At a Glance: 2001-02

COUNTRY REPORT

Iraq At a glance: 2001-02

OVERVIEW The Iraqi regime, led by Saddam Hussein, faces few and diminishing external threats. The country’s relations with its neighbours and the Arab world are expected to improve steadily. The UN Security Council remains divided over how to deal with Iraqi non-observance of its resolutions. Sanctions will remain in place, but may well soften. On the domestic front, attention has focused on the succession process and the rivalry between the president’s sons. However, Mr Hussein currently shows no sign of loosening his grip on power, and the regime will remain united while he is president. Economic policy and foreign trade will continue to be bound by the dictates of UN sanctions and the oil-for-food programme, although burgeoning oil- smuggling revenue gives the government some room for manoeuvre. Iraq’s import volumes will suffer from rises in world non-oil commodity prices in 2001-02, but increased oil production will help to keep export values high. Key changes from last month Political outlook • The president’s elder son, Udai, has made increasingly reckless attempts to reassert authority in the ongoing rivalry with his brother Qusai. The EIU expects this trend to continue, with Udai presenting a growing threat to Qusai’s ascendancy, and hence to regime stability. Economic policy outlook • Iraqi economic policy will centre on the erosion of UN sanctions and the expansion of oil-smuggling routes. Economic forecast • Our oil-price forecast has been revised upwards from our previous report. We now expect the price of Dated Brent crude to average US$24.25/b in 2001 and US$23.06/b in 2002. However, we have revised our forecast for Iraqi oil production downwards, to an average of 2.8m barrels/day in 2001 and 3m b/d in 2002.

February 2001

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ISSN 0269-5502

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Iraq 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2000-01 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Iraq-UN relations

20 Economic policy

22 The domestic economy 22 Economic trends 26 Oil and gas

29 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 22 The oil-for-food programme 24 Status of humanitarian contracts 26 Oil production, IEA data 27 Oil production, MEES data

List of figures

6 Crude oil production 6 Foreign trade

EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001

Iraq 3

Summary

February 2001

Outlook for 2001-02 Factional rivalry within the elite will increase as the president, Saddam Hussein, attempts to engineer his son Qusai’s succession. Iraq will continue to improve its regional political position, although a full lifting of sanctions would require positive action from the UN Security Council. This in turn would need either substantive Iraqi co-operation with UN weapons inspectors or a major change in the attitude of the US. The EIU does not expect either of these to occur, and sanctions will therefore remain in force throughout the forecast period. We have reduced our forecast for oil production to reflect more severe damage to oil reservoirs than we previously anticipated, but economic growth will remain high in absolute terms. Inflationary pressures will start to moderate. Exports will stay firm and the current account will record small surpluses.

The political scene Stories generated by the opposition claim that Mr Hussein has suffered a stroke. This seems unlikely. Saddam’s elder son, Udai, has launched an attack on “sectarian discrimination” in Iraq. The Iraqi army briefly invaded the Kurdish north, but withdrew without firing a shot. Iraq is alleged to have restarted oil exports to Syria via the Kirkuk-Banias pipeline. Ties with Egypt and Jordan have improved, although relations with Iran have suffered a setback. Preliminary indications suggest that the new US administration will continue the policy of “containment” of Iraq.

Economic policy The government has attempted to wrest control of some of its oil-export earnings from the UN by introducing a surcharge on crude exports. This has not had the desired effect, but the policy may yet bear fruit. Smuggling has continued unabated. The governor of the Central Bank of Iraq, Isam Rashid Huwaish, has described some of the constraints affecting monetary policy.

The domestic economy The UN’s oil-for-food programme has suffered from the suspension of oil exports. Even prior to this, the programme was continuing to experience serious structural problems. The water, power and telecommunications sectors are in a particularly bad state, and oil production capacity has also suffered. Royal Dutch/Shell has held talks with the government about development of the Ratawi oilfield.

Foreign trade and A free-trade agreement has been concluded with Egypt, but is unlikely to be payments implemented before sanctions are lifted. A similar agreement has been signed with Syria, and a deal with Saudi Arabia implemented. Turkey is pressing for compensation from the 1990-96 closure of the Kirkuk-Ceyhan oil pipeline.

Editors: Tristan Cooper (editor); Merli Baroudi (consulting editor) Editorial closing date: February 1st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001 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 election March 27th 2000

Head of state President, currently Saddam Hussein, elected by the Revolutionary Command Council (RCC), the highest national authority. The vice-president is Taha Yassin Ramadan

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 Mohammed Hamza al-Zubaidi Hikmat al-Azzawi

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 al-Azzawi Foreign affairs Mohammed Said Kazem al-Sahhaf Health Umid Midhat Mubarak Higher education & scientific research Fahad Salim al-Shaqra Housing & reconstruction Maan Abdullah Sarsam Industry & minerals Adnan Abdel-Majid Jasim Interior Mohammed Zimam Abdel-Razzaq Irrigation Mahmoud Diyab al-Ahmed Justice Munder Ibrahim al-Shawi Labour & social affairs Shabib Lazem al-Malki (acting) Military affairs General Abdel-Jabbar Khalil Shanshal Oil Amir Mohammed Rashid Trade Mohammed Mahdi Saleh Transport & telecommunications Ahmed Murtada Ahmed Khalil

Speaker of the National Assembly Saadoun Hammadi

Central Bank governor Isam Rashid Huwaish

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Economic structure

Annual indicators

1996a 1997a 1998a 1999a 2000a GDP (US$ bn) 8.3 10.8 13.7 19.3 26.7 Real GDP growth (%) 0.0 40.0 35.0 18.0 4.0 Consumer price inflation (av; %) 225.0 150.0 140.0 135.0 100.0 Population (m) 20.6b 21.2bc 21.8 22.5 23.1 Exports of goods fob (US$ m) 950.0 4,414.5 6,946.0 12,044.7 18,832.5 Imports of goods fob (US$ m) 1,457.0 2,843.2 4,425.4 7,687.2 12,074.9 Current-account balance (US$ m) –532.0 118.7 –49.7 33.8 315.1 Total external debtd (US$ bn) 111.5 117.7 124.0 130.5 138.7 Debt-service ratio, paid (%) 0.0b 0.0b 0.0b 0.0b 0.0b Exchange rate (av; ID:US$) 0.311b 0.311b 0.311b 0.311b 0.311b

February 2nd 2001 ID1,700:US$1 (black-market rate)

Origins of gross domestic product 1993 % of total Components of gross domestic product 1993 % of total Agriculture 6.1 Private consumption 72.3 Industry 13.1 Government consumption 13.9 Oil 11.4 Gross fixed capital formation 14.5 Services 80.8 Change in stocks 1.0 Total 100.0 Exports of goods & services 1.3 Imports of goods & services –3.0 Total 100.0

Main destinations of exports 1999e % of total Main origins of imports 1999e % of total US 56.4 France 19.2 Netherlands 12.3 Australia 18.0 Japan 9.4 China 12.5 France 7.6 Germany 8.4 a EIU estimates. b Actual. c Iraqi government census. d Estimates of Iraqi debt are extremely dubious. Press reports have indicated figures both higher and lower than EIU estimates. e Derived from partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators

1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Sectoral trends Crude oil Productiona (m barrels/day) 2.48 2.51 2.81 2.29 2.32 2.76 2.79 2.40 Spot prices, Kirkuk-37 (US$/barrel) 10.03 13.91 19.47 23.08 25.51 24.21 26.18 26.21 Foreign tradeb (US$ m) Exports fob 1,305 1,611 2,473 3,349 2,303 1,974 n/a n/a Imports cif –359 –304 –364 –504 –327 –320 n/a n/a Trade balance 946 1,307 2,109 2,845 1,976 1,654 n/a n/a Exchange rate ID:US$ (end-period) 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 ID:US$ (av) 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 0.3109 a Estimates. b DOTS estimates. Sources: IEA, Monthly Oil Market Report; Oil Market Intelligence; IMF, International Financial Statistics; Direction of Trade Statistics.

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Outlook for 2001-02

Political outlook

Domestic politics Having survived concerted domestic and international efforts to destabilise it over the past decade, the Iraqi regime is unlikely to crumble during the forecast period. The president, Saddam Hussein, has learnt to live with the comprehensive international sanctions imposed after the Gulf war, with an extensive smuggling network bypassing the restraints that had threatened to undermine his domestic security operations and the well-being of his inner circle. His most important external foes—the US, the UK and several states in the region— appear to have recognised that their efforts to replace him are unlikely to succeed, and have settled instead for keeping Iraq “boxed in”. The outlook for the regime thus seems less threatening than it has done for some time.

