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Area (

24,001,816 (July 2002 est.)


Iraqi dinar (IQD)



Formerly part of the Ottoman Empire, Iraq became an independent kingdom in 1932. A "republic" was proclaimed in 1958, but in actuality a series of military strongmen have ruled the country since then, the latest being SADDAM Hussein. Territorial disputes with Iran led to an inconclusive and costly eight-year war (1980-88). In August 1990 Iraq seized Kuwait, but was expelled by US-led, UN coalition forces during the Gulf War of January-February 1991. Following Kuwait's liberation, the UN Security Council (UNSC) required Iraq to scrap all weapons of mass destruction and long-range missiles and to allow UN verification inspections. Continued Iraqi non-compliance with UNSC resolutions during the past 12 years resulted in the US-led invasion of Iraq in March 2003 and the ouster of the SADDAM Hussein regime. Coalition forces remain in Iraq, helping to restore degraded infrastructure and facilitating the establishment of a freely elected government.

During the first two months of military occupation, despite the appointment of General Jay Garner at the head of the Office of Reconstruction and Humanitarian Affairs and then of Paul Bremer to supervise the political transition and reconstruction efforts, little has been achieved in terms of either maintaining security for the civilian population or re-establishing vital supplies. As Iraqi households were rapidly running out of food, the second half of May proved especially critical in this regard. Nonetheless, behind the curtain an intense debate is taking place with regard to the issue of reconstruction and on the exploitation of Iraqi oil reserves. The expectation is that US companies will take the lion's share of both reconstruction contracts and exploitation rights, but both the Russians and the French claim the validity of existing contracts and the payment of outstanding debts. How this will be settled is unclear yet. Some officials in the Bush administration invited the creditors to waive Iraq's debts to help the reconstruction, but given the huge windfall expected once Iraqi oil production restarts in earnest, such position never had many chances of being accepted. Russia, France and Germany have indicated that will not forgive the debts, but only reschedule the repayments, which could also be capped at a certain percentage of Iraq's oil revenues. Overall, Iraq's debts, including war reparations, are estimated to amount to US$350-US$400 billion. 
With the approval of the US-sponsored resolution at the Security Council, during June international bickering around Iraq subsided, without disappearing altogether. There were unconfirmed reports that the Bush Administration has issued instructions to keep French companies out of the reconstruction business. However, most of the attention was focused in June on Russia, whose government officials repeatedly stated that they have been assured that there would be no discrimination against Russian companies in the reconstruction. Despite that, acting Iraqi oil minister Ghadbhan cancelled a maxi-contract with Lukoil, which threatened retaliation. Moreover, the fate of Iraqi foreign debt, owed mainly to Russia, France and Germany, is still not clear. At the beginning of June Paul Bremer called for more generosity by creditors, saying that the moratorium on service repayments, which they have offered, is not enough.

The Iraqi economy has been steadily declining since at least 1991 and by 1999 was estimated to have fallen by 75%. Of course the latest war and the current virtual paralysis of economic activities have made the situation worsen further. The fact that the state used to control so much of the economy makes the political chaos all the more important in terms of negative impact. About 45% of the Iraqi workforce is directly employed by the state. Such schemes as the distribution of dollars to state employees by the occupation authorities are not much more than palliatives. The production of oil almost stopped during the war and is not expected to restart for at least another month and probably longer. The oil fields have been subjected to extensive looting and it will take time and money to repair them. Efforts to repair oil extraction and transport facilities began to produce results only during June, causing acute shortages of oil to hit the Iraqi internal market, to the point that officials in the oil industry stated the need to start importing oil from abroad. There were fears that petrol shortages would cause unrest and contribute to complicate the political situation. However, the oil industry has been paid much greater attention than the rest of the economy and by June the US administration and the Iraqi officials working for it could claim at least some relative successes. The main achievement was the restart of oil exports through Turkey on 22 June. By the end of June production had reached 800,000 barrels a day, up from 310,000 barrels a month earlier. Production is mostly concentrated in the North, where the disruption and looting caused by the war has been less severe.
The reestablishment of water and power continued slowly during May and June and even in Baghdad was far from complete. Most of the telephone network is also in need of repair, while banks remain closed. Although trade businesses are reopening, many of them are reported to be on the verge of bankruptcy. The dinar, however, recovered from its low of 4,000 to a dollar during the war, to stabilise in June at 1,400. At least something has been done to help the moribund Iraqi agriculture. Production of grain is expected to be half that of 1990 this year and the distribution network has collapsed. The UN are launching the largest food aid program in the world to help the Iraqis, with a budget of US$1.3 billion. More importantly, the World Food Program will buy this year's harvest from Iraqi farmers, helping them to earn enough to sow the land for the coming year. 

