First Claims Against Iraq Awarded—But Now What?

By Colin MacKinnon

This spring, the first claims against Iraq for losses suffered in Saddam Hussain's invasion of Kuwait will probably be awarded. Numbering about 1,100, they're all in the individual death and injury category with pay caps of $2,500 per person, $10,000 per family. Therefore, settling them will cost no more than $4 million, if that.

The U.N. Compensation Commission, the Geneva-based body that is supposed to adjudicate and pay out war claims against Iraq, is said to have hoped to pay an additional $200 million in July, but won't have the money to do so. The spring payments will likely be the last for a long while.

This first payment, however, is supposed to be symbolic. Worthy claimants will be seen to be getting something, and the Compensation Commission will be seen to have done something. But this niggling payment, out of the commission's funds, not Iraq's, may symbolize something else: the ineffectiveness of the commission and the hopelessness of the claims process.

The Compensation Commission has been operating for almost a year and a half and had a 1993 budget of $21 million. Yet its panels of blue-ribbon judges, secretariat, and press office so far have managed to pay only themselves.

This doesn't reflect sloth or bad faith on the part of the commission, whose members surely would like to parcel out justice. The fact is that the commission. has no money except from governmental donations; and governments are loath to transfer much in the way of funds, even frozen Iraqi funds, to the commission.

No Iraqi Oil Sales

This isn't how things were supposed to be. The commission was supposed to be funded from the proceeds of Iraqi oil sales, but Iraq has not cooperated. Baghdad has not agreed to a proposed one-shot sale of oil to raise $1.6 billion to buy food and medicine for domestic consumption ($1 billion) and help fund the commission and make claims payments ($600 million).

Nor will the Security Council allow the resumption of regular Iraqi oil sales. This is because the U.S. and U.K., in particular, hope a continued ban will force the departure of Iraqi President Saddam Hussain. Hence, no Iraqi funds are coming to the commission.

Stalemate, however, is not what makes so much of the claims process so hopeless. The real problem is that Iraq, even if it resumes foreign sales, will never have enough money to pay off all the legitimate claims that can be made against it.

The claims are a useful political tool against the current Iraqi regime.

Before the invasion, Iraq had run up an enormous debt to international creditors, something in the range of $60-80 billion. The major creditors were, and are, French, Soviet and British arms suppliers, Gulf state lenders, Turkish and Eastern European construction companies, and the U.S. government (the U.S. Department of Agriculture's Commodity Credit Corporation had underwritten close to $2 billion in credits for purchases of U.S. agricultural products by Iraq when Saddam Hussain marched into Kuwait).

Then there's Iran. For all its current outcast status, Iran has claims on Iraq for war damages. These could be as much as $100 billion.

International claims stemming from the invasion of Kuwait will probably total $80-$100 billion (the exact total will be known toward the end of summer). At this point, over two million claims have been filed ' mostly small claims filed by Third World countries on behalf of their citizens. Corporate and governmental claims, though much fewer in number, will be very high and still are being submitted.

All of these claims by foreigners against Iraq now total something like $250 billion. The deadline for submitting claims is July I for corporations and August I for governments. Kuwait's, of course, will be enormous.

Iraq Can't Pay—Ever

There is no way on earth these claims can be satisfied. When sanctions are lifted and Iraq starts selling oil again on the international markets, the country's likely foreign earnings will be only $15-20 billion a year at best.

Siphon off a third of these earnings for war damages and other claims—call it $6 billion a year—and it would take 40 years under the rosiest of scenarios to settle the claims fully, not taking into account inflation and the time value of money. Since the money simply isn't there, and never will be, what might happen?

Corporate Scenario

The scenario one corporate lawyer suggests is that the small individual claims, which run to the billions of dollars, will be paid to a certain level when funds become available. After that, the "decided claims," those heard and adjudicated, would be paid pro rata as funds become available.

This means the claims of Third World nationals would be paid first, but perhaps at a smaller percentage than the U.N. has promised them, in order to leave more funds for corporations.

This corporate lawyer's scenario sounds unlikely. For corporations, it would mean retaining high-priced lawyers into the next century to chase funds that may never be there.

For such small claimants as the Bangladeshi, Egyptian, Pakistani and other expatriate workers who lost their savings and their livelihoods, it would mean even lower compensation than they've been told they deserve. If the U.N. broke its promises to them, the act would look pretty unsavory.

Frozen Assets

The commission, therefore, wants U.N. Secretary-General Boutros Boutros-Ghali to pressure member nations holding frozen Iraqi assets to turn over some $2 billion of them to the commission for settling claims. Governments have resisted the idea strongly, and it isn't likely.

A question U.S. firms will increasingly want answered is when can they write their Iraqi debt off as tax losses. The U.S. government doesn't care for the idea. Once the government admits that debts owed by Iraq are uncorrectable and qualify for write off, the U.S. Treasury will take a large hit.

More importantly, the policy implications of admitting that Iraq can't pay off foreign claims are currently unacceptable. The claims are a useful political tool against the current Iraqi regime and that's that.

If Saddam Goes

But what if Saddarn Hussain goes? The harsh economic line the U.S. and British governments have been taking toward Iraq would almost certainly change (depending of course on who Saddam's successor turned out to be and how he acted). Sanctions would probably be lifted and the demands on Iraqi earnings cut drastically, reducing even further the potential pay-out to corporations.

What else is left? Well, those frozen Iraqi assets are tempting.

They might be used to pay off U. S. claimants on a pro-rata basis. The U.S. holds something like $1.5 billion of Iraqi assets, more than any other government.

If, despite the murky legality of seizing assets, the U.S. actually does it, to whom would they go? The U.S. government itself is a major creditor. When a company in the U.S. goes belly up, first in the line of creditors to go after its assets is always Uncle Sam. Will that be the case with Iraq?

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Report.