Mr Hussein relies on the support of several overlapping security services, which have demonstrated their ability to uncover the most carefully prepared coup plots. Their brutal methods have enabled them to crush even the larger unrest that has come to the fore in recent years, generating a reputation which intimidates all but the most determined from organising against the regime. This is not to say that Mr Hussein has complete command of the country. The three northern provinces are in effect detached from the Iraqi state and remain under Iraqi Kurdish control—a constant reminder of the regime’s relative impotence. In the south of Iraq government control is patchy, with some parts treated as no-go areas, especially at night. Reports of unrest within and between units of the Republican Guard, and among certain tribes in the Sunni Muslim centre of the country, have been augmented by recent accounts of attacks on ruling Arab Baath Socialist Party officials in rural areas.

However, although serious, these problems are manageable. The Special Republican Guard and other security services have long since eclipsed the Republican Guard as the trusted protector of the regime. Indeed, few regular Republican Guard units still have access to live ammunition. Tribal unrest is more alarming, but is likely to remain limited to specific grievances over the distribution of government largesse, rather than developing into wider hostility. Attacks on Baath Party officials have grown common in the Shia-dominated south, but would only be considered serious if they spread into central areas on a sustained basis.

The most serious threat to Mr Hussein’s position will come from the fractious politics of Iraq’s highly competitive elite. In particular, the president’s efforts to raise the profile and increase the authority of his younger son, Qusai, will continue to cause considerable resentment. In September the president appointed Qusai head of a newly formed family council, giving him a quasi-formal mechanism for accession to the Iraqi presidency. Mr Hussein’s elder son, Udai, is understood to be particularly displeased by his sibling’s elevation and has attempted to reassert some authority. He has gone about this in a fairly reckless manner, however, and most senior regime members would far rather have Qusai on the Iraqi “throne”, than Udai. Nevertheless, with his 60,000-strong

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quasi-private army, “Saddam’s Fedayeen”, at his disposal, Udai will remain a dangerous and potentially destabilising element in the Iraqi succession.

The president’s goal must be to reinforce Qusai’s position, ensuring a smooth transfer of power in the long term, without seriously alienating either Udai or other senior members of the ruling family. Managing these contradictory pressures will be the most serious domestic political challenge facing the president over the next two years. In the event of Mr Hussein’s death, there is a significant risk that Udai will mount a challenge to Qusai’s succession. The EIU would expect Qusai to win this struggle, but the conflict has the potential seriously to undermine elite cohesion, ushering in a new period of political uncertainty in Iraq.

International relations While Mr Hussein faces few external threats, he will continue to seek a means to escape the isolation imposed on Iraq. The country’s regional position is far stronger now than a year ago, with improvements in relations with Egypt, Syria, Turkey, and Jordan in the past quarter. The trickle of business delegations to the Iraqi capital has turned into a flood, and of the six Gulf Co-operation Council (GCC) member states, only two, Saudi Arabia and Kuwait, lack diplomatic representation in Baghdad.

Each new embassy that opens in Baghdad represents an important political victory for Mr Hussein, and confirms the continued “fraying” of sanctions. However, a full lifting of the embargo will require positive and unanimous action from the UN Security Council. Consequently, most observers have been attempting to forecast the attitude likely to be adopted by the new US administration led by George W Bush. Statements of intent have been few, but it already appears that a radical change in US policy is unlikely. Rather, a “re- energised” sanctions regime, as the new secretary of state, Colin Powell, calls it, will concentrate on denying the Iraqi regime access to military imports, while broadening the range of genuinely humanitarian inputs. The new administration is unlikely to forgo the core demand that UN weapons inspectors return to Iraq and begin credible inspections before sanctions are suspended. The Iraqi regime may flirt with this possibility, and inspections could eventually begin. However, the regime will not give up what remains of its weapons programme willingly, and relations with the inspectors would be likely to dissolve into stale- mate once more. In the meantime, the regime will look to Russia, France and China for support. However, these states, while keen to have sanctions removed, will ultimately be able to offer little more than moral support. Consequently, we expect sanctions to stay in force in 2001-02, although they may well continue to soften. Their effect will also be diluted by increasing levels of informal trade.

Economic policy outlook

Policy trends Fiscal and monetary policy will remain erratic and driven by political exped- iency. Moreover, with sanctions set to stay in place, policy will continue to be bound by the UN’s oil-for-food programme, which permits Iraq to sell oil to ease its humanitarian crisis. UN Resolution 1284 of December 1999 introduced a number of reforms to the programme, some of which have already been

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implemented. These changes should have a positive impact on policy formulation and execution. Streamlining the imports approval process, for example, should help to ease the planning difficulties currently caused by long delivery delays, while the decision to allow Iraq to spend an unspecified portion of its export earnings on domestically produced goods will—if followed through—inject additional demand into the local economy. However, the impact of the reforms should not be overstated. The UN will continue to hold Iraq’s oil earnings, denying it control of its external accounts and severely curtailing its fiscal and monetary options. Iraq has recently attempted to reassert some of its authority by insisting that oil lifters pay a “surcharge” of 40 US cents/barrel. This has led to the disruption of Iraqi oil exports, but the policy may ultimately pay dividends for the government. Major oil companies may be willing to work with the concept of a surcharge and, as the UN admits, stopping the practice will be almost impossible.

Fiscal policy Fiscal policy, such as it is, will remain largely detrimental to the country’s economic health. There is no meaningful taxation system in Iraq, and any attempt to impose one now would be unduly provocative. Although oil revenue has declined sharply since 1990, it is sufficient to meet the government’s greatly reduced economic commitments. Smuggled oil revenue sustains the elite and its extended retinue, while officials at all levels are allowed to collect their own “taxes” in the form of bribes. The cabinet periodically announces fiscal initiatives, such as providing cheap loans to parastatals, to kick-start growth, but these are rarely pursued. Even where the loans are made, little of the money finds its way into productive sectors of the local economy. The government has not published a budget outturn since the mid-1980s.

Economic forecast

International assumptions Iraq will suffer from sharp increases in world non-oil commodity prices in 2001 and 2002, of 7.6% and 12.4%, respectively. This is significant, as Iraq is heavily import-reliant. The country will be particularly affected by the projected jump in the prices of food, feedstuffs and beverages. Furthermore, the forecast decline in world oil prices will limit Iraq’s ability to pay for imports.

At its January meeting OPEC agreed to reduce its crude oil production limits by 1.5m barrels/day in order to boost prices. The benchmark Dated Brent had fallen to under US$22/barrel in mid-December. Prices have since bounced back, but, as US demand slows and stocks are replenished, we expect them to level off to an average of around US$24/barrel and US$23/barrel in 2001 and 2002, respectively.

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International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 5.0 3.9 4.1 US 4.2 5.1 2.5 3.1 EU 2.4 3.3 2.8 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 118.0 114.5 US$:€ 1.07 0.92 1.00 1.09 SDR:US$ 0.731 0.759 0.754 0.727 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.50 0.50 US$ 3-month commercial paper rate 5.18 6.32 5.63 5.65 Commodity prices Oil (Brent; US$/b) 17.9 28.4 24.3 23.1 Total non-oil commodities (% change in US$ terms) –13.4 2.1 7.6 12.4 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 10.8 14.2 Industrial raw materials (% change in US$ terms) –4.2 14.6 3.7 9.9 Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Economic growth The absence of economic data for much of the past two decades makes it impossible to assess GDP with any accuracy. As a guide, we expect real growth to reach 9% in 2001, falling to 7% in 2002. This forecast is in line with our projections for Iraqi oil production, which remains uncertain. A report by a team of UN-appointed oil experts who visited Iraq in January 2000 points to a sector in urgent need of investment. The report predicts an annual decline in production of 5-15%, unless immediate remedial action is taken. Other observers are starting to share this assessment, as details of the damage to reservoirs begins to emerge. Notwithstanding an expected acceleration in the delivery of spare parts for this vital sector, we expect oil production to increase only mar- ginally in 2001, to around 2.8m b/d. Assuming that the process of infrastructure improvement continues in 2002, a 7% increase to 3m b/d seems likely.

It should be noted that Iraq’s high GDP growth is taking place from a low base; in real terms, the economy will be smaller than in 1989, despite a significant rise in the population. The likelihood of sharp geographical variations should also be noted: the three northern governorates—where humanitarian relief is administered directly by the UN and associated agencies—will continue to benefit from a more efficient and equitable distribution process. Humanitarian conditions in these areas have improved enormously since the advent of the oil-for-food agreement, boosting private-sector confidence, and generating construction and even some light manufacturing activity.

Inflation Inflation will remain high over the forecast period, but price growth should ease, as increased supply under the oil-for-food programme reduces shortages. In the absence of national data, anecdotal evidence bears out our suggestions that inflation is slowly falling, and is now under 100%. We expect inflation to

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average 80% in 2001, falling to 60% in 2002. The inflation rate is volatile, rising sharply when the distribution network breaks down or political crises threaten the supply system.

