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REPUBLICAN REFERENCE

Area (sq.km)
437,072

Population
24,001,816 (July 2002 est.)

Capital
Baghdad

Currency
Iraqi dinar (IQD)

President

Background:
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.

Summary 2003

International

During the first three 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 initially indicated that they would 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. By November the creditor countries were however accepting that a rescheduling is inevitable. The Bush administration and international financial organizations prefer to talk in terms of debt relief and cancellation, although the latter are somewhat less generous than the US government and ask for a writing-off of a 66-80% of the debt, depending on the institution.
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. During September the efforts of the US Department of State to involve more countries in its Iraq campaign yielded very little results, despite the support of a growing number of top brass. The Pentagon and vice-president Cheney are known to be contrary to the involvement of other countries and will not be too displeased by this lack of developments, but President Bush appears increasingly worried that Iraq might still be a bleeding wound by the time the campaign for next year's US presidential elections gets under way. For this reason, he requested in September US$66 billion for Iraq, significantly more than expected. The key countries targeted by the Department of State, namely India, Pakistan, Turkey, Germany and Russia, are all asking for rewards that have so far been judged excessive by the Bush administration. The positive development in September was that after much vocal protest, the Arab countries started cooperating openly with the Iraqi Governing Council and the newly appointed government. Not only did the Arab League let Iraq take part in its meetings, but Iraq got back its seat within OPEC. Now that an Iraqi interim government is in place, the IMF and the World Bank will be keener to start lending money.
During October the Bush administration relaunched on a large scale its efforts to pacify Iraq. On the one hand it created the so-called "Iraq stabilization group", on the other it succeeded in pushing through the Security Council of the UN a new resolution. The Iraq stabilization group reduced the influence of the Pentagon and in particular of Mr. Rumsfeld over the decision-making on Iraq, a development which in the view of many should contribute to make things better. The new resolution assured that the US will not be permanently stationed in Iraq and that the multinational force will leave once Iraqi rule is re-established. There are also indications that the US might be willing to accept to bring its troops under international control, according to a statement of Javier Solana, European Union foreign policy chief. It seems, however, that the US and their British allies still plan to maintain 6 military bases in Iraq and do not seem to be intending to discuss the issue with the future Iraqi sovereign government, a fact which casts some doubts on the character of that sovereignty. The decision of the Bush Administration to ban countries which opposed the war against Iraq from bidding for the reconstruction projects was a startling development in December, at least in terms of the attention that it attracted. As a matter of fact, few ever thought that countries like France, Germany and Russia would have been allowed to win any contract, although the fact that such a policy has been announced publicly does represent a surprise. Again, while the internal popularity of Bush might benefit from this, at least in the short term, declaring such a ban handed more arguments to those same countries for opposing the cancellation of much of Iraq's foreign debt. In the end, the forgiving of much of the debt remains very likely, but France, Germany and Russia might now be in the position of asking something in exchange.