The situation in Iraq is inevitably going to remain chaotic for some time. Although the Baath state has been thoroughly defeated, the US-British military occupation is spread rather thinly throughout the territory, mainly because of security concerns. Although a decrease in the looting activity was reported as the end of June approached, patrolling by American troops remained limited, both due to the insufficient number of troops available and to the unwillingness to risk even modest casualties. The about 7,500 Iraqi policemen taken back into service were not enough. This left much room of action for several militias that have sprung up, mainly composed of Shiite Islamist militants, but also of neighbourhood associations which are trying to maintain security locally. Northern Iraq, of course, remains under the control of the Kurdish militias, as it has been for many years now. 
There are several factors that are feeding the political instability. First of all is the fact that most parties and factions based in Iraq oppose to various degrees the military occupation and are not ready to cooperate with a US military administration. Also, there is tension between exile groups which are coming back to Iraq with the support of the US, and indigenous groups, which feel they are being overtaken by newcomers who know little of the reality of Iraq. Last, but no less important, is the fact that the internal opposition is by no means united. The centre stage in the first few weeks after the fall of Saddam's regime has been taken by Shiite religious groups, which moved quickly to occupy as much ground as possible. However, there are strong currents of secularism in Iraqi society and tensions might arise soon, especially if the Shiite parties tried to monopolise the political scene. The relationship between secular and religious parties is not always bad and in fact the second most important islamist movement, Al-Dawa, is allied to the communists and other secular parties, but other islamist groups, including the largest of all, SCIRI, are explicitly calling for an Islamic government, at least at the local level. At present, however, the competition is mainly among Islamic groups which claim to represent the Shiite community, a situation which has already led to clashes and even the killing of Abd al-Majid al-Khoi, a moderate Shiite leader. 
After more than two months of occupation, the political situation actually appeared to be worsening by the end of June. The US managed to alienate virtually all Iraqi Arab political forces, including the exiles whom they brought back to the country, by postponing the establishment of a proper Iraqi interim administration until after the political elections, which in turn are not expected before a year.
In the areas inhabited by Sunni Arabs, there appears to be starting a guerrilla insurgency, which could develop in a serious annoyance for the US occupiers. 
The political groups rooted among the Shiite majority have so far adopted a cautious approach. Despite not hiding their distaste of the Americans, they have refrained from armed opposition and are focusing on consolidating their hold on the population. In the short term, Shiite parties and their Iranian patrons have no interest in an open confrontation, but the potential threat to American interests will remain. Disappointed by the bickering and ineffective exile parties, the Americans appear to be turning to others in order to find some interlocutors. In particular there is a clear effort to establish links with the tribal chieftains, hoping that this could allow the maintenance of order without committing troops. The tribal chieftains are building up their militias, in a situation that could soon resemble the power-sharing deal with the warlords in Afghanistan. On the other hand, plans to rely on selected former Baathist officials are proving more difficult to implement that initially foreseen. Not only the majority of the population rejects these officials, but few have accepted to serve under the conditions imposed by the US, which include a clear and unequivocal rejection of the Baathist ideology. The presence of an armed opposition to the American occupation and the fact that several Baath leaders are still at large clearly represent a powerful disincentive for former Baathists to join the Americans, not least because of fears of assassination.

Forecast 2003

It appears likely that US military presence in Iraq will continue for the foreseeable period, as the Pentagon is reported to be planning the establishment of permanent military bases in the country. This will inevitably not please the Syrians and the Iranians, who however will mostly try to maintain a low profile in order not to attract the wrath of the Bush administration on them. In the case of Iran, however, the situation is made more complex by the intricacies of factional conflict within its ruling elite and Islamic hardliners within it might want to push their Iraqi allies towards a more confrontational path against the US, hoping to keep the Americans busy for some time.