Exchange rates The official exchange rate will remain at ID0.311:US$1, although at some 5,300 times the black-market rate, it will not reflect the currency’s true value. Reform to the exchange rate is unlikely while sanctions are in place, as the UN restrictions hold Iraq’s legal foreign-currency earnings in an external escrow account. The black-market rate, which currently stands at ID1,640:US$1, will reflect conditions in the local black market, rather than the state of the economy as a whole.

The black-market currency rate will strengthen slightly against the US dollar, as higher prices for smuggled oil exports increase the supply of foreign currency. However, the dinar’s value will continue to fluctuate in line with political shocks, as well as the government’s ill-judged attempts to inject demand into the local economy.

External sector While sanctions remain in place, the dictates of the oil-for-food programme restrict Iraqi import spending to under 70% of the country’s export earnings, with the balance financing payments to the UN compensation fund and other services costs, such as use of the Turkish oil-export pipeline. However, with levels of informal trade—particularly oil smuggling—increasing, the current account is fluctuating outside of these boundaries. Based on our oil-price and production assumptions, we expect Iraq’s total (legal and illegal) exports to earn US$18bn in 2001, rising to US$18.5bn in 2002, as lower oil prices are more than offset by increased production. This will produce current-account surpluses of US$421m in 2001 and US$422m in 2002.

Forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth 18.0 4.0 9.0 7.0 Consumer price inflation (av) 135.0 100.0 80.0 60.0 Oil production (’000 b/d; av) 2,523c 2,520 2,800 3,000 Exports of goods fob (US$ bn) 12.0 18.8 18.0 18.5 Imports of goods fob (US$ bn) 7.7 12.1 12.4 12.7 Current-account balance (US$ bn) 0.0 0.3 0.4 0.4 % of GDP 0.2 1.2 1.6 1.6 External debt (year-end; US$ bn)d 130.5 138.7 146.5 154.8 Exchange rate (ID:US$; black-market; av) 1,800 1,700 1,600 1,500

a EIU estimates. b EIU forecasts. c Actual. d Estimates of Iraqi debt are extremely dubious. Press reports have indicated figures both higher and lower than the EIU estimates.

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The political scene

The president is rumoured Iraq’s domestic political scene has been marked by further speculation about to have had a stroke the health of the president, Saddam Hussein, and more energetic political activity from his elder son, Udai. Relations with regional states have improved, with the notable exception of Iran.

Rumours of Mr Hussein’s ill-health have continued to circulate, following speculation that the Iraqi president is receiving treatment for lymphatic cancer (August 2000, pages 15-16). According to the Iraqi opposition group, the Supreme Council for the Islamic Revolution in Iraq (SCIRI), the president suffered a stroke following a military parade in Baghdad on December 31st and was rushed to the intensive care unit of a Baghdad hospital. The story was carried by a number of Arabic newspapers, as well as the London-based Sunday Telegraph, which added “confirmation” of the story from “military experts” in Baghdad. According to the Sunday Telegraph, Mr Hussein complained of chest pains following a five-hour salute of his military forces. The Telegraph says that he was taken to Ibn Sina, a hospital reserved for VIPs within the presidential palace compounds, where he was treated by his personal surgeon, Dr Aziz Shukri, and his team of eight doctors, including a cardiologist.

This does not quite fit with a report carried by the London-based, and Saudi- financed Al Sharq al-Awsat, which insisted that the president had merely fainted at a banquet following the parade. However, the volume of reports appears to have been enough to prompt the Iraqi leader into a number of television appearances in an effort to dispel the rumours. Mr Hussein appeared to be in rude health in all of these appearances—one a direct televised address to commemorate the 80th anniversary of the formation of the country’s armed forces. However, opposition sources said that it was impossible to tell whether the speech was live or pre-recorded. They claimed that other footage, for example of Mr Hussein chairing a cabinet meeting, was from several years earlier.

This is probably little more However, many analysts attribute the speculation to wishful thinking, rather than wishful thinking than hard evidence. According to one experienced observer, Mr Hussein’s fainting fit may well be related to benign tumours on the soles of his feet, pain from which would have been exacerbated by five hours standing through a military parade. Nor is there any sign that Baghdad is on high alert, something one might expect if the president really had suffered a stroke. Neighbouring countries such as Syria, Jordan and Iran have shown little interest in the story.

There is more high-profile Rumours of the president’s imminent demise have, however, coincided with activity by Udai Hussein further attempts by Mr Hussein’s eldest son, Udai, to raise his political profile. In recent years Udai has suffered from the meteoric rise of his younger brother, Qusai, reportedly Saddam’s heir-apparent, and the recently appointed head of a family council, designed to take over the running of the country should Mr Hussein become incapacitated (November 2000, page 13). This only appears to have made Udai more determined and outspoken. In late December Udai made his first appearance at Iraq’s National Assembly, following his election to the institution in March 2000. Ironically, given his family

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background, Udai’s address to the Assembly called for greater progress towards multi-party democracy in Iraq. He claimed that it had always been his father’s intention to introduce such a system, but these plans had been stymied by the impact of sanctions. Udai then rounded on the Assembly itself, which he accused of failing “to reach a level which makes it an effective body and different from other parliaments”. Udai’s criticism was undoubtedly intended primarily for the speaker of the National Assembly, Saadoun Hammadi, whose job Udai was annoyed not to have won when he was elected to the parliament in March (May 2000, pages 12-13).

Udai condemns “sectarian Udai, who owns the Babel newspaper and the popular Shabab television chan- discrimination” in Iraq nel, then directed his criticism towards a variety of ministries. He was scornful of the education ministry’s efforts to end Iraq’s “brain drain” and criticised it for deepening class divisions by creating new types of schools. The trade ministry also came under attack, with Udai accusing it of importing low-quality goods under the oil-for-food agreement. Most controversially, Udai condemned the Ministry of Endowments and Religious Affairs for what he termed “sectarian discrimination” in failing to build sufficient mosques in areas inhabited by Shia Muslims. The foreign ministry was accused of failing fully to exploit sanctions fatigue among other states to Iraq’s advantage. Finally, Udai accused the health ministry of selling medicines generated by the oil-for-food programme on the black market, an activity he himself has often been accused of.

For a member of Iraq’s Sunni Muslim-dominated elite to draw attention to Iraq’s sectarian divide so publicly is highly unusual. Iraq’s Shia majority has long been excluded from the upper reaches of the political pyramid. The southern areas of Iraq, where the Shia are concentrated, have often been the scene of political ferment, most notably in the immediate aftermath of Iraq’s eviction from Kuwait in 1991, when a Shia uprising almost led to the collapse of the Baathist regime. Rumblings of discontent have been felt in the south ever since, particularly when the regime has interfered in Shia religious affairs. Udai’s reference to official religious policy therefore appears particularly reckless. It was notable that none of the official media, save the organs that he owns, carried his remarks on this topic.

The attack is a high-risk Udai’s motivation is difficult to gauge. Ever since a near-fatal assassination strategy attempt in 1996, the 36-year-old has been attempting to recast himself as a “people’s champion”, using his media outlets to launch campaigns against various ministries. These campaigns have generally been concerned with relatively benign issues, such as power supply or sanitation. The lurch into the realm of sectarian politics is without precedent. Even the accusation levelled at the health ministry is high-risk, exposing the type of venality that sustains the regime. Given that his father is unlikely to have sanctioned this verbal assault—the silence from the official media appears to confirm this—it suggests a fairly desperate attempt by Udai to regain political attention. Alternatively, Udai may believe that his father is too preoccupied with his own health problems to pay much attention.

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Qusai maintains a Assuming that the Iraqi president is not mentally incapacitated, Udai can ex- dignified silence pect a fairly severe reprimand. It is possible that he is attempting to force a con- frontation with Qusai, who remains his father’s closest confidante and, according to most analysts, the heir to the Iraqi presidency. This showdown has so far failed to materialise, despite a series of provocative acts by Udai (November 2000, pages 14-15). Qusai, who is a cooler head than his brother, controls the Special Republican Guard as well as access to the regime’s foreign bank accounts, and can probably afford to bide his time. He may believe that statements of the type recently made by Udai will only remind other senior regime figures of Udai’s recklessness and ultimate unsuitability for the presidency.

The Iraqi army briefly Meanwhile, fears that the Iraqi army would launch an offensive into the invades Kurdistan Kurdish north of the country were realised in December, although the venture was short-lived. On December 9th two Iraqi battalions and an infantry brigade pushed 5 km into territory held by the Kurdish Democratic Party (KDP). KDP radio reported that the Iraqi forces were deployed briefly opposite the town of Baidrah, some 60 km from Dohuk, but withdrew to Iraqi government territory on December 11th. No clashes with KDP forces were reported. A KDP spokesman said that while his organisation was committed to a peaceful and just settlement of the Kurdish cause, any attempt by the Iraqi army to return to the region would be “fully confronted”. Ironically, it was the KDP which invited Iraqi government forces into the region in 1996 in a bid to turn the military tide against its long-time Kurdish rival, the Patriotic Union of Kurdistan (PUK) (October 1996, page 16).