Economy
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. Towards the end of the year the government was drafting plans to create jobs, such as one involving public-private partnerships to build residential complexes and employ 250,000 people. At the same time plans were being developed to pay out unemployment subsidies at the rate of US$700 million a month, which would represent a major part of the state budget.
The production of oil almost stopped during the war and it took time to restart it. 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 situation started improving particularly rapidly towards the end of the year in the southern region, where looting has been contained and rehabilitation has been proceeding fast. The most significant improvements remain those recorded in the oil industry. In November 2.1 million bpd were produced, of which 1.5 million were exported. The impact on production was such that crude exports are expected to reach 1.7 million bpd already in December, which is the maximum export capacity given the current facilities. By 2004 it is likely that production will recover the pre-war level (2.5 million bpd) and the Iraqi Oil Marketing Organisation revised its forecast upwards in November, stating that 2 million bpd will be exported daily by March 2004. At present 300,000 bpd are still being injected back into the ground, because they cannot be used. The analysts expect rapid improvements in 2004 because developing the southern fields should be rather quick, given the presence of infrastructures in place and the low-level technology required, the increase in production is expected to continue even beyond the capacity levels of before the war. Saudi Arabia has already declared its intention to reopen the Iraqi pipeline that runs through its territory. There are however some shadows cast over the rapid recovery of Iraq's oil industry. The primitive technologies and dubious engineering practices used in the past several years to maintain production in the oil fields will demand significant additional investment to be remedied and some production potential is likely to have been lost for good. The rapid recovery will end relatively soon and major investments will soon be needed. The International Energy Agency released estimates in November that at least US$5 billion will be needed to bring production capacity to 4 million bpd. 
On the other hand, in the present political conditions, maintaining some semblance of a state in Iraq will be much more expensive to the US than it was to Saddam Hussein and even if the US$150 million that Iraq was earning every week from oil at the end of September were multiplied by three or four, it would still be far from enough. As a result, the budget for 2004, which is expected to range between US$13-14 billion, will still largely be funded through foreign aid. In November, as at the international donors conference in Madrid pledges of aid were higher than what the pessimists had forecast, with US$18.5 billion on top of the US$20 billion already pledged by the US, although only US$6 billion of this is in grants.
It has now been accepted that sufficient electricity production is not going to be reestablished in the short term and efforts are being made to start importing electricity from neighboring countries. Iran has already signed a contract, while Turkey seems to be about to sign a second one and Syria is negotiating another. The hopes that the northern oil fields would have given their contribution were quashed after they were sabotaged just a couple of days after their reopening. More guards are being recruited to help guarding the pipelines, but they might not be enough. Some experts say that to bring production to the 3.5 million bpd which was the original target will take as much as US$30 billion, which might not be easy to gather. Western oil companies are reported to have told the Bush administration that they are not going to make large investments in Iraq for the foreseeable future. Production is mostly concentrated in the North, where the disruption and looting caused by the war has been less severe. By mid-July, the Iraqi oil industry was still struggling to reach the targets set for June, as sabotage of the pipelines and administrative confusion prevent the full exploitation of this potential. 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 first budget was presented in August and covers the remainder of 2003. By far the single largest sector will be social expenditure, at US$1.35 billion. The budget is based on assumed oil rents of US$3.45 billion, which are expected to contribute 88% of all revenues. This in turn, is based on the expectation that oil production will reach 2.8 million barrels per day by March 2004, which is not unrealistic.
Towards the end of September a set of economic reforms was announced, including the freedom for foreign investors to buy Iraqi companies, except in the oil industry, but including banks. Foreign investors will be free to transfer their earnings abroad. The central bank will become independent, while a new, modest tax rate of 15% will be imposed on both individuals and companies. The custom rate will be just 5%, except for food and medicine which will be exempt. 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. Paul Bremer, the boss of the CPA, for the first time in August hinted that reconstruction could cost as much as US$100 billion. US$13 billion should be needed for the electrical grid and another US$16 billion for the water system. For the next year, the UN estimates a need for US$20 billion as a bare minimum and Iraqi revenues are not expected to exceed US$15 billion at best. The US$5 billion gap should be covered by donors. Inevitably, the US will have to contribute more money than it expected. The oil industry rehabilitation plan approved by the CPA and oil ministry already calls for the US to contribute US$1 billion, which had not been budgeted before the war. 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. 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. 
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. 
The CPA claims that imports of medicines have increased sevenfold, that 1,000 schools have been rebuilt and that the irrigation ditches in southern Iraq are being cleaned up, but Iraqis are more concerned by the continuing lack of electricity and sometimes water. At present the CPA estimates that there is a 30% shortfall in electricity production. Just to meet demand investments of about US$2 billion will be needed.
Although the conditions of living of most Iraqis were finally showing some signs of improvement in October, the Food and Agricultural Organisation (FAO) and the World Food Program (WFP) claim that 13 million Iraqis still need food assistance. Chronic malnutrition of millions of people is reported. 
A typical paradox of the current situation in Iraq is the fact that thousands of workers are being imported from India and Bangladesh to work within the US military bases, while the unemployment rate among Iraqis has now reached an estimated 50-60%. Security reasons are cited as the reason for this choice, but this explanation was not enough to prevent massive demonstrations of unemployed Iraqis in front of American bases. About 500,000 of those who are employed work in inefficient or very inefficient state-controlled enterprises, while another 1,000,000 work in the state bureaucracy, which gives an idea of the size of the problem. The privatisation plan of the new government, sponsored by the Americans, would in the short term have a very heavy social impact. The World Bank estimates that in 2003 the Iraqi economy will shrink by 22%, after having lost 21% in 2002 and 12% in 2001. The average income is now estimated at between US$450 and US$610, down from US$3,600 in 1980. State food subsidies are worth about US$2 billion and it is expected that in 2004 US$10.6 billion of US$12 billion worth of oil revenue will be spent in salaries and subsidies. Just US$1.4 billion will be spent on reconstruction, even that assuming oil prices do not fall below the target level, cutting the expected oil revenue. The fact that state salaries have been increased up to 40-fold might have helped gain some popularity, but did not help the reconstruction effort. The lack of institutional capability will limit reconstruction expenditure to no more than US$5 billion in 2004 and US$8-9 billion in subsequent years, according to the World Bank, whatever the international community will decide to contribute. By October, reconstruction had barely started and even the telephone network is only 50% active even in Baghdad.
By the end of the year there was no doubt that consumer confidence was improving in Iraq and that consumer spending was up. However, this was an improvement from a very low level and few Iraqis were satisfied with it. Paradoxically, the recovery in consumer demand contributed to maintain energy and fuel shortages, since it stimulates demand. The establishment of the Trade Bank of Iraq was authorized at the end of November. It is expected to favour economic recovery, together with low corporate taxes, fixed at 15%.

