Global Policy Forum

By Charles Recknagel

Under the terms of the United Nations oil-for-food program, Baghdad is permitted to sell unlimited amounts of crude oil and use the revenues to buy humanitarian goods for the Iraqi people.

But in practice, that simple formula, which is supposed to ease the suffering of the Iraqi population under UN sanctions, rarely works smoothly.

The present situation of the oil-for-food program illustrates the point. The program is suffering from a $2.25 billion shortfall in funds, which could have been used to purchase enormous quantities of foods, medicines, and other products for ordinary Iraqis. Instead, the goods are not being purchased because Baghdad has cut its oil exports in a dispute with the UN Sanctions Committee over how the oil should be priced for sale.

The dispute has seen Iraq decrease its oil exports to a current level of just 1.2 million barrels per day, which is about half of its sustainable export capacity of 2.2 million barrels per day. At the same time, the export drop has been exacerbated by Iraq's periodically halting its oil exports altogether to make various political points. A halt for several weeks last summer protested efforts by London and Washington to tighten the sanctions regime against imports of goods with potential military uses. A stoppage this year protested Israeli military operations in the Palestinian territories.

As Iraq's oil exports and revenues have fallen, Baghdad and the UN Sanctions Committee have each faulted the other for playing with the welfare of the Iraqi population. Washington and London, the strongest backers of the sanctions regime, say Iraq has cut its exports in an effort to force the lifting of pricing controls intended to prevent Baghdad from imposing secret surcharges on oil buyers, surcharges that circumvent the oil-for-food program.

Baghdad, which denies ever seeking surcharges, says the pricing controls have made it impossible to find sufficient numbers of buyers for its oil, forcing it to lower production against its will.

This week, the dispute dominated discussions at the UN Sanctions Committee as the permanent members of the Security Council sought a way to end the deadlock and revive Iraq's oil exports. The discussions centered on whether to maintain the committee's current practice of retroactively pricing Iraqi oil after it has been loaded onto tankers to safeguard against illegal surcharges. That retroactive pricing system has been in place since Washington and London pushed it through in October as a way of depriving Baghdad of illegal revenues it might use to pursue weapons-of-mass-destruction programs.

But oil analysts say that the ongoing discussions over pricing are showing few signs of progress. Instead, they have bogged down amid divisions between the permanent Security Council members that have so far defied compromise.

Gerald Butt, an oil-industry expert with the Cyprus-based Middle East Economic Survey, said the dispute in the sanctions committee pits the U.S. and Britain on one side against Russia on the other. He said the Russians, who have never been enthusiastic about retroactive pricing, have become increasingly alarmed at the effects of Iraq's sagging exports on their own oil-trading companies. Russian companies are among the largest traders in Iraqi oil under the oil-for-food program, annually buying up to $5 billion worth of crude, mostly for resale to Western and Asian markets.

Butt said that most of the Security Council members appear ready to move away from retroactive pricing in favor of imposing sharp limits on which companies can trade in Iraqi oil, an alternative way of ensuring no illegal surcharges are paid to Baghdad. But he said Russia's many small and independent-minded oil brokers who trade in Iraqi oil have mounted a stiff resistance to any such limitations. "The rest of the Security Council would accept a strictly controlled list of which companies would be allowed to lift Iraqi crude, and in that way one could stop the kind of speculative sale and resale of crude and the introduction of surcharges. [But] there are a lot of Russian companies involved in buying Iraqi crude, and it is in their best interest to keep the market open rather than have a restricted list of known, respectable buyers," Butt said.

The Russian companies have political backing from Moscow, which called this week for an end to the existing retroactive pricing system but did not propose an alternative. The Russian Foreign Ministry said in a statement that retroactive pricing has created an "unprecedented drop" in Iraqi exports and accused backers of the system, such as the U.S. and Britain, of seeking to undercut the profits of Russian businesses.

The Russian statement said that, "On the pretext of securing more control over Iraqi oil sales, representatives of these countries are trying to minimize profits of companies taking part in the export of Iraqi oil." The ministry also said that the drop in Iraqi oil exports has brought the oil-for-food program to the verge of collapse with "obvious negative consequences" for the Iraqi people.

In an effort to bridge the divides over retroactive pricing, France has proposed a new system that would allow Iraq to set the price of its oil 15 days before it is sold to buyers. French diplomats argue that would give buyers the necessary lead time for deciding whether they want to buy Iraq's oil before they load it on their tankers, yet would still limit opportunities for Baghdad to impose surcharges.

Butt said the 15-day price window would help bring the Iraqi market into line with industry practice and so could help increase buyers' interest. "It gives the buyer more options, and basically the buyer can decide if [it] likes a particular price over a particular period or not, and [it] will have flexibility in terms of moving tankers, getting tankers into the right position, or moving them to other suppliers of crude oil," Butt said.

But he said that the 15-day time frame would still be much more limited than the oil industry's standard of a 30-day price window, meaning that only larger buyers would likely be attracted by such terms. That, he said, could help the UN Sanctions Committee monitor who is buying Iraqi oil and limit Iraq's ability to force them to pay surcharges. "It will restrict the number of companies that are willing to lift and, therefore, it restricts the ability of Iraq to impose surcharges.... The more time there is, the more open and unmonitored the trading market is, the more the Iraqis are able to pick and choose [among the buyers] and impose surcharges," Butt said.

As the UN Sanctions Committee has discussed the oil-pricing issues, there is no indication yet that the French proposal will produce the needed compromise. The French proposal also calls for the scaling back of a list of more than 1,000 companies now allowed to buy Iraqi oil and for a fresh look at the plight of Iraqis under the 12-year-old sanctions.

Reuters quoted one Western diplomat as saying after the UN Sanctions Committee met in New York yesterday that the French proposal "is a step in the right direction." But he said the committee is "still far from an agreement." The committee is expected to meet again in two weeks.

The continuing dispute leaves the funding for the oil-for-food program as uncertain as ever. And there is little prospect that the program, despite its humanitarian intentions, will cease to be one of the main battlefields for disputes between the UN and Baghdad, at the expense of the Iraqi people.

Past disputes have seen the U.S. and Britain accuse Baghdad of deliberately refraining from purchasing goods under the oil-for-food program to exacerbate the suffering of the Iraqi population and raise global opposition to maintaining the sanctions regime. Baghdad, in turn, has accused Washington and London of slowing delivery of goods under the program to build pressure inside Iraq against the government.

The UN imposed sanctions on Iraq in 1990 following Baghdad's invasion of Kuwait, and their lifting remains conditional on Iraq's proving it has no more weapons of mass destruction. The oil-for-food program was established in December 1996 to allow Iraq to sell oil under UN supervision. The revenues from the program are kept by the UN in an escrow account and may only be used for the purchase of humanitarian supplies and for the payment of war compensation claims against Baghdad.

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