Kuwait: Suddenly Very Popular

By John T. Haldane

Sheik Jaber Al-Ahmed Al-Sabah, the Emir of Kuwait, is using a foreign policy ploy which Gamal Abdul Nasser discovered more than 30 years ago: The only way a moderate Arab state can get any serious attention from the United States is to flirt with the Soviet Union.

Kuwait, a tiny city-state of only 1.7 million, has been greatly concerned for some time about the Iranian military forces in southern Iraq near the Kuwaiti border. Kuwait-bound ships have been victims of 17 of the last 22 Iranian missile strikes in the Gulf. The Iranians are well aware that the Kuwaitis provide their fellow Arabs in Iraq with significant financial assistance and that Kuwait's port facilities are used for transhipment of supplies to Iraq.

Kuwait asked Washington late last year to agree to place its increasingly threatened ships under the American flag. According to the Washington Post, the US reply to the urgent request for help consisted of a US Coast Guard brochure outlining the regulations involved and the procedures required. This information was mailed about six weeks after the Kuwaiti request arrived in Washington!

In early March, however, US officials were alerted to the fact that Kuwait and the Soviet Union had reached an understanding to place some Kuwaiti vessels under the Soviet flag. Only five days after hearing the report of the Soviet deal, Washington informed Kuwait that the US would be pleased to accept the responsibility of protecting some Kuwaiti shipping.

President Reagan announced in the White House pressroom that "The use of the vital sea lanes of the Persian Gulf will not be dictated by the Iranians. These lanes will not be allowed to come under the control of the Soviet Union. The Persian Gulf will remain open to navigation by the nations of the world."

What Reagan meant, but did not say, was that the Gulf would be kept open only for selected ship owners. Recent requests by Liberia and Panama for US flag protection for their ships plying the Gulf (to and from Iran) have been rejected by Washington.

The US is also working to lay the groundwork in the United Nations for resolutions calling for an Iran-Iraq cease-fire, a return to traditional borders, and for economic sanctions against whichever party refuses to comply. Iraq has repeatedly proposed such terms to end the war. Countries such as North Korea and China, which are selling weapons to Iran, are resisting such UN measures. To further confuse the matter, Kuwait also has asked China to allow Kuwaiti tankers to fly the Chinese flag.

The Soviets, naturally, were overjoyed at the sudden invitation into the Gulf. The Soviet flag cover opportunity came as a welcome addition to Soviet efforts to become more friendly with Kuwait and the other moderate Gulf Arab states. In February, Moscow announced that it had raised a landmark $150 million loan in Kuwait, in what Arab and West European bankers saw as a strategic bid to boost fledgling economic ties and cement political relations with the Gulf oil states. This loan, an eight-year general purpose commercial credit with a local consortium of nine financial institutions in Kuwait, much enhanced Moscow's profile in the Gulf. It was the first such loan arranged by a Kuwaiti institution at Moscow's request.

While the Reagan administration panicked at the new Soviet role in the Gulf, Congress in turn has panicked at administration counter-measures.

An analysis by Democratic Study Group researchers for the House Democratic majority points out the dangers of President Reagan's decision. The report emphasizes that since Kuwait stores Iraqi weapons in its port and carries them on its ships, Iran will view US naval protection of Kuwaiti vessels as siding with Iraq against Iran in the escalating sea war. The analysis states that although such a move would strengthen US standing among the moderate Arab states which fear an Iranian victory, "the US would be indirectly supporting the country that...began the shipping war in the Gulf and...the US could jeopardize its long-term goal of improving relations with Iran after the departure of Khomeini." It neglected to point out that keeping Iran from winning the war might improve prospects for just such a Khomeini departure.

Kuwait has long been pro-Western and a valued trading partner of the United States. It is the sixth largest market in the Middle East for US goods and services. The United States is Kuwait's third largest supplier, after Japan and West Germany.

With its oil-based economy, Kuwait remains one of the wealthiest countries in the world. Its prosperity appears guaranteed well into the future. Kuwait possesses the second largest oil reserves in the free world (up to 100 million barrels) and production costs among the lowest in the world (about $1 per barrel). At 1985 production levels, these reserves should last more than 200 years.

Government financial reserves continue to grow, topping $80 billion in 1985, even though the state recently has been running a deficit. As a result of prudent investment policies, Kuwaiti income from invested reserves is proportionately larger than in other Gulf states where large-scale petroleum production began considerably later.

Oil production peaked at 2.5 million barrels per day (b/d) in 1979, but has stabilized at around one million b/d over the past three years. The government-owned Kuwait Petroleum Company, emblematic of the country's fundamental strength in petroleum, has continued expanding up and downstream at home and abroad, effectively competing with the international giants of the industry as a major integrated oil company.

In addition to crude oil and petroleum products, Kuwait is a major exporter of capital. While trade and current account surpluses have dropped since 1980, they remain firmly in the black. Net investment income did not drop sharply because the government's two principal reserve funds, the General Reserve and the Fund for Future Generations, had grown up so rapidly through capital contributions and reinvestment of earnings.

Given Kuwait's small size, about that of New Jersey, and great wealth, foreign investment basically flows out rather than into the country. The Kuwait Investment Authority (KIA) was established in 1984 to manage the country's reserve funds. Most of KIA's funds are placed abroad, mainly in the United States and Western Europe, with over half in dollar-denominated investments.

Kuwait's contribution to international development assistance remains high despite falling oil revenues and budget cuts. Most assistance comes through the Kuwait Fund for Arab Economic Development, either directly from the Fund's Capital, or as government funds administered by the Fund. In FY 84/85, the Fund committed about $221 million in new loans, the lowest amount in several years. This was not because of resource constraints, however. The beneficiary countries simply were unable to come up with enough viable projects. Future government budget cuts should have no impact on the Fund's lending since income on investment of paid-in capital plus repayment of prior loans could support a lending program in excess of $350 million per year.

Kuwait's overall, long-term economic future is secure. Its short-term political strategy of seeking American, Soviet, and Chinese flag protection for its shipping should lessen the threat to Kuwaiti vessels of Iranian attack. And the Emir surely must be feeling pleased with his strategy to force the United States to take a clear position vis-a-vis the Iran-Iraq war.

Business Week stated recently: "Arab states have doubted Washington's seriousness since the disclosure of secret US arms deals with Iran. Such skepticism had been growing since the Reagan administration's 1984 pullback from its disastrous intervention in Lebanon and the virtual abandonment of US efforts to promote an Arab-Israeli peace settlement."

Clearly the Reagan administration is belatedly seeking to recapture some credibility through its present two-tiered approach. While working on the one hand through the United Nations for international sanctions if Iran refuses to make peace, it seems resolved to use US military power, as needed, to keep the Gulf open to Kuwaiti shipping. That resolve very likely will soon be put to the test.

John T. Haldane is a Middle East specialist who has served as a Foreign Service Officer in Baghdad, Cairo, and Beirut, and as an international economist in the Departments of Commerce and Treasury.