Global Policy Forum

By Colum Lynch

For more than four years, France has been the world's largest beneficiary of trade with Iraq through a U.N.-sponsored humanitarian aid program, signing deals for more than $ 3 billion worth of Peugeot minibuses, Renault garbage trucks, Alcatel communications equipment and other French goods.

But in the past year, France's privileged status has begun to fade. Irritated by Paris's opposition to illegal surcharges on oil exports and its training of U.N. weapons inspectors, Baghdad has slashed trade with its most important European supplier nearly in half.

The change illustrates how Baghdad uses its buying power to reward international allies and punish opponents, complicating efforts by the United States to isolate Saddam Hussein's government and prevent him from rebuilding his military or developing weapons of mass destruction.

Today, the Bush administration was forced to concede defeat, at least temporarily, on one of Secretary of State Colin L. Powell's chief foreign policy initiatives, an effort to win approval in the 15-member U.N. Security Council for an overhaul of the 10-year-old economic sanctions on Iraq.

One of the principal factors in the U.S. defeat was Iraq's financial muscle. It has been growing along with Baghdad's oil revenue, which has surged from $ 4 billion in 1997 to $ 18 billion last year. Moreover, analysts say Iraq has undertaken a broad shift in its trade policy, channeling ever more trade to its neighbors and making it harder for Washington to secure their support.

In the last six months of 2000, according to confidential U.N. records, Egypt signed more than $ 740 million in contracts with Iraq, making it Baghdad's No. 1 trading partner. Following close behind is the United Arab Emirates, with $ 703 million in business. Syria, meanwhile, buys as much as $ 1 billion in oil from Iraq each year.

The Iraqi government has used this leverage to try to block the Bush administration's plan and, gradually, to erode the sanctions imposed after Iraq invaded Kuwait in 1990. When the United States and Britain introduced a Security Council resolution that would lift restrictions on imports of civilian goods but tighten up on military-related items, Iraq halted its oil exports in protest on June 4.

To punish France, apparently for backing some aspects of U.S. policy, Baghdad cut its imports of French goods to $ 310 million in the second half of 2000, down from $ 616 million in the first six months of last year, according to U.N. records. Baghdad also has threatened retaliation against its neighbors, including Turkey and Jordan, if they go along with a U.S.-British proposal to tighten their borders and halt Iraqi smuggling.

"Politics is about interests. Politics is not about morals," said Iraq's U.N. ambassador, Mohammed Douri. "If the French and others will take a positive position in the Security Council, certainly they will get a benefit. This is the Iraqi policy."

The pressure clearly is having an impact.

Russian Foreign Minister Igor Ivanov warned last week that Moscow would veto the U.S.-backed sanctions resolution because it threatened Russia's commercial relations with Baghdad. Iraq owes Russia about $ 8 billion, largely for past arms sales, and Russian companies are major middlemen in the Iraqi oil trade.

Syrian President Bashar Assad also told U.N. Secretary General Kofi Annan at a June 14 meeting that he would not allow U.N. inspectors into his country to enforce the U.S.-British plan. And Jordanian Prime Minister Ali Abu Ragheb sent Annan a letter warning that Jordan's cooperation "might very well threaten its social, economic and political stability."

Even some of Washington's most stalwart allies have been swayed by the prospect of gaining a foothold in Iraq's expanding oil economy. The Netherlands, where exports to Iraq dropped after it backed an American plan for weapons inspectors in 1998, has been pressing the 15-member Security Council to lift a ban on foreign investment in Iraq's oil sector.

Diplomats said the Netherlands, like many other countries, is eager to obtain commercial contracts for its own firms, including the powerful Royal Dutch/Shell Group.

"Iraq is using money and oil as a weapon against the international community," said James B. Cunningham, the acting U.S. ambassador to the United Nations. "My government is accustomed by now to Iraq's cynicism towards its own people, and to its bluster and threatening policies. We find it harder to understand, however, why others would join in playing that game when the status quo is clearly not satisfactory."

The U.N. Security Council first voted in December 1996 to allow Iraq to sell oil to purchase food, medicine and other humanitarian goods. Gradually, all limits have been removed on the amount of oil that Iraq can sell through the "oil-for-food" program, but the revenue must go into a U.N. escrow account, and Iraqi purchases are carefully reviewed by a Security Council committee.

Under the U.S.-British proposal, the council effectively would end restrictions on civilian imports. But it would establish a series of highly targeted or "smart" sanctions to prevent Iraq from smuggling oil through neighboring countries, evading U.N. scrutiny and using the profits to buy military supplies.

Some analysts contend that the Bush administration miscalculated the degree of opposition to this plan.

"I think we were naive in pressing for smart sanctions, first in enumerating to the world exactly what they were, second in believing we could realize them," said Larry Goldstein, president of the Petroleum Industry Research Foundation, a trade group in New York.

The Bush administration had hoped to win approval of the Security Council resolution this week. But resistance, particularly from Russia, forced the United States and Britain today to agree instead to a five-month extension of the existing oil-for-food program. It is the second time that the administration has pushed back its self-imposed deadline for revamping the sanctions.

Britain's ambassador to the United Nations, Jeremy Greenstock, appealed to the council last week not to "allow national economic self-interest to hold up positive measures for the Iraqi people."

"The risk is that if we do not act now, the Security Council may never be in a position to act," he added. "There is no intention in this resolution to harm the economic interests of neighboring states or others doing legitimate business with Iraq. We expect to see an expansion of civilian trade which will benefit all."

Four of the five permanent members of the Security Council -- the United States, China, France and Britain -- reached agreement last week on a list of items with both military and civilian applications. Such "dual-use" imports would be subject to Security Council approval under the U.S.-British plan. But Russia did not accept the list.

The talks were deeply influenced by Iraq's growing economic might. France and China succeeded in drastically shortening the original U.S. list in part to allow unrestricted imports of items, including computers and telecommunications equipment, that their companies are trying to sell to Baghdad.

For instance, the French telecommunications company Alcatel has more than $ 73 million in pending contracts with Iraq for microwave equipment, fiber optics, digital radio and other telecommunications devices, according to confidential U.N. records. Chinese companies, meanwhile, have more than $ 80 million in pending contracts. The Pentagon suspects one of those firms, Huawei Technologies Co., of illegally providing Iraq with fiber-optic cable to improve its antiaircraft missile batteries.