Wars and Empire



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By: Dr. Sam Vaknin

Also published by United Press International (UPI)

The French were at it again last Friday. Any reduction in Iraq's mountainous $120 billion external debt should be negotiated within the Paris Club of creditor nations, they insisted. It ought not - indeed, cannot - be tackled bilaterally. And what about another $200 billion in war reparations and contractual obligations? This, said French Foreign Ministry spokesman Francois Rivasseau, is to be discussed.

A day earlier, Paul Wolfowitz, the American Deputy Defense Secretary, prompted the French, Russian and German governments to write off Iraq's debts to them, so as to facilitate the recovery of the debtor's $15 to 25 billion a year economy. He echoed U.S. Treasury Secretary John Snow who suggested, in an interview to Fox News Channel, that Iraq's debts should be discarded even as was the dictator who ran them up.

At first, Putin made conciliatory noises upon exiting a gloomy meeting with the two other co-founders of the discredited "peace camp". Russia, he reminded the media, is number one in erasing debts owed it by poor countries.

But he was swiftly contradicted by the Chairman of the Duma's Committee on the State Debt and Foreign Assets Vladimir Nikitin, who called the American proposals "more than bizarre". Iraq's debt to Russia - some "well verified and grounded" $8 billion - is not negotiable. Contradicting his own contradiction, he then added that discussions on debts have to be held bilaterally.

Gennady Seleznyov, the Chairman of the lower house of the Russian parliament, concurred. For good measure, he also demanded $2 billion from the USA for contractual losses due to the war. The Russian government and especially Finance Minister and Deputy Prime Minister, Alexei Kudrin, cautioned Wolfowitz that applying his proposal consistently would lead to the scrapping of the debts of another departed evil regime - the U.S.S.R.

Russia needs Iraq's money - especially if oil prices were to tumble. According to Russia's Central Bank, the Federation's foreign debt was up $2.7 billion in 2002 and reached $153.5 billion, of which $55.3 billion is in Soviet-era debt, $48.4 billion were accrued in post-Soviet times and the rest is comprised of various bonds and obligations.

But the U.S. is unfazed. US Ambassador to Russia Alexander Vershbow reiterated to the Russian news agency, Rosbalt, his government's position thus: "We intend to organize a conference of creditors in order to discuss ways of finding a balance between the rights of the creditors and the rights of the Iraqi people to develop their economy. In my opinion, it would be unwise to immediately demand large sums of money from the new Iraqi government."

In this debate, everyone is right.

Iraq's only hope of qualifying for the status of a Highly Indebted Poor Country (HIPC) is by reaching iron-clad debt rescheduling agreements with both the Paris and the London Clubs. Still, as the Americans envision, creditors can unilaterally forgive Iraqi debt - especially one arising from Saddam Hussein's misdeeds - without hampering the process with the World Bank and without hindering future access to global or internal capital markets.

This is especially true when it comes to the United Nations Compensation Commission which administers Iraqi reparations to victims of Iraq's aggression against Kuwait in 1990-1.

Signs of utter confusion abound. The International Monetary and Financial Committee of the International Monetary Fund, headed by Gordon Brown, Britain's Chancellor, is committed to the Paris Club multilateral route. Yet, James Wolfensohn, the President of the World Bank, a twin institution, plumps for a bilateral resolution of this novel controversy.

Anticipating a beneficent outcome, $2 billion in traded Iraqi sovereign and commercial loans, harking back to the 1980s, have recently doubled in value to c. 20 cents to the dollar. According to The Economist, brokers are betting on a 70 to 90 percent reduction of Iraq's debt. This is way too exuberant. Moreover, not all creditors are created equal.

Iraq owes the IMF and the World Bank a mere $1.1 billion. But there is an abundance of unpaid high priority trade credits and bilateral loans. Private banks and commercial firms come a dismal third. Moreover, following Nigeria's example, Iraq may choose to ignore Paris Club creditors and deploy its scarce resources to curry favor with those willing and able to extend new financing - namely, private financial intermediaries.

Trading Iraqi debt - sovereign notes, letters of credit and papers issued by the central bank and two other financial institutions, Rafidain Bank and Rashid Bank, is onerous. The Economist describes it thus:

"Trading, or even holding, Iraqi paper is loaded with traps. Its validity can expire every few years, according to the statute of limitations in various jurisdictions. Renewing it requires some acknowledgment from the borrower, and that was difficult even before the war. Assigning the debt from buyer to seller requires the borrower's assent, and the Iraqi banks have been unco-operative since 1988. The trick is to apply during public holidays, or when communications are down (as they are now), because the borrower's failure to respond within ten working days can be taken as agreement."