Internal
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. 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. 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 30,000 Iraqi policemen taken back into service were not enough. Even the announced formation of a small Iraqi army to guard the country's borders will have no short-term impact, as will the formation of a 6,500-strong militia. 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. 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. Following the attacks to the UN compound and the Jordanian embassy and a number of US civilians killed, plus the attacks to the pipelines and the US military, security became more than ever the primary concern of the US occupation administration during August. Unable to increase the level of US troops for reasons of internal policy and also because of objective overstretching of available resources, the Bush administration tried hard to convince more countries to send additional contingents, with little success.
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. 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. 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. 
By July the CPA had decided to take another path and it established 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 CPA. 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. During August the Iraqi Governing Council (IGC) that they have established is slowly winning some support. The UN recognised it and although the Arab countries mostly refused do so, most Arab neighbours are accepting to deal with it on an provisory basis. 
Together with the government which was subsequently established, the Iraqi governing council seemed initially to be achieving some degree of support among the population, which is eager to see the reconstruction start. However, in order to legitimise themselves they are beginning to collide with US interests in Iraq. The possible future deployment of Turkish troops represented in October the first instance of a clash between the occupation authorities and the ruling Iraqi body. As the end of 2003 approached, various projects of restructuring the pro-occupation Iraqi authorities were being circulated, including a plan to expand the Governing Council to 100 members from the present 24, making it more representative in the process. Another plan called for the creation of a smaller 10 member body within the council. Plans to recreate an Iraqi Army have also popped up, but on the whole this multiplication of plans and options only confirms that the occupation authorities do not have a good grasp of the situation. 
The capture of Saddam Hussein by US forces in December was a major media event and it will certainly have a long-term impact, but it is not clear yet how. The hope among coalition forces is that the insurgency will rapidly subside. However, even if this happened, which is far from certain, the capture might lead to the emergence of as many problems as it resolved. The impact is more likely to be in terms of Bush's own internal popularity, rather than in terms of sorting out the Iraqi mess. Many, who were unwilling to play Saddam's game by opposing the occupation actively, might be tempted to do so now. In the weeks following the capture of Saddam, efforts aimed towards the Iraqization of the conflict suffered a blow when it emerged that the creation of a new Iraqi national army is not going according to the plans and many recruits are dropping out of the ranks. Plans to replace the Iraqi Governing Council with something more representative were also running into difficulties, as among the Shiite community there was a strong opposition to the type of indirect elections which is currently planned, both because they might be easier to manipulate and because they might deny them the majority that direct elections would ensure, since they account for 60% of the Iraqi population. On the other hand, replacing the IGC was seen by year's end as a necessity, because the Council was by then rapidly losing popularity among the Iraqis. The Bush Administration wants to hand over sovereignty to the Iraqis by July and cannot afford to wait and see whether the IGC manages to recover. Among the Iraqi business community strong opposition emerged to the new (very liberal) investment law presented by the Coalition Provisional Authority, which they fear will allow foreign firms to brush them aside. The slow improvement in the security situation as far as common crime is concerned is overshadowed by the repeated waves of indiscriminate terrorist attacks. Even Saudi Arabia, which otherwise adopted a much more pro-Coalition stance after the war than it had before, stated in December that it will withhold the US$1 billion in loans and credits that it had promised until the situation improves. Some companies involved in the reconstruction, like South Korea's Omu Electric Inc, are now planning to withdraw their workers. The UN and several NGOs have already largely done that.

