Iraq is now free from U.N. Security Council sanctions for the first time in more than two decades
BAGHDAD – Iraq is now free from U.N. Security Council sanctions for the first time in more than two decades – both a measure of the country’s progress and a harbinger of the challenges that accompany full sovereignty.“This arrangement has come to an end,” said Iraqi Foreign Minister Hoshyar Zebari, who has orchestrated Iraq’s gradual fiscal liberation “to give Iraq its full freedom to manage its resources.”
It’s a double-edged sword. Iraq is no longer bound by international restrictions and oversight and can mainstream its economy by joining the World Trade Organization and rating its sovereign debt. But these restrictions were accompanied by international legal immunities preventing claims on Iraqi funds – all of which ended on June 30.
Iraq retains some protections under an American executive order, which was signed by President George W. Bush in 2003 and extended under President Barack Obama, most recently through May 20, 2012. Unlike the former U.N. immunities, however, the American protection does not cover Iraqi funds held outside the U.S.
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Beyond the boundaries of the remaining American immunity, Iraq’s assets are now exposed to countries, companies and individuals who claim they are owed billions of dollars.
Much of Iraq’s debt was either waived or discounted in post-2003 agreements orchestrated by the United States. But Iraq still has an estimated $30-plus billion in outstanding bills – mostly reparations due to Kuwait from the 1990 invasion and war, but also sovereign and business debt.
An unknown number of bill collectors have been waiting for the day, which has now arrived, when they can take their claims to courts around the world. That uncertainty is the biggest risk for Iraq going forward, experts said.
“They (Iraqis) are not sure what claims are out there,” said a U.S. official familiar with Iraq’s finances. “If they are not aware, they are not sure how much they owe.”
Under the U.N. sanctions regime, Iraqi oil revenue flowed directly into the Development Fund for Iraqi (DFI), which was overseen by a U.N.-mandated body called the International Advisory and Monitoring Board (IAMB). Among other responsibilities, the IAMB ensured that five percent of revenues went towards paying Kuwaiti war reparations.
Kuwait and Iraq have a contentious relationship. The two countries recognize mutual interests – such as the need to delineate land and water borders and negotiate the development of cross-border oil and gas fields – but haven’t been able to reach agreements.
As part of the deal removing the U.N. sanctions, Iraq has agreed to continue setting aside 5 percent of its oil revenues, most of which goes to Kuwaiti reparations. Although Iraqi officials have complained this percentage is too high, they can’t dismiss it altogether: if Iraq reneges on those installments, Kuwait could turn to the courts for an immediate payout.
“Through our successor agreement, we made sure the five percent will still be paid” as talks continue, Zebari said.
Kuwait has recently angered Iraq by moving forward on a massive commercial port which, though in its own territories, could have a negative impact on Iraq’s plans to build a port on the Fao peninsula.
And Kuwaiti Airlines, which claims a $1 billion-plus tab is due from Iraqi Airways for theft of planes and parts in 1990, has said it will enforce a British court order by seizing any assets outside of Iraqi territory, including oil.
Such a move is unlikely because Iraqi crude, once it leaves Iraqi territory, is typically in the custody of another country or an international company.
And it won’t happen in the United States. “Any sovereign account has immunities,” said the U.S. official. “And the executive order gives extra immunities on top of that.” If the money stays in the United States, it is protected from attachment because no lawsuits can be filed in the United States and decisions by other country’s courts won’t be honored.
Iraq is now in charge of its own finances. Its central bank has taken control of the DFI, which consists of an estimated $50 billion held at the Federal Reserve Bank of New York, and an Iraqi Committee of Financial Experts (COFE) will play the oversight and auditing role previously performed by IAMB.
Like IAMB, COFE is subcontracting much of its auditing work to PricewaterhouseCoopers.
Iraq remains unsteady with violence and political disputes hampering development, but the country’s new financial sovereignty will allow it to enter the international marketplace and receive a sovereign debt rating, potentially spurring further investment.
Iraq has the third-largest proven oil reserves in the world and has already opened up to foreign oil investment. Exports have earned more than $30 billion so far this year – an enormous sum which nonetheless pales in comparison to the country’s reconstruction needs.
“The way investors look at Iraq is purely, purely, purely an oil play,” said Farouk Soussa, chief Middle East economist at Citibank, in a recent interview. He said the protection of Iraq’s money was key, as investors “just look at whether the cash flow is going to be sufficient.”
Ben Van Heuvelen contributed from New York.
Iraq oil money retains US protection