The two main Kurdish The recent incursion, although brief, appears to have been enough to con- leaders hold talks centrate Kurdish minds. In mid-January the leader of the PUK, Jalal Talabani, paid a visit to his KDP counterpart, Marsoud Barzani, for talks. Details of the meeting are sketchy, although one source said that Mr Barzani had agreed to remove the KDP’s “prime minister”, Kusrat Rasul Ali, from his post. A person- ality clash with his PUK opposite number has been a major stumbling block to administrative co-operation between the two organisations.

Both leaders will be conscious of the current vulnerability of the Iraqi Kurdish position. While minor Iraqi government incursions into Kurdish territory have been recorded since 1996, the latest trespass comes at a pivotal moment for US policy in the region, as the new US foreign policy team begins to draw up its priorities. It is not clear how strong the new US administration’s commit- ment to Kurdish protection will be. Mr Hussein will have been pleased that his brief incursion drew no official US response.

Turkey remains the main Kurdish politics itself remains as confused as ever. While Mr Talabani and powerbroker Mr Barzani have agreed to keep talking to each another, it was symbolic of the fundamental mistrust between the two that Mr Talabani was on his way to Ankara for talks with Turkish officials when he stopped off to see Mr Barzani. Turkey remains the main powerbroker in the region, and has recently been providing the PUK with arms and other assistance in return for its help in reining in the Turkish Kurdish group, the Kurdish Workers’ Party (PKK).

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The Iraqi government cannot afford to be dismissive of Turkish influence in Iraqi Kurdistan, and this may yet keep it from reinvading the northern provinces. While both Iraq and Turkey are keen to squeeze the Kurds wherever possible, Turkey is preoccupied with the PKK and is thus willing to support the PUK (or the KDP) to keep it hemmed in. A major Iraqi assault against the PUK or KDP would not, under the current configuration, be welcome to Ankara.

Turkey sends an Despite these complexities, or possibly because of them, Iraq’s relations with ambassador to Baghdad Turkey have, broadly speaking, continued to improve over the past quarter. In early January Turkey appointed an ambassador to Baghdad, a significant move, given that diplomatic relations were unceremoniously downgraded following the Gulf conflict of 1990-91. Turkey is even talking of opening a new border gate in the 6-km strip of no-man's land between Syria and Iraqi territory under KDP control. That would open a direct land link between Turkey and the Iraqi regime, and simultaneously cut the KDP out of the lucrative trade in smuggled oil goods.

In fact, Turkey’s attitude to this oil trade is ambivalent. While it tends to distort the Turkish retail market for oil products—some estimates suggest that up to one-quarter of the Turkish market for diesel and fuel oil is supplied from Iraq— the supply, being smuggled, is cheap. There are other problems in Turkish-Iraqi relations. Turkish logistical support for the US-UK aerial sorties over northern Iraq, not to mention Turkey’s periodic invasions of the northern Kurdish mountains, will not quickly be forgotten by the regime in Baghdad. Turkey’s refusal to enter into tripartite discussions with Iraq and Syria over water sharing is also likely to cause tension. A Turkish claim for compensation for losses sustained because of sanctions is also unlikely to improve bilateral ties— if approved, the claim will be paid for by Iraqi oil revenue (see Foreign trade and payments).

Iraq is alleged to have Ties with Syria are less complex, and are certainly improving. There are strong started exporting oil to indications that the Syrian-Iraqi pipeline, running from Kirkuk to Banias, has Syria been re-opened, in defiance of UN resolutions (see Oil and gas). Industry observers reported a sharp increase in Syrian crude exports in November, suggesting that Syria was substituting Iraqi crude for its domestic needs. Other reports suggest that Syria has lifted travel restrictions on its citizens’ travel to Iraq. Previously, Syrian passports used to carry the legend “not valid for Iraq”. This is a further example of the rapid process of détente witnessed between the two erstwhile Baathists rivals over the past couple of years. Other measures include the opening of an Iraqi interests section and an Iraqi Airways office in the Syrian capital, Damascus, as well as the re-opening of a rail link between Mosul and Aleppo.

Ties with Egypt improve Relations with Egypt have also recovered from Iraq’s sharp criticism of a pan- Arab summit held in Cairo in mid-October (November 2000, pages 18-19). The summit, which was organised by Egypt, was intended to formulate a common Arab position towards the violence between Palestinians and Israelis, but was condemned by Iraq as “weak and suspect”. Any hurt that Cairo may have felt at this description seems to have been quickly forgotten. In mid-January the

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Iraqi vice president, Taha Yassin Ramadan, arrived in Cairo for the most senior bilateral visit to Egypt since Iraq’s invasion of Kuwait. Full diplomatic ties have yet to be restored, but Mr Ramadan was empowered by Mr Hussein to sign a free-trade agreement (see Foreign trade and payments). In early January Egypt sent a 45-strong delegation by air to Baghdad, its fifth such flight of recent months. The passengers were mainly businessmen.

Relations with Jordan are Ties with Jordan have also improved, despite a mid-December announcement also on a solid footing by Royal Jordanian (RJ) that it was suspending regular flights to Iraq. An RJ source said that the airline had decided to restrict its activities to “occasional” humanitarian flights, following pressure from the UN sanctions committee (only strictly humanitarian flights given pre-clearance by the sanctions committee are allowed to enter Iraq). Despite this, Jordan is continuing to develop trade relations with Iraq—prior to the Gulf war, Iraq was its main trading partner. In mid-December the Jordan Times reported that Jordan was seeking to have a JD36m (US$54m) agricultural protocol with Iraq approved by the UN. The protocol appears to fall outside the terms of the oil-for-food deal (see Foreign trade and payments).

Iraq is scornful of Saudi As a growing number of regional states have continued to make overtures Arabia and Kuwait towards Iraq, so Iraq’s disdain for Saudi Arabia and Kuwait—its most implac- able Arab enemies—has grown. A string of Iraqi newspaper editorials on the anniversary of the 1991 conflict savaged the Saudi and Kuwaiti positions, particularly their decision to allow US and UK airstrikes and sorties from their territory (Turkey also received some rather more muted criticism on this issue). During his recent visit to the Iraqi National Assembly, Udai recommended that the map of Iraq that is displayed on the building’s wall be redrawn to include Kuwait.

The GCC softens its position Strangely, this act of provocation did not have much impact on a meeting of on Iraq the Gulf Co-operation Council (GCC) in late December; indeed, the GCC’s final communiqué did not include the traditional condemnation of the Iraqi government that has appeared in GCC statements since its invasion of Kuwait. Instead, the body urged Iraq to open “a comprehensive dialogue” with the UN Security Council in order to lift sanctions. The communiqué added that GCC leaders would support any humanitarian effort that would help ease the suffer- ings of the “brotherly Iraqi people”, but did not blame the Iraqi regime for their suffering. The communiqué’s language apparently reflected a compromise between the governments of Kuwait and Saudi Arabia, who are keen to main- tain a hard line towards Iraq, and those of the UAE and Qatar, who have both called for an immediate end to sanctions. Moreover, the torrent of abuse that Saudi Arabia regularly receives from Iraq does not seem to be hampering the development of trade relations between the two countries (see Foreign trade and payments).

The rapprochement with Relations with Iran, however, have failed to build on the momentum generated Iran hits a hurdle by the visit of the Iranian foreign minister, Kamal Kharazzi, to Baghdad in October (November 2000, page 18). A series of explosions close to the barracks of an Iranian Revolutionary Guards complex, north of Tehran, in early January

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was attributed to the Mujahideen-e Khalq (MKO) opposition group. The MKO is based essentially in Iraq, and has enjoyed support from the Iraqi government. Mr Kharazzi’s visit to Baghdad was supposed to be the first step towards establishing a comprehensive security agreement between the two sides, aimed at ending support for each other’s opposition groups (Iran extends support to SCIRI). A verbal agreement to this effect had been secured during a meeting between the Iraqi president, Mohammed Khatami, and Mr Ramadan at an OPEC meeting in Caracas, Venezuela, in 2000. However, the MKO’s attack led the Iranian defence minister, Ali Shamkhani, to declare that the Iraqi government’s pledges could not be relied on.

Iraq-UN relations

Iraq and the UN agree Relations between Iraq and the UN Security Council have shown few signs of to talk progress over the past quarter. Ostensibly, the Council is waiting for Iraq to accept UN Security Council Resolution 1284 of December 1999, enabling weapons inspections to resume and, if all goes well, leading to the lifting of sanctions. However, this has been the case for over a year now; Iraq merely insists that it is free of proscribed weapons and that sanctions should be lifted immediately.

