Global Policy Forum

By Peter Finn and Peter Baker

Germany, Canada and Russia expressed irritation and disbelief Wednesday after a Pentagon announcement barring firms from those countries from bidding on $18.6 billion in reconstruction contracts in Iraq. Analysts said the move would set back U.S. efforts to repair relations with friendly countries that opposed the war.

France, which led the antiwar coalition but has recently tried to mend relations with the United States, was more circumspect. President Jacques Chirac, leaving a cabinet meeting, would not comment, but a Foreign Ministry spokesman later said, "We are studying these decisions' compatibility with international competition law."

The response in Berlin was much blunter. A spokesman for Chancellor Gerhard Schroeder said the decision was "unacceptable" and that it ran counter to what the Germans had perceived as a new "spirit" in relations, one of "looking toward the future and not the past." Last month, in a clear nod to Washington, Schroeder said he favored restructuring Iraq's massive foreign debt to help the country recover and was open to forgiving some of the $100 billion or so that Iraq owes its creditors.

News services reported that President Bush called Chirac, Schroeder and President Vladimir Putin of Russia on Wednesday to ask them to reduce Iraq's debt. A National Security Council spokesman, Sean McCormack, said Bush discussed "the need to restructure and reduce Iraq's crushing debt burden" and asked the three leaders to meet with former secretary of state James A. Baker III, whom he appointed last week to handle the debt issue.

The Canadian government was also upset by the Pentagon decision. "If these comments are accurate . . . it would be difficult for us to give further money for the reconstruction of Iraq," said John Manley, the deputy prime minister. "To exclude Canadians just because they are Canadians would be unacceptable if they accept funds from Canadian taxpayers for the reconstruction of Iraq." A government spokesman noted that Canada had already donated about $190 million toward reconstruction.

Paul Martin, who is set to become Canada's next prime minister on Friday, told reporters he found it difficult "to fathom" the decision. "I understand the importance of these kinds of contracts, but this shouldn't be just about who gets contracts, who gets business," Martin said. "It ought to be about what is the best thing for the people of Iraq."

A spokeswoman for the European Commission said it would investigate whether the U.S. action violates World Trade Organization rules, the Associated Press reported. In response to questions from European governments, U.S. officials cited an exception to WTO contracting rules in cases of "essential security." The office of the U.S. Trade Representative, however, issued a statement saying that the Coalition Provisional Authority is not subject to international procurement obligations, which means there is no need to cite that exception.

The Bush administration said it was well within its rights to direct U.S. taxpayer money to companies of its choosing. Another $13 billion pledged to Iraq in October by other countries and international institutions will be overseen by the World Bank and the United Nations.

White House press secretary Scott McClellan said primary contractors would be limited to partners in the military alliance now contributing to Iraqi reconstruction. "If additional countries want to participate with our efforts . . . then circumstances can change," he said.

State Department spokesman Richard Boucher pointed out that all such partners would be eligible and said, "As a general proposition, I would tell you it was not done to exclude, it was done to include." The administration was criticized last spring for reserving all contracts for U.S. contractors. Once the primary contracts are awarded, Boucher said, the winning bidders will be entitled to hire subcontractors from any country they choose, including France, Germany, Russia and Canada.

"This is a negative decision for German industry and commerce," said Ludolf von Wartenberg, director general of the Federation of German Industries, whose group held a previously scheduled meeting today on opportunities in Iraq. "We regret this decision." German Foreign Minister Joschka Fischer, who was meeting in Berlin Wednesday with his Russian counterpart, said, "We noted with astonishment today the reports, and we will be speaking about it with the American side."

Russia's defense minister, Sergei Ivanov, said he would contact Defense Secretary Donald H. Rumsfeld on the issue and suggested it should not be up to the United States to decide who rebuilds Iraq. "As for future contracts in Iraq, I believe that is a matter for the sovereign government of Iraq," he said at a news conference in Moscow. The Pentagon decision particularly irritated Moscow because Putin has tried to be accommodating to Washington on postwar issues. While pushing for the occupation to be put under the auspices of the United Nations, Putin has supported the United States remaining in command of military forces in Iraq.

Russia had a strong business relationship with Iraq before the war and wants to get its oil companies back into the country. Lukoil, Russia's second-largest oil producer, has been particularly eager to salvage a multibillion-dollar contract to develop the West Qurnah oil fields. Russia also holds substantial Iraqi debts, assessed at between $8 billion and $11 billion, and seems prepared to use that as leverage with the United States. Ivanov said: "We are not planning to write off any debts. Iraq is not a poor country."

"It's the kindergarten approach to transatlantic relations," Eberhard Sandschneider of the German Council on Foreign Relations said of the Pentagon action. "If you destroy my sand castle, I will destroy yours. If improvement in transatlantic relations was any part of America's focus, it's a mistake. Emotions are coming back into the equation after months of trying to get them out."

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