Iraqi Oil Deal Frees Up Funds for Hussein’s Military

President Saddam Hussein had planned to resist the United Nations deal to resume Iraqi oil sales to feed his suffering population and had even drawn up plans to make massive cuts in his military to free up resources, senior U.S. officials said Thursday.

Hussein reluctantly relented only when it appeared that he would soon have to begin carrying out cutbacks in the military machine that is the most powerful in the Persian Gulf region--and is the prop that has kept him in power.

“The military was for the first time really feeling the pinch,” a senior Pentagon official said. “Saddam had to disband a division of Republican Guards last year and now he was looking at cutbacks of up to 50% of the Iraqi military across the board.”

But by agreeing to Monday’s oil-for-food deal, Hussein not only can maintain his military at current levels but also will effectively be able to free up money now being used to pay for food and medicine. And the funds will be in internationally accepted hard currency, not fluctuating Iraqi dinars.

Now that the long-delayed agreement is complete, the broad implications of the oil sales--the first of Iraqi oil since the 1991 Persian Gulf War--are the subject of intense analysis in Washington and throughout the region.

Some close U.S. allies are likely to face problems because of the deal. In particular, Jordan, which has turned against Baghdad after supporting Hussein during the war, now faces major economic and political challenges.

The oil-for-food deal allows Iraq to sell $2 billion worth of oil in the next six months. Iraq is to spend $1.4 billion of that sum on humanitarian aid and the other $600 million on war reparations, assistance for the Kurdish minority, some U.N. costs and its own oil export expenses.

After the deal was signed, U.S. officials claimed that Iraq effectively was becoming a U.N. trusteeship, because its economy will come under U.N. control, much as Iraq’s military has been heavily supervised by U.N. monitors since the war.

Yet Clinton administration officials and Middle East experts now concede that the deal liberates a windfall of funds for Hussein.

“Money is fungible,” said James A. Placke, director of Cambridge Energy Research Associates in Washington and a former U.S. diplomat in Iraq. “To the extent that the new oil revenues are able to provide basic necessities for Iraqis, other resources will effectively be freed up, which Saddam Hussein will be able to use in ways of his own choosing--and which the United States and the United Nations may not be able to monitor.”

Jordan’s King Hussein has been appealing to the Clinton administration for months not to let the deal go through, U.S. officials said. The kingdom could lose the 60,000 barrels per day of Iraqi oil that it has been able to buy--at reduced rates--for transportation and industrial uses. Since Jordan recently has become headquarters of the Iraqi opposition, the Iraqi dictator has little incentive to continue selling oil to the kingdom.

“Jordan will be the most exposed,” said one administration official. “Iraq has several options. It could cut off the oil spigot completely, cut it back or make it more expensive.”

Saudi Arabia might be willing to make up the oil to Jordan but probably not at reduced prices, U.S. officials said. Indeed, Saudi Arabia, which is still recovering economically after paying a large part of the Gulf War tab, could lose up to $3 billion in oil revenues this year if new Iraqi oil on the world market drives prices down $2 per barrel, as is widely expected, Placke said.

“It will mean tightening belts and fewer arms purchases, and it will be much harder to get money from them [the Saudis] for Bosnia and other international programs,” a Pentagon official predicted.

Kuwait is likely to lose $1 billion in oil sales, industry experts predicted. But it also stands to make gains from reparations from Iraq. The United Nations has approved more than 80,000 Kuwaiti claims totaling more than $450 million.

One of the biggest losers may be Iran, which stands to lose up to $1.5 billion in oil revenues if the oil price drops by $2 per barrel. Iran’s economy is already in dire straits.

Turkey is the biggest winner. It is expected to make between $50 million and $100 million from fees for the use of its pipeline, which will carry the majority of the 700,000 barrels of oil per day that Iraq will be allowed to export.

Turkish exporters are also expected to supply the vast majority of food and much of the medicine that Iraq buys--a boon to an economy that last year had a $14-billion foreign trade deficit. Turkish officials said the country lost about $2 billion after it closed the pipeline in 1990 to comply with pending U.N. sanctions.

The decision to channel more than half of Iraq’s exports through Turkey reflects in part a reward for Turkey’s having shut the pipeline in 1990, even before the U.N. sanctions against Iraq went into effect.

“Turkey gains a huge advantage,” said Judith Kipper, a Middle East expert at the Center for Strategic and International Studies in Washington. “Opening the pipeline is what it’s been trying to do since the war ended. It’s a source of badly needed revenue which will help a weak government.”

Even Syria stands to gain from the deal. Iraq has already raised the possibility of exporting oil via a long-unused pipeline between the two countries if the agreement is renewed after the initial six months.

Times staff writer John Daniszewski in Cairo and special correspondent Hugh Pope in Istanbul, Turkey, contributed to this report.