The UN and Iraq are at least talking to each other. In late January a UN spokesman said that the UN secretary-general, Kofi Annan, would meet the Iraqi foreign minister, Mohammed Said Kazem al-Sahhaf, for talks in New York in late February. The vice-chairman of Iraq's Revolutionary Command Council, Izzat Ibrahim, proposed the talks when he met Mr Annan at an Islamic summit in Doha, Qatar, in November, according to Fred Eckhard, a UN spokesman. The meetings were supposed to have begun in January, but were postponed after Iraq failed to respond in time with ideas for an agenda. Mr Eckhard also said that the UN secretariat had not yet received anything in writing on the contents of the talks.

There is little optimism Regardless of the fact that Iraq proposed the talks, there is a strong sense that the government is merely going through the motions of engaging in dialogue with the UN. The fact that an agenda was not drawn up in time, and that Mr Sahhaf, rather than the more senior Tariq Aziz was detailed to attend, adds to this feeling. Moreover, as Mr Annan himself admits, his ability to compromise with Iraq—a prerequisite for any type of progress—is severely limited by UN resolutions, which he must uphold in his role as secretary-general.

There are shifts in the Consequently, of more importance are the subtle shifts in the positions of the positions of the main five permanent members of the Security Council: the US, the UK, France, players Russia and China. Moscow’s position has softened slightly in recent months. In late December Russia’s deputy foreign minister, Vasily Sredin, said that Russia was prepared to co-operate with the new US administration to find a solution to the Iraq problem, suggesting that a compromise solution was possible. As recently as October, Russia’s foreign minister, Igor Ivanov, called for an immediate lifting of sanctions on humanitarian grounds (November 2000, page 17).

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Fundamentally, Russia remains the most sympathetic to the Iraqi government’s position. Mr Sredin insisted that a policy of “threats and pressure” on Baghdad would be “counter-productive”. Rather, Iraq’s “justified wishes” had to be taken into account.

China—generally perceived as sympathetic to the Iraqi government—has been reluctant to make public pronouncements on the issue, but expressed concerns about Iraq’s “humanitarian situation” in an early December letter to the permanent members of the Council. A spokeswoman for the Chinese foreign ministry said that the letter contained an appeal from the Chinese government to “break the deadlock and work out a solution” for the Iraqi issue.

France, too, has recently been pushing the idea of a “compromise”, despite previous calls for an immediate lifting of sanctions. Indeed, the French position appears to have moved back towards the centre of the debate, if comments by the French president, Jacques Chirac, are anything to go by. In a traditional New Year’s address to the diplomatic corps in Paris, the French president said that he had a moral problem with sanctions, but insisted that the UN had to convince Iraq that there was “no alternative to the implementation of Resolution 1284”.

The US is the key to France and Russia’s change of tone is interesting. On one level, the more ending sanctions accommodating, helpful language is perhaps mere diplomatic nicety to an as yet untried US administration. France and Russia’s relations with the US deter- iorated during the years of Bill Clinton’s administration—though admittedly other issues besides Iraq were at stake—and perhaps both the French and Russians are keen to get their relations with the world’s only superpower on a more stable footing. Alternatively, both may realise that sanctions will not simply be whittled away by default; rather, it will take a positive, and unanimous, decision by the Security Council to remove them. While informal trade with Iraq may be on the rise, there are certain “red lines” that the US will not allow other countries to cross. One of these is direct foreign investment in oil exploration and production—French and Russian firms both have provisional contracts for development work in Iraqi fields.

The US position on Iraq is Attempting to forecast the precise position of the new US administration on only just taking shape Iraq is perilous. Given a paucity of concrete statements, most commentators have attempted to interpret the stated wish of the new secretary of state, Colin Powell, to “re-energise” sanctions. In a statement, given to a reporter in mid- December, Mr Powell said that Iraq had not yet fulfilled its UN obligations and therefore sanctions “in some form” had to be kept in place. Mr Powell added that re-energised sanctions would be sufficient to contain the regime, while the US would be willing to confront the regime should this be necessary. This statement was augmented by a comment from the new US president, George W Bush, who said in mid-January: “we must continue to contain Saddam Hussein and we must watch his money and make sure he doesn’t develop weapons of mass destruction”.

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This suggests a fairly relaxed approach to the problem of Iraq: keeping the regime pinned down with sanctions and, if necessary, occasional airstrikes. This tends to fit with the general perception that Mr Bush’s senior foreign policy team, and the president himself, are concerned only with narrow US interests. Earlier statements by Mr Powell confirm the impression that he would be unwilling to commit US troops to any venture unless the goals were clearly defined and an “exit strategy” in place. An ideological drive to re-engineer Iraq’s polity in the US image seems lacking.

Colin Powell is sceptical This should rule out military support for the exiled Iraqi opposition. In January about the Iraqi opposition Mr Powell received a briefing on Iraqi policy from the State Department’s Bureau of Near East Affairs at which, according to some reports, he expressed deep scepticism about the capabilities of the Iraqi opposition. Mr Powell will therefore have been particularly unimpressed by a high-risk plan to re-establish an opposition presence within Iraq, approved by the Clinton administration in December. In a report submitted to Congress in early January, the Clinton administration outlined plans to distribute food, medicine and other forms of humanitarian relief inside government-controlled areas of Iraq by means of the Iraqi National Congress (INC), the main umbrella group for exiled opposition forces. The US$12m programme would commit the US to assisting the INC in re-establishing a base in the northern, Kurdish-controlled provinces. From there the opposition members would make clandestine forays into government-controlled areas, to distribute relief supplies and propaganda.

These actions would undoubtedly attract the attention of the Iraqi government. The question would then be how far, and by what means, the US government would be willing to assist and protect the opposition members.

Others may be more If Mr Powell had his way, it is doubtful that the plan would be implemented. enthusiastic However, others on the Republican team have pledged strong support for the Iraqi opposition. In a February 1998 open letter, the secretary of defence- designate, Donald Rumsfeld, along with his deputy Paul Wolfowitz, joined other conservatives in urging the administration to recognise a provisional government of Iraq headed by the INC. Among other measures, the letter called on Mr Clinton to “help expand liberated areas” in Iraq “by assisting the provisional government's offensive against Saddam Hussein's regime logist- ically and through other means.” However, more senior voices are likely to counsel caution. The vice-president and former defence secretary Dick Cheney argued in 1998 that “working the UN” and keeping sanctions in place were the most effective means of undermining the regime.

If the latter statement does come to represent the main thrust of US policy, the US will still have considerable support within the Security Council, following its latest reconfiguration. Although the Netherlands and Canada (strong backers) left on December 31st, along with Argentina, Namibia and Malaysia, the US can expect support from newcomers Singapore, Mauritius and Columbia. The likely attitudes of new members Ireland and Norway are more difficult to fathom.

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There may be a shift in the Of potentially far greater significance is the attitude of the UK, which has been UK’s position the US’s firmest supporter on Iraqi affairs, participating in the “no-fly zones” as well as carrying out periodic airstrikes against Iraq during the past decade. However, its attitude now appears to be shifting. According to a report by the London-based Guardian newspaper in early January, the UK is to propose to the Bush administration that airstrikes against targets in southern Iraq be halted, as part of a wideranging review of policy towards Iraq.

UK may want to cease Although officially denied by the UK foreign office, an official told Reuters that “southern watch” patrol the UK is indeed seeking to end the “southern watch” air patrols, which it believes are becoming a public relations liability. Iraqi radar regularly locks onto US and UK aircraft patrolling the area. This is deemed a hostile act and the allied response is usually to destroy the radar site in question. There have been civilian casualties, which Iraq has made great play of. Saudi Arabia, for one, has signalled to the US and the UK its growing unease with air sorties that are often launched from its territory. Beyond this, the official admitted that the UK is seeking to introduce so-called smart sanctions, which would target military imports rather than maintaining the blanket economic embargo on Iraq which has caused widespread humanitarian suffering in the country.

British officials have for some time admitted privately that the sanctions in their current configuration are not doing their job. Not only is the regime continuing to provide luxuries for its retainers, but it has also been able to re-arm itself. Critics point to the December 31st military parade in Baghdad, which displayed vast amounts of conventional weaponry. Some analysts insist that Iraq now has more serviceable main battle tanks than it had prior to the invasion of Kuwait. If this is the case, then Iraq’s smuggling operations are far more sophisticated than many supposed. More alarmingly, some experts say that Iraq is only a matter of months away from completing the Arab world’s first atomic bomb. Dr Khidir Hamza, the most senior Iraqi nuclear physicist to have defected to the West, said in Washington in November that all Iraq lacked was sufficient weapons’ grade uranium or plutonium with which to arm a crude atomic device.