Any government that invested large resources in paying those debts, rather than rebuilding Iraq, would find it difficult to consolidate its legitimacy. Once the most immediate task of restarting the economy will have been addressed, there is little doubt that wide-ranging economic and structural reforms will be attempted. The banking sector in particular is considered to be completely unsuitable for a "liberal" economy, which is what most people expect Iraq to become over the next few years. It is likely that the dollar will substitute the dinar as the Iraqi currency. The transition from a state-controlled economy to a relatively free-market one will be characterised by all the problems that have been met in (for example) Eastern Europe, with the additional drawback of a post-war situation and (possibly) continuing political turmoil, but with the advantage of a rapidly growing oil revenue. The Iraqi agriculture, on the other hand, might recover quickly, as much of its decline was due to the sanctions and the difficulty to maintain the level of inputs such as fertilizer and seeds. As far as the oil sector is concerned, there was talk to expand production to as much as 6.5 millions in the near future, although this will be subject to which level of investment will be achieved and how quickly. In any case, despite the limited damage caused by the war to the oil production facilities, the acting oil minister, Ghamir Ghadhban did not expect production to reach pre-war levels (2.5-3 million barrels a day) for at least a year, while the 2 million barrels target could be reached by the end of 2003. Production was officially expected to reach about half that level by the end of June, although many were more pessimistic and did not expect this target to be reached before mid-July. Since domestic needs stand at about 550,000 barrels, there was supposed to be soon a modest surplus for export. Oil refineries restarted production at the beginning of June, contributing to reduce the long queues for fuel. However, continuing looting and sabotage activity are hampering the efforts to bring the oil industry back on its feet. The original expectation, that oil revenues would have contributed almost all of the US$41 billion required for the reconstruction within the first two years of occupation, now look wildly optimistic. Apart from claims that the reconstruction will cost much more than US$41 billion, over the next year oil revenues are not likely to exceed by much the US$13 billion of 2002. According to a study, bringing oil production back to the pre-1991 level will take at least 18 months and require US$5 billion of investment. Moreover, due to damage to the oil fields, the price of Iraqi oil is now going to be lower than it used to be, because of higher sulphur content. On this basis, it is estimated that oil revenue will probably not exceed US$5 billion in 2003 and US$15 billion in 2004 and not necessarily will it be possible to spend this whole amount on reconstruction.

The political future of Iraq is very difficult to predict at the time of writing. The occupying coalition forces do not seem to have confronted yet the issue of how to secure the country for the civilian population. As a result, warlords and militias are likely to continue to rapidly expand their hold over vast regions of the country, offering at least some semblance of security to the local population. Because most of these militias are politically aligned, conflicts are likely to arise in the medium and long-term if this situation persists. At the same time, complex political negotiations will be required to determine the future of the Iraqi state, both in terms of coalition governments and in terms of institutional reconstruction. The role to be played by the Kurdish parties and exile politicians on one side and the relationship with occupation forces on the other will likely prove the most contentious issues. The plan is for an Iraqi Interim Authority to gradually take over government functions from ORHA, but in the short term the role of Iraqis will be confined to a Consultative Council, which will mainly focus its work on drafting a new constitution and on legal reform. 

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Update No: 003 - (24/07/03)

US begins reconciling with reality on the ground
The main development in Iraq during July was the establishment of the Interim Governing Council (IGC), made up of 25 Iraqis of different backgrounds. The establishment of the council itself can be seen as a concession from Paul Bremer, the head of the Coalition Provisional Authority (CPA). At the time of taking over in May, he had announced that time was not ripe for Iraqi self-government and that no ruling council was going to be established in the short term. Iraqis were to be involved only in the drafting a constitution, according to his plans. However, pressure from the UN, international donors and Iraqi political parties forced Bremer and the Bush Administration to give in. The potential contributors to the planned international fund to rebuild Iraq stated clearly that they would not even agree to meet until an interim government composed of Iraqis was in place.
The IGC has the power to nominate ministry heads and form commissions to recommend policies concerning the reform of the Iraqi state. Even the composition of the IGC shows that Americans are moderating their earlier ambitions to reshape Iraq in their own image. Although pro-US Iraqi returnees from exile are still over-represented in the IGC, compared to what seems to be their actual following among the population, anti-US factions are fairly well represented too, including seven Islamists and a Communist. The lack of an overall majority within the IGC resulted in the inability of the council to elect a president. The Bush Administration had probably hoped for a friendly Iraqi, like Chalabi, to preside the council, but the IGC opted for a rotating collegial leadership of three members instead. 
Still at the end of June the Americans had been moving in an opposite direction, stopping the selection process of local administrations in Iraqi cities, which they themselves had started. It appears that they were unhappy about the outcome of the local elections, with too many former Baathists and Islamists getting through. 