Forecast 2004

International
The ambition of the Pentagon to establish permanent military bases in the country appears in doubt, after President Bush accepted in November that power should be transferred to the Iraqis as quickly as possible and that foreign troops should be withdrawn. However, even if the Bush Administration stuck to this decision, US and other troops would remain in Iraq in large numbers for years to come, although likely with a reduced profile. Iranians, Syrians and other countries of the region will therefore not be able to relax and assume that the worst threat for them is over. They will be likely to maintain an active presence in Iraqi politics. Even if the Bush Administration is no longer so keen on a long-term presence in Iraq, it is too late for a disengagement which would not look like a defeat. 

Economic
Assuming that Iraq will be forgiven most of its debts, in 2004 the most immediate task for the government will eventually still be restarting the economy, given the lack of success during 2003. Plans of wide-ranging economic and structural reforms will only be possible to implement if security improves, which does not look likely in the short term. The banking sector, which is considered to be completely unsuitable for a "liberal" economy, remains at the top of the priorities. 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) until well into 2004. Since domestic needs stand at about 550,000 barrels, the surplus for export will be enough to keep the government running, but not to start reconstruction on a massive scale. Looting and sabotage activity will be much less of a problem in 2004, but 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, has now been completely abandoned. Apart from claims that the reconstruction will cost much more than US$41 billion, over 2004 oil revenues are not likely to exceed by much the US$13 billion of 2002. 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$15 billion in 2004. The main issue appears indeed to be the lack of export routes, as active export facilities are now approaching saturation. Kuwait does not seem to be interested in helping to export Iraqi oil through its ports, in part at least because it is itself busy dramatically expanding its production. Iran, on the other hand, has accepted to import 350,000 bpd of Iraqi oil, which would free an equivalent amount of its own oil for export, but the Bush Administration opposes the deal, due to its sanctions against Iran. The 1.6 million bpd pipeline through Saudi Arabia is functional, but the Saudi government has not decided yet whether to allow Iraq to use it. Saudi Arabia of course fears Iraq as a future rival on the oil market. Iraq's own facilities at Khor al Amaya are being rebuilt, but it is not clear when they will be reopened.

Political
The Iraqi government and Governing Council appear to have some potential to gain support from the population, but only if a minimum of stability can be guaranteed and the reconstruction started. The occupying coalition forces are increasingly opting for the rapid rebuilding of Iraqi armed forces, which are expected to take over most of the security tasks during 2004. However, the effectiveness and reliability of these forces remain to be established. By the end of 2004 they are expected to number 200,000, but so far their contribution to the campaign against the guerrillas and the terrorists has been modest. 
In order to gain some popularity the Iraqi government will have to confront the occupation forces on a number of issues, which will make the coexistence of the two more difficult. 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. 
Now that Saddam cannot represent even a remote danger, maintaining all anti-Saddam Iraqis united behind the US is clearly becoming more difficult. The Kurds, once the most supportive of the occupation authorities, already in early 2004 were pushing increasingly hard for a strong and expanded autonomy in the northern region. The Bush Administration has so far allowed the Kurdish parties to promote their agenda unhindered, but the Turkomans and the Arabs who live in the same region are now becoming more vociferous in their opposition. On the other hand, the moderate Shiite leaders, formerly quite supportive, were now busy promoting their own agenda too, especially in the case of Al-Sistani. The Iraqi Governing Council also began to appear increasingly divided internally, especially between the "exiles", who tend to be far more receptive to US wishes, and the representatives of parties and factions which are more rooted in Iraqi society. 
The efforts of the Bush Administration to ease the debt burden on Iraq's shoulders continued to meet some success in January, with a number of countries, most importantly Japan, pledging to erase or reduce the Iraqi debt, which bides well for the rest of 2004.
In its attempt to stabilise the situation and to share the burden of managing Iraq, the Bush Administration will try to bring the UN back, but the chances of success appear limited. The UN want to be in charge and are unlikely to accept a subsidiary role, especially given the security concerns. The Bush Administration, on the other hand, is adamant that it will not accept UN control and it is divided internally, between a Department of State which favours involving the UN as soon as possible and a Pentagon which resolutely opposes any such involvement. 