The new US administration Whether the US will agree to drop the southern air patrols is unclear. Despite may well be sympathetic obvious political differences between the UK’s ruling Labour Party and the US Republican administration, there is said to be greater empathy towards the UK’s defence establishment from the Republicans than there was from the Clinton team. Certainly, the proposal to reduce unnecessary military activity, while simultaneously tightening up on military imports to Iraq, is likely to receive a sympathetic hearing from the Bush team.

Economic policy

The government introduces While the Iraqi government waits to see if there is any substantive change to a surcharge on oil sales US policy under the new president, George W Bush, the main thrust of its economic policy remains unaltered: that is, to re-secure control over its oil revenue. While the regime has used its oil-smuggling networks to great effect,

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re-establishing Iraq as a regional power will require the restoration of control over the country’s entire oil output.

To this strategy the UN-approved oil-for-food programme is obviously a hin- drance. The government has treated the programme with a mixture of con- tempt and indifference since its inception and it was no surprise when it suspended official oil exports from December 1st. This followed the UN’s refusal to validate Baghdad’s imposition of a 50 US cents surcharge (later reduced to 40 US cents) on each barrel of oil lifted by international oil companies.

The UN declares the The surcharge would have been paid into a separate, government-controlled move illegal account, and therefore represented a direct challenge to the essence of sanctions. Consequently, the UN had little choice but to declare any payment of a surcharge illegal. This was enough for major international lifters of Iraqi crude, who all refused to pay the surcharge. Iraq’s calculation that companies would be forced to lift Iraqi crude at higher prices proved wrong. Rather, in a softer market, Asian refiners began switching to Iranian supplies and the US and Saudi Arabia announced that they would make up any shortfall of crude on international markets. Prices actually declined by around US$10/barrel in the first two weeks of December after Iraq had carried out its threat.

Smuggling continues The Iraqi ploy may yet pay dividends, however (see Oil and gas). Meanwhile, unabated the government’s willingness to suspend official oil exports highlights just how insulated its smuggling networks are from the oil-for-food programme. The US- based Petroleum Intelligence Weekly estimates that during the hiatus in official supplies Iraq continued to send in excess of 100,000 barrels/day by truck over the Turkish border, while Jordan may be receiving as much as 50,000 b/d on top of the 90,000 b/d which is acknowledged and overlooked by the UN. There are further sizeable amounts of oil being smuggled out of Iraq through the Gulf and, it seems, Syria. The Cyprus-based Middle East Economic Survey (MEES) gives an aggregate figure for domestic consumption and illegal cross-border trade with Syria, Jordan, Turkey and the Gulf of 600,000 b/d for December.

The 2001 budget is Details of more conventional economic policy initiatives remain thin. The announced Iraqi cabinet has, apparently, approved the state budget for 2001, but the official announcement carried on Iraqi radio in December provided no details of spending plans. At a subsequent cabinet meeting, also in December, the president reviewed the activities of various ministries during the course of the year. This is presumably an uncomfortable experience for whichever minister hap- pens to be in the spotlight. This time it was the oil minister, Amir Mohammed Rashid, who was forced to brief the cabinet on his oil marketing efforts.

The Central Bank governor Meanwhile, the governor of the Central Bank of Iraq, Isam Rashid Huwaish, is interviewed gave a rare interview in early January in which he shared his thoughts on a range of economic issues. Speaking to the London-based Al Sharq al-Awsat, Mr Huwaish admitted that interest-rate policy had been undermined by rampant inflation in the wake of the Gulf war and the imposition of sanctions. Mr Huwaish said that he had been forced to engineer a rise in lending rates to 26%, although he did not say when this had occurred. He claimed that rates

had since fallen and currently stood at around 15%, although he also admitted that the rate of inflation was “higher than this figure”. The governor implied that the exact rate of inflation was unknown and said that the black-market exchange rate was used as the primary indicator of inflationary pressures.

The governor describes the Mr Huwaish then described the constraints that the embargo has imposed on reduced role of the Bank the Central Bank’s activities. In particular, the freezing of the Bank’s assets abroad have reduced the Bank’s main function to that of a “banknote-issuing body”. With surprising candour, the governor said that while in the past the bank issued a limited amount of notes, at present Iraq has huge sums of circulated banknotes.

The governor said the size of Iraq’s frozen assets abroad was difficult to deter- mine, but claimed that Iraq had at least US$60bn in European banks and a further US$3bn in US banks. He also claimed that Iraq’s assets outweighed its debts, insisting that in any case these debts were not major, and would be settled once the embargo was lifted. Mr Huwaish said that the debts were not in “liquid currencies”, but were instead mainly goods that Iraq had agreed to buy on credit. He added that some Arab governments had effectively unfrozen some of Iraq’s assets by releasing them in the form of goods, “without violating UN Security Council resolutions”.

Mr Huwaish denied that the Central Bank had any dealing with smuggled oil revenue, but admitted that “violations often come from private-sector smugglers”. He added cryptically: “if I registered the revenues of these operations, they would definitely show indirectly”.

The domestic economy

Economic trends

The oil-for-food programmea

Barrels (m) Revenue (US$ m) Phase I 120 2,150 Phase II 127 2,125 Phase III 182 2,085 Phase IV 308 3,027 Phase V 361 3,947 Phase VI 390 7,402 Phase VII 343 8,302 Phase VIII 376 9,564 Phase IX 28 516b

a As of January 19th 2001. b Converted from E558m. Source: UN Office of the Iraq Programme (UNOIP) website.

Phase IX of the programme Iraq’s early December decision to suspend oil exports has obviously had a dele- gets off to a shaky start terious impact on the oil-for-food programme, notwithstanding the piecemeal resumption of exports two weeks later. As of January 19th, Iraqi oil exports in phase IX of the programme (December 2000-May 2001) amounted to just 28.1m barrels/day of oil, for an estimated E558m (US$516m) in revenue, according to the UN Office of the Iraq Programme (UNOIP) in Baghdad. In the week to January 19th Iraq was exporting crude oil at a rate of just 800,000 b/d, compared with 2.77m b/d in the week to October 20th. Oil prices have also softened, with the benchmark Dated Brent crude trading at just over US$27/barrel on January 28th, down from a high of US$37.7/b in September.

Benon Sevan says poverty is The director-general of the Iraq programme, Benon Sevan, gave his thoughts widespread on the progress of the programme on December 4th, just after Iraq had announced its suspension of exports, and one day before the end of phase VIII of the programme. Mr Sevan stated baldly that although the humanitarian situation in Iraq had generally improved since the inception of the programme, the lives of ordinary Iraqis had not improved commensurately. The director-general said that the absence of “normal economic activity” had given rise to the spread of deepseated poverty. Mr Sevan again urged the Iraqi government to consider providing for the more specific needs of the very poor in phase IX of the programme.

Suppliers come in for Turning to specific problem areas, Mr Sevan noted that the rate of submission more criticism of applications for phase VIII remained slow for the majority of sectors. As of December 1st the UN had received only 865 applications, totalling US$2.93bn and comprising just 39.7% of the budget for phase VIII. As Mr Sevan pointed out, once the government signs the contracts with its suppliers, responsibility for the submission of applications to the UN lies with the contractors through their respective “permanent or observer missions”.

In dealing with the problem of incomplete technical information accom- panying contracts (November 2000, page 24), Mr Sevan was pleased to note that the decision to allow the sanctions committee to make corrections to applications containing obvious technical errors had yielded “good results”, enabling the UN to reduce the number of applications in this category by more than 41%—from 434 on October 3rd to 253 on November 30th. Mr Sevan puts the blame for the delay to the outstanding contracts squarely with the ap- plicant missions concerned.

There is a further appeal to On the issue of holds placed by the sanctions committee on applications, reduce the number of holds Mr Sevan said that initially there had been good progress in releasing the number of holds. In the two-month period from April 2000 a total of US$608m of holds were released. However, the value of holds has since risen “drastically”, from less than US$1.34bn (11.4% of applications) in mid-June to US$2.52bn (15% of applications) by November 30th. Mr Sevan called for the implementation of a further “campaign” to reduce the number of holds, which he says have had the most negative impact on the telecommunications, electricity, agriculture, oil, water and sanitation sectors.

Telecoms sector is badly In fact, the number of holds affecting the oil sector appears to have come affected by holds down quite sharply in recent months (see Oil and gas). This has not been the case with the telecoms sector, however, an area where imports have an obvious security, and hence “political”, application. Here 45% of applications were on hold as of November 30th. Mr Sevan has urged members of the sanctions committee to provide “timely feedback”, enabling the UNOIP to take any action necessary to expedite the release of the holds. Mr Sevan is clear that the absence of such feedback “long after the necessary clarifications are provided” has given rise to speculation “as to the real motive behind the hold placed on an application”. By January 19th roughly 21% of all contracts (humanitarian and oil spare parts) submitted under phases IV-VIII were on hold.