Trouble ahead
Bremer was clearly trying to get things going throughout July, especially in terms of improving security and regaining the trust of the Iraqi people. The strength of the police force was built up to 30,000, essentially by recruiting former policemen of the Saddam Hussein era. He also announced the formation of a small Iraqi army to guard the country's borders. Recruitment for the new army started in mid-July. However, little actual improvement was noticeable in the streets, not least because the Americans do not allow Iraqi police to carry weapons. Washington sources increasingly acknowledge that the Iraqi post-war plans were based on expectations which completely failed to materialise. It is reckoned that it will not be possible to reduce the level of troops committed to Iraq for several months to come at least, a fact that is pushing Pentagon expenditure in Iraq to around US$4 billion a month, roughly twice as much as it had been forecast. Some sources even claim that Bremer already asked for 50,000 more troops, to help secure the country. It is generally accepted that with current troop levels and given American wariness to risk losses, maintaining security throughout Iraq will not be possible. 
The CPA is becoming somewhat more efficient now, but the start was quite disastrous. The decision to privilege military personnel over civilian reconstruction specialists has proved particularly ill advised. The Bush administration is also finding more difficult than expected to recruit countries willing to share the burden of securing Iraq. The negative answer of France was probably expected, but India's "no" appears to have been more of a disappointment. There are indications that President Bush now regrets having refused a greater UN involvement. The Secretary-General of the UN, Kofi Annan, might have been approached with a proposal for a security role, which he rejected.
The fact that the guerrilla warfare waged against US troops by Saddam loyalists and other anti-US elements shows no signs of slowing down is not Bush's only worry. Earlier expectations that oil revenue would have been enough to fund the reconstruction are now giving way to concern that American taxpayers might have to pay at least part of the bill. The latest assessment is that US$90 billion are needed to rebuild Iraq over the next decade. The Bush administration budgeted just US$2.4 billion, which moreover it is unable to spend because of the widespread insecurity. Only about US$250 million have been spent so far. The Iraqi power supply system appears to be a major problem for the American occupiers. Damaged by previous wars and lack of maintenance, the CPA has not been able to restore it in such a way to bring energy supply back to pre-war levels. Worse still, it seems resigned to not being able to do so. The building of new power stations is likely to take years and in the meanwhile the insufficient power supply will greatly hamper the economic recovery.

Little progress towards economic recovery
By mid-July, the Iraqi oil industry was still struggling to reach the targets set for June. The oil fields appear to be now in a condition to pump more than one million bpd, but sabotage of the pipelines and administrative confusion prevent the full exploitation of this potential. So far Iraq has only been able to export oil stored in Turkey and in Iraq itself, while freshly pumped oil is being absorbed by internal consumption and smuggling. Even according to the most optimistic estimates, oil exports will not be able to contribute to Iraq's recovery before the end of 2004.
The continuing mess did not prevent the CPA from discussing plans for the future. One issue which is being raised is currency reform. At present there are three currencies in circulation, the dollar, the Iraqi dinar and the Northern Iraqi dinar. With inflation running at an estimated 70% a year, the need is felt for creating a single currency which would make it easier to stabilise money supply and fight inflation. Other plans which are being made public reflect less urgent recovery needs and more the appetite for lucrative deals. On 17 July the CPA invited bidders for three mobile phone licences to express their interest. Although the European GSM technology is used throughout the region and would therefore be the most logical choice, US firms are lobbying the Bush administration in order to have the American CDMA standard adopted a nice piece of imperial preference.

