the people, with no increase in prices or speculations of quick profit ... The real problem of this sector lies in freedom of movement”. This does not necessarily mean an enhanced role for the private sector, but does suggest a temporary reprieve for “speculators” and “profiteers” who have been an obvious target for the government when inflationary pressures mount.

—while the Central Bank A further easing of government interference in the economy came on November removes some currency 13th when the governor of the Central Bank of Iraq, Isam Huwaish, announced restrictions that the bank had lifted certain restrictions on Iraqi citizens holding hard currency. The governor said that Iraqi citizens will now be able to hold foreign currency, exchange any remuneration they receive in foreign currency, lease property to foreigners, and work with foreign institutions and receive those salaries in a foreign currency. Mr Huwaish added that restrictions on Iraqis setting up private banks or money exchange institutions have also been included. Speaking on the occasion of the 50th anniversary of the Central Bank, Mr Huwaish said that the lifting of these restrictions will help to liberalise the exchange rate of the Iraqi dinar against the dollar. However, he gave no indication that the government was prepared to abandon the official exchange rate.

The regime blames the US Although the UN says that significant progress has been made in the delivery for hold-ups in medical and distribution of up to 95% of essential foodstuffs under the oil-for-food supplies— deal, only around 25% of medical supplies have reached Iraq during the second phase of the deal. The Iraqi government says the fault lies squarely with the UN sanctions committee, whose member states, particularly the US, have done everything possible to frustrate Iraqi medical purchases.

—an argument which Support for this view came from Dennis Halliday, the chief UN humanitarian finds support from the UN co-ordinator in Iraq, who said that although there were several other reasons that had compounded the delay in medical supplies, he sometimes found it “hard ... to understand the hesitations of the [sanctions] committee in New York”.

Malnutrition remains a Malnutrition continues to be a major problem for many Iraqis, particularly major problem— children. On November 12th Mr Halliday presented UN figures which showed “acute” and “chronic” malnutrition. This, he said, had “developed into some 1m children suffering from stunting”, a problem he believed to be “very serious and long-term”. Mr Halliday’s findings are supported by a nutrition survey published jointly by the Food and Agriculture Organisation (FAO) and the UN World Food Programme (WFP) on November 24th. The survey, conducted in June and July in Baghdad and Kerbala, showed that 32% of children under the age of five, numbering around 960,000, are chronically malnourished. Adult malnutrition is also prevalent. Of 1,278 adults tested by the FAO/WFP mission, 25% of men and 16% of women were considered chronically energy-deficient.

—exacerbated by a fall in Although agriculture has increased in importance since the imposition of sanc- agricultural production— tions in Iraq, and food production increased in 1995 and 1996, the FAO/WFP mission forecasts production this year to be around 13% below the 1995 level and 26% lower than in 1996. The reasons behind this decrease include rising

soil salinity and lack of irrigation water, a scarcity of farm machinery and other inputs, increased insect, pest and weed infestations, and the continuous use of land without proper replenishment of plant nutrients. Production of the main cereals in 1997 is estimated at 2.2m tonnes (less than one-third of which is from the north) and total production of vegetables at around 2m tonnes (only 25% from the north), compared with production of 3.2m-3.5m tonnes/year in 1991-95.

—as a parasite epidemic This sector’s problems are likely to be exacerbated by an epidemic of screw- takes hold worm, a parasite that is potentially fatal to livestock. According to the FAO, some 50,000 animals were affected by the parasite in 12 out of Iraq’s 18 gover- norates in December alone. The screw-worm generally affects cattle and sheep, but can also affect humans. The FAO said that a small number of cases affecting people had been reported in Iraq, and that it had recommended a two-year action plan to tackle the pest using chemical insecticides, costing some $7.3m. The organisation said that it had already allocated $400,000 to fighting the infestation and the Netherlands had donated a further $600,000. It added that discussions with financial institutions were under way.