Status of humanitarian contractsa (US$ m) Contracts Contracts Contracts Sector approved on hold arrived Foodb 8,177 0 6,032 Food-handling 1,099 304 309 Healthb 1,501 222 1,115 Oil spares 1,337 340 502 Electricity 1,769 848 521 Water/sanitation 849 242 354 Agriculture 1,402 437 653 Education 384 112 109 Telecommunications & transport 424 397 16 Housing 886 17 77 Northern governorates 961 1 527c Total 18,789 2,920 10,296

a As at December 31st 2000. Includes phases I-VIII. b Includes food and health-sector supplies bulk- purchased by the Iraqi government for the three northern governorates. c Excludes food and health-sector supplies included above. Source: UNOIP website.

Mr Annan’s latest report Mr Sevan’s comments came in the form of an attachment to the latest report notes little improvement by the UN secretary-general, Kofi Annan, on the progress of the oil-for-food programme. The report covers the six-month period up to October 31st 2000. Mr Annan notes that the scope of the oil-for-food programme has widened with time and the increase in oil revenue. Far more resources are being channelled into infrastructural projects, including housing, than in the early phases of the programme, when the priority was, understandably, food and health. However, despite the growing sophistication of the programme, the plight of most Iraqis remains desperate. The secretary-general notes that four years into the programme, the majority face a situation of decreasing income, intensifying their dependence on the programme. This itself presents a theoretical and practical problem—as UN officials are at pains to point out, the oil-for-food programme is not intended to replace the state as the main source of welfare.

Distribution is at the heart The social impact of this growing level of “pauperisation”, as Mr Annan refers of the problems to it, is difficult to quantify. However, he suggests that the middle class has been “weakened” (most suspect it has been virtually wiped out); the gap between rich and poor has grown; and vast numbers of highly trained profess- ionals have emigrated. He also notes a growing disparity in terms of services and infrastructure between the three Kurdish-controlled provinces of Dohuk, Irbil and Suleimaniyah and the rest of the country. Mr Annan offers no explan- ation for this, but the fact that aid is administered directly by the UN and associated agencies in these three governorates is no coincidence. The contrast appears most stark in nutritional targeting. According to Mr Annan, none of the 15 public health centres or 68 community childcare units assessed in October 2000 had a government vehicle for the distribution of targeted nu- trition supplies. In the northern governorates, by contrast, the World Food Programme (WFP) distributed 8,500 tonnes of assorted food commodities under its supplementary feeding programme in the six months under review. By October 31st almost 100% of commodities under phases I-VI had arrived and been distributed; 40% of phase VII commodities had also arrived.

In an attempt to address some of these distribution problems, an October 2000 WFP mission to Iraq recommended creating a new food handling and transport sector from the relevant subsectors contained within the distribution plans. The mission also suggested the inclusion of a team of ten WFP international observer specialists in ports, railways, road transport, warehousing, silos and milling. Some of these specialists have now taken up their positions. However, Mr Annan reports no noticeable improvements to the facilities at Umm Qasr, Iraq’s main port, which remain in a “lamentable” state. The problems there are so bad that the last remaining functioning container forklift has broken down, leading to further pile-ups of cargo in the already congested port. A lack of trucks has only exacerbated the problem. As of October 31st none of the items in the contracts approved to date for the rehabilitation of Umm Qasr port, valued at US$28.5m, had arrived in Iraq. This was due to delays in contracting by the government, delays in the approval of applications by the sanctions committee and the lengthy lead-time for the delivery of some items.

Water contamination is The water sector also remains in a pitiful state, despite modest increases in becoming a major problem “performance efficiencies” in water production. Unfortunately, notes Mr Annan, the full benefits of these increases have not been realised at the consumer level, because of the estimated 40% water losses from leakage in the network, wastage and additional demand resulting from population growth. Alarmingly, Mr Annan adds that nearly 90% of raw sewage from the sewage pumping stations in Iraq is currently being discharged directly into rivers and streams. Consequently, many Iraqi people who rely on river water for their daily needs are being compelled to deal with contaminated water, “with serious public health implications”. The reason for this situation is that the majority of the sewage treatment plants in the country have not benefited from programme inputs. The only exception is the sewage treatment plant in Baghdad, and this, although currently operating at 65% efficiency, is able to handle only 32% of the city’s sewage volume. Iraqi water and sanitation authorities face a serious shortage of qualified personnel and inadequate planning capacity, and

are forced to implement projects according to essentially unplanned arrivals of materials. They have insufficient budgets, and once these are used or over- stressed, projects either have to be cut back or stopped.

Improvements to the power The electricity sector has shown some improvement. According to Mr Annan’s sector are marginal report, the power deficit in August 2000 stood at 1,800 mw, leaving large areas of the south and centre of the country without electricity for up to 18 hours a day during the peak summer months, and four to eight hours a day in the Baghdad governorate over the same period. However, since then, thanks to both reduced seasonal demand and programme inputs, the situation has improved considerably. It has been reported that in the 14 governorates in the centre and south, there are now shortages of eight to 12 hours, whereas in Baghdad there is a continuous supply of electricity. Nevertheless, the problems of system stability, “controlled load flow” and the lack of “spinning reserve” to cushion abrupt generation failures continue. The UN believes that in the majority of cases the difficulties in preventing further deterioration have been exacerbated by or are directly attributable to applications on hold. As of October 31st, 188 contracts totalling US$871m were on hold, representing 37% of all holds in all sectors. If released and fully implemented, these would add a further 1,443 mw to the grid. Given the importance of the power sector to the entire economy, Mr Annan describes these holds as “unacceptable”.

In summing up, Mr Annan reiterates the point that although locally produced food items have become increasingly available throughout the country, most Iraqis do not have the necessary purchasing power to buy them. Given that the monthly food rations represent the largest proportion of household income, the population is obliged either to barter or sell items from the food basket to meet other essential needs. According to the report, this is one of the factors explaining why the nutritional situation has not improved in line with the enhanced food basket.

Oil and gas

Oil exports collapse Figures from the International Energy Agency (IEA) confirm the collapse of Iraqi exports in late 2000 following the refusal of most international oil companies (IOCs) to pay a surcharge on oil contracts. The IEA puts oil production in December 2000 at 1.32m barrels/day, down from 2.9m b/d in November and 3m b/d in October. In the week to January 19th 2001 Iraqi crude exports were just 814,000 b/d, according to the UN.

Oil production, IEA data (m b/d) 2000 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Production 2.52 2.32 2.76 2.79 2.40 2.57 Source: International Energy Agency (IEA), Monthly Oil Market Report.

These figures differ slightly from those recorded by the Cyprus-based Middle East Economic Survey (MEES), although the trend is the same. MEES puts December production at 1.2m b/d, November production at 2.7m b/d and October production at 2.96m b/d.

Oil production, MEES data (m b/d) 2000 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Production 2.54 2.31 2.73 2.75 2.29 2.52 Source: Middle East Economic Survey (MEES).

Iraqi production restarted in mid-December, but exports remained patchy as the State Oil Marketing Organisation (SOMO) scrambled to sign contracts with some of the world’s lesser-known oil companies. These companies were presumably willing to pay the 40 US cents/barrel surcharge that the government demanded, although this has not been confirmed. According to the UN, payment of the surcharge would contravene sanctions against Iraq, as it would be paid into an account controlled directly by the government.

Mr Rashid is confident The situation in late January 2001 remained confused. The Iraqi oil minister, production will pick up Amir Mohammed Rashid, is reported to have assured OPEC that Iraqi production will be back up to full capacity (presumably around 2.9m-3m b/d) by early February. However, MEES is sceptical about this promise, as it claims that the Iraqi authorities have decided to persist with the surcharge. This would suggest that exports, and therefore production, will not return to their previous levels by February.

Some think the surcharge Nevertheless, MEES also claims that IOCs are beginning to reconcile will be institutionalised themselves to the surcharge and are starting to work around it. According to MEES, Russian firms such as Sadanco, Machinoimport, Slavneft, Zarubzhneft and Actec, which were major primary lifters of Iraqi crude, have recently signed contracts with SOMO. It is unclear whether these firms have agreed to pay the surcharge, however; MEES claims that companies from countries with preferential trade relations will be exempt, and Russia would certainly fall into this category. MEES adds that “major European oil firms” that were primary lifters are considering becoming secondary buyers if the price is right, if there is no explicit payment of the surcharge and if they find a buyer that is willing to accept a penalty in case of non-delivery. Even US firms are reportedly considering this option. MEES also notes that determining whether a surcharge has been paid, especially if this involves some type of barter arrangement, will be almost impossible.