No one has a clear idea of how much Iraq owes and to whom.

According to Exotix, a sovereign debt brokerage, Iraq owes commercial creditors $4.8 billion and other Gulf states $55 billion  -regarded by Iraq as grants to cover the costs of its war with Iran in the 1980s. It owes Paris Club members - excluding Russia and France ($8 billion apiece) - $9.5 billion, the countries of Central Europe, mainly Germany - $4 billion and others - about $26 billion, including $5 billion to the U.S. government and American businesses.

The tortured country's foreign debt alone amounts to $5000 per every denizen. With reparations and commercial obligation, Iraq's destitute inhabitants are saddled with more than $16,000 in debt per capita - or 15-20 times the country's gross national product. Iraq hasn't serviced its loans for well over a decade now.

Others dispute these figures. Frederick Barton compiled, together with Bathsheba Crocker, an inventory of Iraq's outstanding financial obligations for the Center for Strategic and International Studies in Washington.

According to Barton-Crocker, quoted by the Gulf satellite channel, al-Jazeera and by the Christian Science Monitor, Iraq owes $199 billion in compensation claims to more than a dozen nations, another $127 billion in foreign debts and $57 billion in pending foreign contracts - public and private. Iraq owes Russia $12 billion, Kuwait $17 billion, the Gulf States $30 billion and less than $2 billion each to Turkey, Jordan, Morocco, Hungary, India, Bulgaria, Poland, and Egypt.

Most of the pending contracts are with Russian firms ($52 billion) but the French, Chinese, Dutch, United Arab Emirates and Egyptians have also inked agreements with Hussein's regime. The United states and American firms are owed little if anything, concludes al-Jazeera. Debt forgiveness would allow a more sizable portion of Iraq's oil revenues to be ploughed into the American-led reconstruction effort, to the delight of U.S. and British firms.

Russia and France are not alone in their reluctance to bin Iraqi credits. Austrian Minister of Finance, Karl-Heinz Grasser, was unambiguous on Tuesday: "We see no reason why we should waive 300 million Euros of Iraqi debts". He noted that Iraq - with the second largest proven oil reserves in the world - is, in the long run, a rich country.

In the build-up to the coalition, the United States promised to buy the debt Iraqis owe to countries like Bulgaria ($1.7 billion) and Romania. In Macedonia, Dimitar Culev of the pro-government daily "Utrinski Vesnik", openly confirms that his country's participation in the coalition of the willing had to do, among other, longer-term considerations, with its hopes to recover Iraqi debts and to participate in the postwar bonanza.

Poland's Deputy Labor and Economy Minister, Jacek Piechota, on Tuesday, affirmed that Poland intends to recover the $560 million owed it by Iraq by taking over Iraqi assets in a forthcoming "privatization". Another option, he suggested, was payment in oil.

Nor are such designs unique to sovereign polities. According to Dow Jones, Hyundai hopes to recover $1.1 billion through a combination of crude oil and reconstruction projects. During the Clinton administration, American creditors almost helped themselves to between $1.3 and $1.7 billion of frozen Iraqi funds with the assistance of the U.S. Foreign Claims Settlement Commission. Luckily for the looming new Iraqi government, the legislation languished in acrimony.

The debt question is not academic. As the London Times observes: "As things stand, no one can write a single cheque on Iraq’s behalf until the question of its towering debts is sorted out. Not a single barrel of oil can be sold until it is clear who has first claim to the money; no reputable oil company would touch it without clear title."

According to Pravda, to add mayhem to upheaval, the Iraqi opposition indignantly denies that it had broached the subject with the USA. Iraq, they vow, will honor its obligations and negotiate with each creditor separately. But, some add ominously, members of the "friends of Saddam" fan club - alluding to Russia, Ukraine and Belarus among others - are unlikely to get paid.

The Iraqi opposition is as fractured as the Western alliance. Some exiles - like Salah al-Shaikhly from the London-based Iraqi National Accord - promote the idea of a big write-off cum grace period akin to the 66 percent reduction in the stock of Yugoslav obligations. Debt for equity swaps are also touted.

The trio of creditors - especially France and Russia - might have considered debt reduction against a guaranteed participation in the lucrative reconstruction effort. But a fortnight ago the House of Representatives approved a non-binding amendment to the supplementary budget law calling upon the administration to exclude French, Russian, German and Syrian companies from reconstruction contracts and to bar their access to information about projects in postbellum Iraq.






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