Oil and gas

Iraq resumes oil exports— On January 14th Iraq resumed oil exports under the terms of the third phase of the oil-for-food agreement. Although positive for the Iraqi population, the news threatens to add more uncertainty to an already volatile oil market. In mid-January forward contracts for Brent Blend deliveries were trading at less than $16/barrel. Four months previously, Brent had been trading at more than $21/b.

—though a slack market Iraqi influence on international oil markets is especially volatile because of the will mean an increase in way in which the oil-for-food programme is structured. By setting a value, rather production than a volume, target, the UN has ensured that Iraqi export volumes fluctuate according to prices. In 1997, when Brent averaged about $19.30/b, Iraq exported an average of just over 700,000 barrels/day (b/d). But if present prices of about $16/b persist, Iraqi exports will need to average about 900,000 b/d to meet the $2.4bn target. Actual Iraqi exports in the next two months could be as high as 1.3m b/d because the UN requires that half the money is earned in the first three months of the programme. Iraq’s demand for a new aid plan means that one month of that period had already passed before exports started.

Russian and French firms By January 14th a total of 12 Iraqi requests for oil sales contracts, totalling are rewarded with about 61m barrels, had been approved by the UN. In keeping with Baghdad’s increased allocations— policy of rewarding “friendly” nations, French and Russian firms fared best. The French majors Elf Aquitaine and Total both had their volumes doubled from the second term of sales, to 10.8m and 12.2m barrels respectively, while the Russian trader Zarubezhneft was awarded 10.8m barrels, also twice as much as in the last round.

—while US and UK majors In contrast, the US major Mobil saw its contract cut by 25%, to 2.7m barrels. It suffer was unclear what volumes would be awarded to the other regular US lifters of

Iraqi crude, two private trading houses, Bayoil and Phoenix, and the refiner and trader Coastal. Bayoil, which lifted 3.6m barrels in the last phase, may escape punishment because it applies for Iraqi contracts from its Swiss base. British Petroleum and the Anglo-Dutch giant Royal Dutch/Shell were expected to be excluded from the current sales term, as they were under the second phase of the oil-for-food deal. Other European traders said they would delay the signing of contracts until February when reduced Iraqi prices, which are tied to Saudi formulae, come into effect.

The oil minister talks up On announcing the resumption of exports, the oil minister, Amir Rashid, also production capacity— said that Iraq was able to export three or four times more crude oil than the amount allocated by the UN. However, this figure is disputed by many. Accord- ing to the Cyprus-based weekly Middle East Economic Survey, sustainable production for Iraq is about 1.3m b/d, with surge capacity of about 1.6m b/d.

—although further input Nevertheless, in December Saadallah al-Fathi, a senior adviser at the oil from foreign firms will be ministry, said that Iraq is developing its production capacity, in order to reach required— 4.3m b/d in 2000 and 6.6m b/d in 2010. To this end, Mr Fathi said the country remained interested in signing joint production agreements with international oil companies in order to develop a number of new fields. He added that there were increasing opportunities for foreign participation in the areas of oil explor- ation and oil-associated engineering projects.

Most analysts are confident that Iraq will continue with its plans to open up the upstream sector after the oil embargo is fully lifted. Nevertheless, this reopening could be delayed if the post-sanctions UN arrangements, under which 30% of Iraq’s gross oil receipts are to be earmarked for compensation to Kuwait and other countries and individuals, continue to be implemented. If so, the ratio of output left will be greatly reduced, not only for the Iraqi government, but also for any potential foreign investors.

—as more provisional Nevertheless, provisional oil agreements with foreign firms have continued contracts are signed, apace. At a meeting in Hanoi in mid-October, the Iraqi deputy prime minister, with Vietnam— Mohammed Hamza al-Zubaidi, discussed plans for joint oil and rice production with senior Vietnamese officials. According to the Vietnam News Agency, Mr Zubaidi “agreed to reserve an oilfield with estimated reserves of 2bn barrels to be jointly exploited with Vietnam” once UN sanctions have been lifted. The Vietnamese state company, PetroVietnam, has previously expressed interest in the Amara oilfield in the south of the country.

