After Sales to Iraq Begin-What?

by Colin MacKinnon

By the end of February, the United Nations had approved 33 contracts for Iraq to sell oil on the international markets. The proceeds amount to $518 million and the Iraqi government can now use the money to buy food, medicine and other humanitarian items.

What is Iraq buying? By March 5 the U.N., which must also approve Iraqi imports, had okayed some $152 million worth of sales contracts15 requests out of 37. A few large contracts for wheat (France and Australia), rice (Thailand) and tea (Jordan) totaling $100 million have been signed and approved and the goods should begin arriving by the end of March. Other contracts are for baby food (France, Tunisia) and soap (the U.K.).

Few U.S. Companies Interested

Only a few U.S. companies have shown much interest in selling to Iraq. According to the U.S. Treasury Department, whose Office of Foreign Assets Control has to vet potential U.S. sales, five applications, all of them commercial food deals, are in various stages of approval.

That’s not surprising. The U.S. has never done a lot of business with Iraq. For much of the first half of this century Iraq was a British commercial preserve. Then, after a bloody military coup in 1958, the country became a hard-to-deal-with military dictatorship with a prickly statist ideology and a definite tilt toward the East Bloc.

Like a number of the more hard-line states in the region, Iraq broke diplomatic relations with the U.S. during the 1967 Arab-Israeli war and kept them broken. Though the U.S. did maintain an interests section in Baghdad, its commercial efforts were low-key.

Bad diplomatic relations were not the only reason the country has been a hard place for Americans to do business. Iraq also became one of the toughest enforcers of the Arab boycott of Israel, a policy that did much to keep U.S. business out of the country, says Howard L. Stovall, a Chicago-based lawyer with extensive experience in the Gulf.

“Tough Iraqi enforcement meant that U.S. companies couldn’t register trademarks. In many cases they couldn’t set up branch offices and they couldn’t compete for Iraqi government contracts,” says Stovall. “Doing business there was extremely difficult.”

In the 1980s, relations improved and the U.S. opened an embassy in Baghdad in 1984. By the time the U.S. got up to speed in the mid-1980s, Iraq was in a cash crunch in its 1980 to 1988 war with Iran, so there wasn’t a lot of money for big projects and there was very little opportunity for the Americans. Most U.S. sales to Iraq were agricultural, many of them financed by the Banca Nazionale di Lavoro’s scandal-plagued Atlanta branch.

Beyond the boycott, firms had the difficulty of dealing with a statist government. Before the Gulf war, the Iraqi government controlled 90 percent of foreign imports. When so much trade is in the hands of a government, politics become tremendously important commercially. In Iraq’s case it was the politics of the Arab-Israeli dispute. How a company’s home government approached that dispute determined, partly at least, whether the company got contracts or not.

All in all, therefore, Iraq has been an unhealthy place for U.S. business.

Europeans, Japanese Major Suppliers

Not so for the Europeans, especially the East Europeans, and the Asians. Some European and Asian firms, in fact, have a 20- to 30-year history in the country. Some of them presumably still have physical assets in Iraq, an old office here or there, some equipment, corporate records. They have dominated foreign contracting in Iraq since the 1950s, a history that is going to count for a lot commercially. The preliminary U.N. figures seem to bear this out.

How Long Will Sanctions Last?

Some observers see the current limited sales as the beginning of the end of sanctions. David Kay is one. Now vice president of Science Applications International, Kay was formerly the U.N.’s man in Iraq overseeing the removal of weapons of mass destruction. Kay thinks sanctions will fall away eventually, possibly before the end of the second Clinton administration, and sees signs that that’s happening now.

“First of all,” says Kay, “you have the current limited removal of sanctions. Another sign will be the French, the Russians, and British more openly speaking of lifting sanctions, with the U.S. feeling very isolated. I think you’ll also see proposals to increase the amount that [Iraq] is able to sell [under the U.N.-approved oil-for-food program]. It will be a series of small cuts and steps. [Maintaining the sanctions] will be a very heavy burden that will fall on the U.S.”

Nor does the U.S. have much regional support to continue sanctions. “With the exception of Kuwait, most of our Gulf allies don’t feel as strongly as we do and I think that’s far more worrying.”

Dr. Christine Helms, of the Petroleum Finance Corporation, sees the same thing. “You’ve seen a very strong drive [to ease sanctions] by the UAE government, Qatar, the Omanis. In the UAE it’s been particularly strong.”

“There is the perception,” says Helms, “that sanctions are helping the U.S. pursue its own interests in the region, that U.S. interests are not necessarily synonymous with those of other countries. A bill came out of the Russian Duma recently saying that [Russia] should break the sanctions on Iraq because “it’s in the Russian national interest to do so.” Yeltsin nixed it, but to me the mere fact that this bill was circulating around the Duma is very telling.”

What Will Happen After Sanctions?

“The Iraqis will have a lot of money,” says Kay. “They legitimately will purchase materials to rebuild their civil economy, which gives a perfect background against which to import probably undetectable levels of military equipment. The flow will be so large you just won’t know what is coming in. Saddam Hussain will rebuild his military into a highly capable force. Today everybody is scrambling to sell arms. The prices are way down from where they were during the Cold War days. You’ve got Russia and a lot of former Soviet states that have military equipment and are willing to sell it for hard currency.”

New Order in Iraq?

Under pressure of war and then sanctions, Iraq as a place to do business has changed drastically. The old state-controlled economy is now propped up by a private sector that, since the Gulf war, has managed to live by its wits, to import and export goods, and to a degree break the U.N. sanctions regime. Since 1995 the government has tolerated private money changers and has allowed the creation of private banks. The regime apparently even intends to sell off large chunks of state-private enterprises to the people who work in them. In the Iraqi scheme of things, these are astonishing developments.

But how long will this last? The regime freed up the private sector in order to get around sanctions. If sanctions do come off completely, what then will become of Iraq’s emergent private sector?

In Iraq’s uncertain and probably unstable political environment, that’s anybody’s guess.