Iraq Fights Back With Commerce

For a country operating under strict economic sanctions and the threat of war, Iraq is an awfully busy place. Ships carrying tons of Australian wheat and Vietnamese rice unload their cargo every week in the port of Umm al Qasr. France’s giant Alcatel telecom firm is working on a $76-million project to repair the country’s telephone system, heavily damaged during the Persian Gulf War.

In the face of last week’s arms-control ultimatum from the United Nations and warnings that Washington is ready to use force, the government of Saddam Hussein is fighting back with old-fashioned dollar diplomacy. Using the billions it is allowed to spend under the oil-for-food program administered by the United Nations, the Iraqi regime is conspicuously doling out lucrative contracts in hopes of undermining the U.S.-led campaign to oust it from power, according to businesspeople and Middle East experts.

Those efforts were on full display at the 35th annual Baghdad International Fair, which ended Sunday with Iraqi Trade Minister Mohammed Mehdi Saleh’s announcement that his government had signed more than 20 oil-for-food contracts worth $500 million with Saudi Arabia, Iran, the United Arab Emirates, France and Spain. The 10-day trade fair attracted 1,600 companies representing 49 countries, most from the Middle East and Europe, according to the official Iraqi media.

Earlier, the Iraqis declared the government’s intention to also reward Germany with contracts in exchange for its opposition to the U.S. campaign.

“Iraqi-German relations have witnessed a notable improvement after the firm positive stand of Germany in rejecting the launching of a military attack against Iraq by the U.S.,” the government-run newspaper Iraq Daily stated in an article on the trade fair. “Accordingly, President Saddam Hussein has ordered to give priority to German companies to enter the Iraqi market.”

But with politics and business so closely intertwined, companies and countries are keenly aware that they could fall out of favor under a new regime.

Years of war and the trade sanctions imposed by the United Nations in 1990 have forced Iraq to operate on the sidelines of the global economy. However, even a shackled Iraqi government offers attractive opportunities for firms angling for a piece of the oil-for-food program. Established in 1995, the program allows Iraq to sell oil and use the funds to buy humanitarian goods such as grains and vegetable oils, medical supplies and machinery. The U.N. must approve those contracts and can deny a sale if it does not fit the program’s humanitarian goals.

In the last six years, Iraq has received more than $56 billion in oil revenue, and signed contracts for an estimated $36 billion worth of food and other supplies, under the program, according to the Coalition for International Justice, a Washington-based human rights group that just released a report on Hussein’s legal and illegal revenue sources. The coalition says Hussein and his close associates took in more than $2 billion this year from illegal sales of oil to Syria and kickbacks and smuggling tied to the U.N. humanitarian program.

“These trade fairs are wonderful propaganda devices,” said Susan Blaustein, a senior consultant and co-author of the coalition’s report. “Baghdad can show, at least to the Arab world, that it is doing business, the sanctions aren’t working and people want to do business there.”

The single biggest customer for Iraqi oil has been the United States. From January to August of this year, Iraq was America’s sixth-largest supplier, providing 525,000 barrels of oil a day, or 4.6% of total U.S. imports, according to the American Petroleum Institute. Refineries in Texas and California, which make their purchases largely through European traders, like Iraqi crude because it is a low-sulfur product that is cheaper to process, according to oil experts.

The Iraqi government has been quite open about using its economic clout for political gain. Iraq, the leading customer of U.S. wheat and long-grain rice in the 1980s, is now the top purchaser of wheat from Australia and rice from Vietnam. France and Russia, considered crucial counterweights to the United States in the U.N. Security Council, were the largest recipients of contracts in the early years of the U.N. program, according to U.N. documents. More recently, many of Iraq’s neighbors -- Egypt, Jordan, Tunisia, Syria and the United Arab Emirates -- have seen their share of contracts increase dramatically.

Though Cargill Inc. and a handful of other U.S. firms were awarded contracts for agricultural exports early in the U.N. program, the United States and Britain -- America’s staunchest ally in the campaign to disarm Hussein -- have largely been frozen out of any oil-for-food contracts in recent years. U.S. executives have laid low during the Iraq debate, anxious not to appear predatory or anti-patriotic. But privately, they express excitement about regaining those markets if the U.S. government succeeds in opening those doors.

“We’re just sitting and waiting because Iraq is where our expertise is,” said Ray Kafaji, an executive with Luxor California Exports Corp., a San Diego company that sold $50 million worth of food and machinery to Iraq earlier in the oil-for-food program but has not received any contracts in two years. “We are boycotted by the Iraqis just because we are a U.S. company.”

Even if the political barriers were lifted, American firms would need to overcome any lingering animosities that Iraqis might harbor against the United States, according to some U.S. executives. “We would be in there very fast and working very hard to try to resolve any perceived political problems,” said Tom Mick, executive director for the Washington Wheat Commission, an export promotion group.

Australians know how tenuous those ties can be. In August, an angry Iraqi government halted the unloading of wheat from Australia after the country backed the U.S. in its campaign against Iraq. But after Australian Wheat Board Chief Executive Andrew Lindberg paid a conciliatory visit to Baghdad, the Iraqi government agreed to resume the imports, which were worth $420 million to Australia last year.

Peter McBride, a spokesman for the wheat board, said he is confident that his growers can hang on to their top market. “We believe we can continue to trade with them,” he said. “They have a lot of respect for the Australian wheat grower.”

Some foreign executives have voiced concerns that U.S. companies would be given an unfair advantage in a post-Hussein economy run by a government beholden to the United States. Those fears are particularly noticeable in the oil industry, which is anxious to get access to Iraq’s vast reserves, second only to Saudi Arabia’s.

As of last month, Iraq had negotiated contracts for future oil exploration worth as much as $38 billion with companies from Russia, China and France, according to Deutsche Bank. But little progress has been made on those contracts because of the U.N. sanctions, and there is skepticism that they will all pan out, according to a U.S. Department of Energy report on Iraq.

Assessing Iraq’s economic clout is difficult because of the lack of independent data and the high level of under-the-table activity. Iraq is known for announcing large trade and investment deals with great fanfare for propaganda purposes, but they often don’t materialize, according to Middle East experts.

But there is no question that the economic fallout of a regime change in Iraq would be the greatest for its neighbors, who have been the biggest recipients of Hussein’s legal and illegal largess. In the last two years, the Iraqi government has signed 11 free-trade agreements, most of them with countries in the Middle East.

“Most of the Middle Eastern countries who are opposed to the war on Iraq are motivated by the fear that such a war will harm them economically,” said Nimrod Raphaeli, a senior analyst with the Middle East Media Research Institute in Washington.

Take Syria, a longtime rival of Iraq whose relations have warmed dramatically in recent years. Last year, Damascus signed a free-trade agreement with Baghdad. Iraq also is believed to be earning as much as $100 million a month in illegal revenue from oil shipped through Syria, according to the U.S. Department of Energy.

Jordan’s King Abdullah II is vulnerable. Iraq is Jordan’s top trading partner and the source of $600 million in U.N.-approved oil a year. Jordanian companies also do about $400 million a year in business under the U.N. oil-for-food program. But the U.S. is Jordan’s No. 2 trading partner and provides the government with about $400 million in aid a year.

Western diplomats in Amman said a new government in Baghdad would be expected to maintain strong economic ties with Jordan. Such an important U.S. ally in the Middle East would not be allowed to founder, said Patrick Clawson, deputy director for the Washington Institute for Near East Policy. “At the end of the day, the U.S. will find a way to help Jordan through its difficulties,” he said.

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Times staff writer Michael Slackman in Cairo contributed to this report.