—Russia— In early November the official Iraqi News Agency (INA) said that the Russian oil company Zardech is to conclude a contract for oil drilling in northern Rumailah oilfield, in southern Iraq, within the next few days. In a statement to INA, Zardech said that it was acting as a co-ordinator of Russian oil firms to execute projects for the development of the Iraqi oil industry within the framework of the 1995 Iraqi-Russian agreement.

Zardech, as part of a consortium with two other Russian oil firms, has signed a contract for the development of the west Qurna oilfield, second phase, at an

estimated investment cost of $3.5bn, and with an output capacity of 600,000 b/d over 23 years.

—and India India’s Oil and Natural Gas Corporation (ONGC) has expressed an interest in securing the production rights in Iraq’s Tuba oilfield. ONGC’s interest was con- veyed by India’s petroleum minister, Janeshwar Mishrato, to the parliamentary speaker, Saadoun Hammadi, during his visit to India on December 2nd. ONGC Videsh, a subsidiary of ONGC, has completed a technical proposal for work on the Tuba field.

The agreement with Iraq and Jordan have signed an agreement under which Iraq will supply Jordan is renewed and 4.8m tonnes of crude oil and refined products to Jordan in 1998, an increase of expanded— almost 7% compared with 1997. Iraq agreed to reduce the price of the oil to $16.80/b from $19.50/b last year, according to Jordan’s energy and mineral resources minister, Mohammed Salah al-Hurani. “We have agreed on a price ceiling of $16.80 ... but we will pay 50% of that price,” he told reporters in Baghdad following the signing of the agreement on December 29th. The Iraqi oil minister declared that the discount was a “bonus from ... President Saddam Hussein to the brotherly Jordanian people, which is $300m of the total sum”— although it also reflects lower world crude prices. Jordan will pay the remaining 50% of the cost in kind.

—but the US blocks The US government has refused to allow the sale of over $3m worth of spare pipeline repairs parts for the Iraqi-Turkish pipeline system, which handles the bulk of Iraqi oil exports, until Turkey agrees to store the parts. Earlier this year, Turkey had asked the UN Sanctions Committee to approve such a deal and Iraq has warned that without these spare parts there could be disruptions to oil exports via the northern route. The Sanctions Committee has approved the deal in principle, but the US is unwilling to endorse the sale until the Turkish company involved agrees to house the spare parts in Turkey, rather than Iraq. The Turkish firm insists that it should store the parts in Iraq, citing cost and logistical problems. The parts are for the Iraqi section of the pipeline.

Foreign trade and payments

The UAE expands Economic relations with the UAE are continuing to improve. Two medical commercial links at the shipments from the Emirates arrived at the Iraqi port of Umm Qasr in December expense of Jordan— and January, both gifts from the government to “the people and children of Iraq”. The UAE has also resumed direct telephone, telex and telegraph links with Iraq, while Iraqi businessmen say that visa rules have been relaxed. Baghdad traders maintain that Dubai is offering cheaper and better products than Jordan, their traditional source of imports. In December an Iraqi trade ministry source said that the UN had agreed to open a shipping line between Iraq and the UAE.

—although the kingdom However, Jordan can take heart from the approval in late December of eight continues to win contracts new contracts for Jordanian companies under the terms of the oil-for-food deal. The contracts were worth $10.9m and push the total value of Jordanian contracts under the deal to $77m.

France announces plan to France has announced its intention to open an office of the French-Iraqi Trade open a trade office Office in Baghdad. The head of the office, General Jeannou Lacaze, visited Iraq in mid-October as head of a French trade mission. The Iraqi vice president, Taha Yassin Ramadan, reiterated the regime’s desire to “give priority” to those countries and companies that displayed “positive stands”, once the embargo is lifted.