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Update No: 010 - (01/03/04)

No voting soon
Despite the calls for early elections in Iraq by leading Shiite politicians, including some prominent pro-US ones, like Ahmad Chalabi, it appears increasingly unlikely that anything like this will take place. After some hesitation, UN officials announced on 20 February that the organization will not support elections in June. This statement effectively ends the chances of such elections happening. The security situation clearly is a strong disincentive from holding elections and the political situation does not look favourable either. Although it may be excessive to speak of an incipient civil war among ethnic-religious groups, there is certainly growing tension among them and election campaigning could easily turn into a bloodbath. 
The primary objective of al Qaeda, according to western intelligence, is to hit Shia targets and simultaneously focus Sunni discontent onto the larger Shia community whom they now fear, and so to render Iraq ungovernable by provoking religious war.
On the other hand, among the Shiite community the demand for early elections is on the other hand so strong, as demonstrated by the endorsement by Chalabi, that a negative answer could stir up trouble anyway. 
The fact that now the US appear about to drop their plan for regional caucuses, which were meant to be a short-term substitute for real elections, add to the confusion. Still, the occupation authorities insist that they will hand over power to the Iraqis on 30 June as promised, but it is not clear how the future interim government will be chosen. There is now a possibility that the UN might step in and assume the task of helping Iraqis to select a caretaker government. The most favoured option is to expand the Iraqi Governing Council to maybe 100 members (up from the current 25), but the real issue is how to select these additional members and how to legitimize the whole operation in the eyes of the Iraqis. 
The promise of democracy means that the concept of an elected government will not go away. It is just that the timescale for handing over power is tied to the US Presidential elections and not what is necessarily best for Iraq. The likelihood is, that the Iraqi body taking charge, however chosen, will primarily be mandated with organizing a general election within a realistic timescale for this country.

Economic reforms continue, despite all
During February the liberalization of the Iraqi economy continued, with two important steps being taken. The Iraqi central bank announced the liberalization of domestic interest rates from 1 March, in the hope that rates will fall, making borrowing cheaper and therefore stimulating economic growth. At the same time, the first three foreign banks, HSBC, Standard Chartered and National Bank of Kuwait received their licences to operate in Iraq during February, with effect from 15 March and for a period of 5 years. Three more foreign banks are awaiting for their own licences and their applications are being examined by the central bank.

The oil industry
The announcement that the privatization of the oil industry has been postponed and is no longer a priority for the government or for the occupation authorities could seem to buck the trend, but given the internal political climate it was widely expected. The success of the Oil Ministry in bringing production up to 2.3 million bpd, exceeding the expectation of many, contributed to this decision, but crucial was the widespread opposition to the privatization move among Iraqis, including many members of the Iraqi Governing Council. Moreover, foreign investment in the industry is still likely to be allowed, as far as the exploration of new fields is concerned. Later on some selling of oil assets like refining and distribution might take place, but extraction is not likely to be privatized for a long time to come.
On the front of the oil industry, on the other hand, February was a month of stagnation, although some good news arrived too. The repairs to the pipeline to Turkey are almost complete, while the pipeline is now also under the protection of security guards, who are supposed to prevent further acts of sabotage. Exports to Turkey, therefore, could restart soon. The pipeline has a capacity of 320,000 bpd, which would increase the current level of exports by 20%. The southern fields, on the other hand, are already exporting to full capacity and therefore offer little possibility to expand production further. Current production forecasts by the Oil Ministry stand at 2.8 million bpd by March and 3 million bpd by the end of the year, reflecting expectations of slow growth throughout the year.

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ENERGY

LUKoil teams up with Iraqi oil ministry

Russian oil company LUKoil and the Iraqi Oil Ministry are drafting a memorandum on understanding, LUKoil president, Vagit Alekperov, said recently, Interfax News Agency reported.
Alekperov said he plans to visit Iraq soon. "I received an official invitation after the last visit a delegation from our company made to Iraq," he said. The LUKoil delegation, ld by LUKoil Overseas Persident, Andrei Kuzyaev, visited Iraq on December 22nd and talked about LUKoil working in Iraq. A consortium including LUKoil (68.5%), ZarubezhNeft (3.25%), Mashin-import (3.25%) and the Iraqi Oil Ministry (25%) signed a production-sharing agreement for the West Qurna-2 field in March 1997, to last to 2020. spending on the development of the field, with possible reserves of 20bn barrels is estimated at US$6bn. Sanctions against Iraq after the Gulf War prevented Russian companies from implementing oil projects in the country. The government of Saddam Hussein announced last year that it was breaking up the agreement on the West Qurna-2 field because LUKoil had failed to meet the terms of the contract. 

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