MEES acknowledges Meanwhile, MEES says that Iraq’s crude oil production capacity, taking into production constraints account the current condition of wells and water-injection facilities, stands at around 2.8m b/d. Therefore, up to December 1st, when Iraqi exports collapsed, Iraq was producing at almost full capacity; indeed, Iraq was producing in excess of capacity during certain months of 2000. Interestingly, MEES says that these high levels are being achieved at the expense of reservoirs, which it

estimates are declining at an annual rate of about 10%. It notes that since January 1991 no more than a handful of wells— exploration, production or water-injection—have been drilled. Moreover, hardly any workover of producing or water wells has been carried out. MEES has generally taken an optim- istic view of Iraq’s production prospects, in contrast to the view of a UN- appointed team of oil experts who declared the sector to be in a “lamentable” state following a visit to Iraq in 2000.

According to MEES, there is no immediate prospect of an expansion of production capacity, because of the delay in receiving equipment and the refusal of the sanctions committee to approve crucial spare parts. In fact, it would appear to be the former that is now the main problem. According to the UN, as of December 31st the UN had approved 2,422 contracts for oil spare parts, totalling US$1.3bn, of which only US$340m remained on hold. How- ever, only US$502m of oil spares had actually arrived in Iraq.

Iraq seeks to expand In November oil industry observers said that Iraq had begun pumping some export routes 150,000 b/d to Syria, through the Kirkuk-Banias pipeline (although this figure has since been disputed). Technically, this is in violation of UN sanctions. UN Resolution 1284 makes provision for Iraq to use additional export routes, but Iraq did not seek permission from the UN before turning on the pumps. It is not clear what Iraq is receiving in return. It has described the oil as a “gift”, and it may be that political capital is the main benefit.

Iraq is unrepentant about the new export route. Indeed, the government seems perfectly happy to discuss further plans. Mr Rashid says that Syria and Iraq intend to build a new pipeline to replace the existing one, which is badly corroded. Mr Rashid said the planned capacity of the new pipeline was around 1.4m b/d. According to the minister, construction of the new pipeline will be in two stages, the first from the Iraqi border inside Syrian territory, and the second inside Iraqi territory. The minister gave no indication when construction would begin, although he said that the Iraqi segment would be implemented only after Iraq’s financial situation had improved.

Mr Rashid said that a further oil pipeline was to be constructed to Jordan’s Zarqa refinery. He stated that the first stage would be implemented by the Jordanian government, which had already announced a tender to set up the pipeline. Again, the stage inside Iraq would be postponed until Iraq's financial situation had improved.

Shell holds talks with the The UK-Dutch oil major Royal Dutch/Shell has held low-level talks with Iraqi oil ministry oil ministry officials regarding “potential opportunities” at the Ratawi oilfield in south-eastern Iraq, a company spokeswoman said in mid-January. Shell has been negotiating with the Iraqi government over the field periodically since 1994. However, the spokeswoman insisted that the negotiations were not “commercial” in nature; Shell would become involved in Iraq only when sanctions were lifted. Ratawi has estimated reserves of 1bn barrels, but is considered a modest field in Iraqi terms.

Foreign trade and payments

A free-trade agreement is Iraq has continued to consolidate its regional trade relations over the past signed with Egypt quarter, helping its political rehabilitation. In mid-January the vice-president, Taha Yassin Ramadan, visited Egypt, where he signed a free-trade deal. The deal establishes a joint trade zone and abolishes all tariffs and duties between the two countries. The Iraqi trade minister, Mohammed Mahdi Saleh, said that the two countries would become “one market with free movement of goods”.

In fact, there is little prospect of this happening while sanctions remain in place, as all bilateral trade will be regulated by the terms of the oil-for-food system. However, the agreement has important political ramifications. Egypt is the pre-eminent Arab power, and a key strategic ally of the US. The agreement therefore gives some credibility to Baghdad’s claims that its regional rehabilitation is in its advanced stages. For Cairo, it is a convenient positioning exer- cise with the post-sanctions era in mind. It seems likely that the agreement will prefigure the restoration of full diplomatic relations between the two states (following the Turkish example), with a new Egyptian ambassador in Baghdad partly justified on commercial grounds. Egyptian exports to Iraq under the oil- for-food programme totalled US$1.2bn in 2000, making Iraq the second largest export market for Egypt after the US.

A similar agreement is In a clear sign of Iraq’s desire to reconstitute ties with Syria as soon as possible, signed with Syria Mr Ramadan flew straight from Egypt to Syria, where he signed another free- trade agreement on similar terms to that with Egypt. Political ties between the two erstwhile Baathist rivals have improved beyond recognition over the past 18 months. Trade, most of it illicit, has also increased. The land border remains extremely porous, while the restoration of a rail link has increased the flow of contraband in both directions (August 2000, page 16). The resumption of Iraqi oil exports through the Kirkuk-Banias pipeline (denied by the Syrian side) would appear to set the seal on the rapprochement (see Oil and gas). It is still not clear how much oil is being pumped through the pipeline. Estimates vary from 35,000 barrels/day to 150,000 b/d. In addition, Iraq is thought to be smuggling some 5,000 b/d of oil products through Syria.

Trade with Lebanon is set Trade with Lebanon is also expected to grow, particularly if a provisional ac- to grow cord, which would resupply Lebanon with Iraqi oil after a 20-year hiatus, is put into action. Lebanese contracts with Iraq doubled in 2000 to US$100m and are expected to reach US$200m in 2001. Six bilateral business fairs are scheduled for the year, three in Baghdad and three in Beirut. Prior to the Gulf war, Iraq was Lebanon’s most important trade partner. The oil protocol, concluded in October, is dependent on the refurbishment of the Lebanese-Syrian pipeline.

An agreement is reached Political rapprochement does not appear to be necessary for the regeneration of with Saudi Arabia trade ties. In mid-January the UN approved the establishment of a border office aimed at facilitating trade between Saudi Arabia and Iraq. This was quickly followed by the signing of a deal between the Saudi land transport company Mabrad and its Iraqi counterpart to carry supplies directly between the two countries. The executive director of the Saudi Export Development Centre,

Ibrahim Foudah, told Reuters that the trade office would be set up at Arar in northern Saudi Arabia. Mr Foudah said that trade would be confined to those goods permitted under the terms of the oil-for-food programme. Saudi Arabia exported an estimated US$600m of goods to Iraq in 2000.

Trade with Jordan rises in Trade with Jordan, meanwhile, grew sharply over the first ten months of 2000. line with oil prices Preliminary figures from Jordan’s Department of Statistics reveal that bilateral trade jumped to JD482m (US$681m) between January and October, a 67% increase on the JD288m recorded a year earlier. However, most of the increase appears to be attributable to higher oil prices; Jordanian exports to Iraq— mainly pharmaceuticals—increased by just JD26.6m, while Iraqi exports (almost exclusively oil and related products) increased by more than JD167.6m. Iraq’s oil supplies to Jordan are subsidised at below market rates, with the price ceiling adjusted on an annual basis. In October the two sides agreed on a ceiling of US$20/barrel for 2001, US$1/b higher than the formula agreed for 2000.

The figures will be a disappointment to the Jordanian government, which has been working hard to boost exports to Iraq in the face of growing competition from Syria and the UAE, among others. Nevertheless, Jordanian exporters should be able to look forward to increased trade in 2001. In November 2000 the two sides signed a bilateral trade protocol giving Jordan a more generous share of contracts under the oil-for-food programme. More controversially, Jordan is planning to sign an agricultural trade protocol that falls outside of the oil-for-food deal, according to the Jordan Times. In mid-December 2000 a Jordanian agricultural delegation, including private- and public-sector figures, flew to Baghdad for talks with their Iraqi counterparts about the proposed protocol. A spokesman for the delegation stated that the Jordanian government was seeking UN approval for the deal, but said that the government should proceed with it even if permission was denied. He claimed that “Syria imports Iraqi barley and urea outside the UN oil-for-food deal and no-one objects”.

The UN approves more In early December the UN Compensation Commission (UNCC), the body res- compensation payments ponsible for dealing with reparations claims arising from Iraq’s 1990 invasion of Kuwait, approved payment of Saudi Arabia's US$33.5m claim against Iraq for damages on its territory during the conflict. The body also approved claims totalling US$175.1m filed by individuals in a host of countries, who proved losses of more than US$100,000. Kuwaitis accounted for about US$153.3m of the total figure, according to officials. However, the secretary to the governing council of the UNCC, Mojtaba Kazazi, told a news conference at the end of a three-day meeting that Iraq had also won the right to review more claims for damages against it and to have more time to respond.

Turkey is seeking Meanwhile, Turkey is pushing ahead with a large compensation claim resulting reparations for loss of from the closure of the Kirkuk-Ceyhan pipeline between 1990 and 1996. business Turkey’s Pipeline Petroleum Corporation (Botas) is claiming US$1.25bn in losses from the closure: US$1.05bn for the loss of transit fees, US$63m in charges for port services, and an Iraqi debt of US$127m that has gone unpaid since the pipeline was closed. The UNCC will make its recommendations to the governing council, which is expected to reach a decision by mid-2001.