No payments are made on No payments have been made on Iraq’s massive foreign debt during the past external debt— three months. The government’s access to funds is severely limited while sanctions remain in place and what funds the regime manages to generate through oil smuggling will not be devoted to the payment of external debt.

—a problem that is In addition to the large sovereign debt owed, Iraq faces a Gulf war reparations exacerbated by bill estimated at $200bn. In October the UN Compensation Commission an- reparations bill nounced that it was paying $568m to 228,575 claimants. But these payments represent an extremely small percentage of total reparations claimed. A solu- tion to the reparations problem and the debt difficulties will almost certainly require a combination of rescheduling and forgiveness, but such negotiations will await a change of regime in Baghdad.

Quarterly indicators and trade data

Quarterly indicators of economic activity

1995 1996 1997 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Production: industry Prodn/day Crude petroleuma m barrels 0.55 0.55 0.55 0.55 0.55 0.65 1.11 1.05 1.22 1.21 Foreign trade & paymentsb Annual totals Exports fob $ m ( 424 ) ( 15 ) ( n/a ) Imports cif “ ( 616 ) ( 227 ) ( n/a ) Exchange rate End-Qtr Market rate ID:$ 3.217 3.217 3.217 3.217 3.217 3.217 3.217 3.217 3.217 3.217c

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Estimates. b DOTS estimates. c End-November.

Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics.

Trade with major partnersab ($ ’000; monthly averages) Exports to Iraq fob Germany France Japan UK US incl goods shipped to Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Jun foreign oil companies 1989 1990 1989 1990 1989 1990 1990 1991 1990 1991 Cereals & products 1 383 1,238 54 0 0 7 0 16,416 0 Textile fibres & waste 314 17 36 0 648 299 10 0 1,513 0 Chemicals 6,027 4,011 3,520 3,405 1,494 610 7,377 129 1,470 0 Rubber manufactures 691 285 383 161 8,715 735 288 0 15 0 Textile yarn, cloth & mnfrs 1,119 393 370 148 1,389 513 376 0 87 0 Iron & steel 17,530 5,768 8,347 2,696 5,047 4,061 2,304 5 1,663 0 Metal manufactures 7,826 3,309 1,404 581 987 876 1,727 22 535 0 Machinery incl electric 41,027 29,113 14,047 26,738 14,963 7,892 19,933 134 11,255 0 Transport equipment 8,748 7,825 1,331 1,096 3,997 3,919 550 23 10,107 0 Clothing 170 53 234 54 1 4 100 0 3 0 Scientific instruments etc 2,124 1,879 973 2,332 1,718 902 4,000 4 1,028 0 Total incl others 97,499 61,426 39,912 45,106 40,880 20,947 43,635 649 59,338 30 % share in Iraq’s imports 1989 & 1990c 13135955881311

US France Italy Germany Japan Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports from Iraq cif 1989 1990 1989 1990 1989 1990 1989 1990 1990 1991 Fruit, vegetables & products 190 30 100 78 14 26 61 19 n/a n/a Hides & skins, raw 0 0 85 71 771 484 0 0 n/a n/a Total excl petroleum, incl others 2,234 1,656 1,204 342 2,147 2,019 1,304 1,736 88 17 Petroleum & products 210,846 268,955 69,859 34,024 54,038 27,032 10,945 2,932 78,513 0 % share in Iraq’s exports 1989 & 1990cd 192964531098

Note. Commodity totals are the sum of items shown in the trade accounts and may be incomplete. a UN trade sanctions have been in place since August 1990. b Figures from partners’ trade accounts. c Calculated from Iraq’s estimated trade statistics. d Including petroleum.

Sources: UN, External Trade Statistics, series D; UK HM Customs & Excise, Business Monitor, MM20; IMF, Direction of Trade Statistics, yearly.