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US appoints banker for Iraq

Long-term Washington insider US Treasury Secretary, John Snow, has appointed the top two officials who will co-ordinate the economic rebuilding of Iraq. 
Peter McPherson, who held the number two job at the US Treasury in the late 1980s, becomes Financial Co-ordinator for the Office of Reconstruction and Humanitarian Assistance (ORHA) in Iraq. 
His deputy will be George Wolfe, who is a senior US Treasury Department lawyer. 
The pair will assist Iraqis in rebuilding the finance ministry, the central bank and the banking system, the US Treasury Department said. 
Tough job 
They will work with retired general Jay Garner, who heads the ORHA and has spent the last few days touring Iraq's devastated cities to size up his job. 
The wider economic reconstruction of Iraq depends on getting the country's oil back on stream, a task which is already underway. Much of Iraq's infrastructure was damaged in the looting which followed the fall of Saddam Hussein's regime. Official records were destroyed as government offices were wrecked, which may hamper reconstruction. 
Textbook CV 
Peter McPherson is currently President of Michigan State University, having moved from his early days in a Washington law firm into government, then banking and academia. He was Deputy Secretary of the Treasury for nearly two years during the administration of ex-President Ronald Reagan. In March 1989 he switched to the private sector, becoming Group Executive Vice President of Bank of America. 
There he dealt with global debt restructuring and investment management. 
"He brings a wealth of experience in the public and private his new position", said Mr Snow. 
Mr McPherson draws lessons about the importance of globalisation and free trade from his previous experience of crisis management in his reminiscences on Michigan State University's website. Recollecting the 1987 global stock market meltdown, he says: "I was Acting Secretary of the US Treasury, and it wasn't a good day to be in that position." 
Mr Wolfe is currently Deputy General Counsel at the US Treasury Department. 

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Russian construction company begins talks on return to Iraqi oil fields

Russia's Stroyneftegaz has begun intensive talks with a new Iraqi leadership to return to Iraqi oil fields, company's board chairman Yuriy Shafranik told ITAR-TASS News Agency on 30th June.
He noted that in the last few weeks representatives of the company visited Baghdad twice and achieved good results during the talks with the Iraqi Oil Ministry.
"The Russian leadership is taking the correct steps towards Iraq. The country's policy will allow Russia to have equal rights in a dialogue with foreign partners. The military phase of events was over and now it is necessary to begin a dialogue," Shafranik said.
He stressed that Stroyneftegaz does not intend to deviate from the schedule. It will present a new feasibility study to Iraqi partners by September to develop one of the largest oil fields in southern Iraq - Rafidayn. An agreement to this effect has been signed before the beginning of military actions in Iraq.
At the same time, Shafranik did not rule out a possibility of creating a consortium with the participation of foreign companies. "This is one of the most effective ways of leading Iraq out of the dead end and it excludes obvious confrontation," he said.
The head of the Russian company stressed that Stroyneftegaz has all rights to developing the Rafidayn oil field. "But if Iraqi authorities adopt a political decision on a new tender, we will take part in it," he added.
Shafranik said projects with foreign partners will help Russian companies reinforce their positions on Iraq's market. "Russia should cooperate with foreign companies in restoring Iraq's economic, extraction and production base," he said. Shafranik believes that this will allow Russian companies to return to Iraq's market. "It is real for Russia to return to Iraq's market," Shafranik said.
"We have a good history of cooperation. Recently we have had serious projects there," he added.
At the same time, Shafranik stressed that Russian companies would have no political preferences any more. "We will have equal conditions with other countries and we have to work in fierce competition," he said.

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Georgian drinks company to start exports to Iraq

Forty-five thousand bottles of beer and the same number of ice tea bottles have been loaded on to two containers at the Qazbegi company's breweries in Tbilisi and Rustavi, which are to be sent to Iraq, prime-News News Agency has reported.
Prime-News was told at Qazbegi that, under a long-term contract, seven brands of ice tea, four brands of lemonade and five brands of beer are to be exported to Iraq.
Qazbegi also intends to enter the US market. The first batch of 32,000 bottles is to be exported to America shortly.

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UN delivers new shipment of emergency supplies to Iraq 

The United Nations Population Fund (UNFPA) has delivered a new shipment of emergency reproductive health supplies to key maternity hospitals and primary healthcare centres in Baghdad in an effort to restore reproductive health services in 
Iraq, IRNA News Agency reported on July 24th. 
The shipment included much needed emergency obstetric care supplies, clean delivery equipment, contraceptives, syringes, essential drugs and other medical supplies sent by the UNFPA office in Iran, said a press release issued by the UN Information Centre in Tehran. 
Priority was given to healthcare facilities serving densely populated areas, those that were directly affected by the war, and others located in areas in need of immediate support, it added. 
Additional UNFPA shipments of reproductive health supplies are expected to arrive in Baghdad soon. 

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