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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.

The immediate future of Iraq is in the hands of the US administrators, as it has been finally decided that the role played by the UN will be quite marginal. During the first month of military occupation, despite the appointment of General Jay Garner at the head of the Office of Reconstruction and Humanitarian Affairs, little has been achieved in terms of either maintaining security for the civilian population or re-establishing vital supplies. Before mid-May Paul Bremer had been appointed to supervise the political transition and reconstruction efforts, an acknowledgement perhaps that something more had to be done. 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. 

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. By mid May, efforts to repair them had not even started yet and acute shortages of oil were hitting 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.

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 for security concerns. This leaves much room of action for several militias that have sprung up, mainly composed of Shi'a 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 Shi'a 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 Shi'a 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 Shi'a community, a situation which has already led to clashes and even the killing of Abd al-Majid al-Khoi, a moderate Shi'a leader. 

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, it is expected that output will recover its capacity of 2.5 million barrels very rapidly, while there is talk to expand production to as much as 6.5 millions in the near future, although this is subject to which level of investment will be achieved and how quickly. In any case, given the limited damage to the oil production facilities, Iraq is expected to recover at least the pre-war production levels quite rapidly.

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: 002 - (26/06/03)

Chaos continues
Despite claims of the contrary by the occupation authorities, only modest progress was made in Iraq during June, especially as far as the living condition of the civilian population is concerned. Although US$0.5 billion were spent in salaries for 2 million civil servants and custom duties are being lowered, allowing a massive explosion of imports, few Iraqis appear to be grateful. After more than two months of occupation, a decrease in the looting activity was reported as the end of June approached, in part at least because not much was left to loot anymore. Patrolling by American troops remained limited, both due to the limited number of troops available and to the unwillingness to risk even modest casualties. The about 7,500 Iraqi policemen taken back into service are not enough. The reestablishment of water and power continued slowly during 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. Although the dinar recovered from its low of 4,000 to a dollar during the war, to stabilise in June at 1,400, there is a crisis of confidence in the dinar, especially the 10,000 note, because of rumours that many are counterfeit and will be declared worthless. The dollar, on the other hand, is coming into widespread use.
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 oil industry: a slow revival
Unsurprisingly, the oil industry has been paid much greater attention than the rest of the economy, but results are far from being triumphal here either. The main achievement was the restart of oil exports through Turkey on 22 June, after six US companies agreed to buy 10 million barrels of Iraqi oil. 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 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 is officially expected to reach about half that level by the end of June, although many are more pessimistic and do not expect this target to be reached before mid-July. Since domestic needs stand at about 550,000 barrels, there is already 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.

Will the anti-war axis be punished?
With the approval of the US-sponsored resolution at the Security Council, international bickering around Iraq has subsided, although it has far from disappeared. 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, 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, who leads the US-Iraqi administration, called for more generosity by creditors, saying that the moratorium on service repayments, which they have offered, is not enough.

Ruling Iraq against the Iraqis?
If the improvement of the economic situation was slow, it could be said the political situation actually worsened between the end of May and the first half 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. Some sort of Iraqi interim administration will be formed sooner than that, but its role will likely be limited to drawing up a new constitution. 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.

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Iraqi oil's uncertain future

An enormous reservoir of petroleum almost certainly lies beneath the Majnoon oil field, a blank expanse of pale sand near the Iran border, reports the Wall Street Journal Europe.
Under Saddam Hussein, Majnoon was the linchpin of an ambitious plan to expand Iraq's oil industry. Its promise captured the attention of French oil company Total SA, which tentatively agreed to put almost US$5bn (€4.25bn) into extracting its treasure.
Now Majnoon is deserted, save for prowling looters and armed robbers. The road to the nearby city of Basra is blocked by razor wire. Though the field remains a crucial component of Iraq's vast potential, it has come to symbolise the profound uncertainties that confront this country and the US forces in control of it as they seek to turn oil in the ground into cash in hand - enough to pay for Iraq's reconstruction and sustain a future government.
Like Iraq itself, Majnoon has abundant oil waiting to be tapped and global energy companies eager to lend capital and expertise for a share of the spoils. Even though the United Nations lifted the sanctions that barred most exports of Iraqi oil for more than a decade, considerable barriers remain. No government exists to sanction contracts, develop fields or determine whether old deals are still valid. No codes are in place for foreign investment. Data about the Majnoon oil are scarce, and major export facilities are battered by years of war and neglect.
The country with the second-largest proven oil reserves in the world, after Saudi Arabia, has become a frontier, one to be traversed cautiously. "All the big il companies are interested to go back into Iraq, provided that the legal government is willing to increase its protection and accept foreign investment," said Alain Lechevalier, Total's vice president for the Middle East. "This means a lot of stability that presently I don't forecast for two to three years. Nobody is going to pour US$5bn into Iraq with no stability in the regime."

LUKoil restarts work in Iraq oilfield

LUKoil, one of Russia's largest oil companies, said it had relaunched work on the development of the West Qurna oilfield in Iraq, despite a dispute over whether its contract signed under Saddam Hussein's regime remains valid.
Leonid Fedun, vice-president of LUKoil, confirmed that company employees and returned to Iraq and were holding consultations with the interim administration, while stressing that the existing US$6bn (€5.1bn) contract agreed in 1997 remained valid.
Separately, its subsidiary LUKoil Overseas confirmed it was reopening its representative office in Baghdad, which had been temporarily closed during fighting, and had sent executives as part of a trade mission to Iraq recently along with other Russian companies.
LUKoil rejected a unilateral decision by the Iraqi authorities late last year to cancel the contract on the grounds that it had not met its obligations, arguing that it had fully complied with the conditions as far as they could be respected alongside the restrictions imposed by the United Nation's sanctions regime.
Vagit Alekperov, LUKoil's chief executive, also stressed that he would seek international arbitration if necessary to enforce the contract, which he said he considered to remain valid.
He said there had been no talks with US oil companies about joint operations in Iraq.
The comments came as a senior Russian diplomat claimed yesterday that Moscow had received assurances, on behalf of its businesses, from the US that there would be no obstacles to their efforts to participate in the reconstruction of Iraq.
Yuri Fedotov, a deputy foreign minister, said Russian companies were holding talks in Iraq in the context of the United Nation's oil-for-food programme, which had also been suspended during military action.
Earlier the foreign minister said it would be swiftly re-establishing its diplomatic representation in Baghdad, after being one of the last to close once the US-led action against Mr Hussein's regime had begun.
The US has said it will not stand in the way of Russian companies in Iraq.

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Petrotub eyeing key projects in post-war Iraq

Petrotub, a Romanian utility, said it is awaiting approval from Washington for its participation in the reconstruction works for war-ravaged Iraq, Medifax News Agency reported. Talks between Petrotub and the American side were initiated, with Petrotub's general manager speaking on behalf of the company, Petrotub spokesman, Vlad Clapa, was quoted as saying.
"Petrotub has been selected to take part in the reconstruction of Iraq, a thing which is quite good for us, but we are waiting for the approval from the American government," Clapa explained. Following the of the Iraq war, the US administration launched an invitation to participate in the reconstruction works to countries that supported the US plan. Some 90 Romanian enterprises have submitted bids. Of those, 30 have received the principle agreement.

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