Making Big Money on Iraq
Kuwait has its diwaniyyas, Yemen its qat chews. But for languorous trade in rumor, gossip and flashes of political insight, there is no substitute for chain-smoking and eating Iraqi masgouf.
At one of several Iraqi establishments in Sharjah, a down-market cousin of Dubai in the United Arab Emirates, the host centered the bulging fish upon a table for six. “Iraq’s economy is like the fish,” he said, laughing. “How much you get depends on how quickly you eat.” It is an apt description of today’s Iraq -- the country’s patrimony is literally being divvied up and devoured.
Despite global financial crisis and declining oil prices, the Iraqi government and its American backers have crafted some good news. Though bombings bedevil Baghdad and Mosul, and street crime remains rampant, they can point to measures of improvement. US troops have withdrawn from the cities and towns inside concrete encampments, and Prime Minister Nouri al-Maliki’s assertion of central control over Shi‘i Islamist rivals in Baghdad and the south appears to be holding. In February, Washington’s top economic official in Baghdad proclaimed: “We may well be at a turning point, frankly. We’ve heard this before, but the conditions are lining up so that there could be significant interest being shown by Western companies. Politics are becoming more normal. What that means is the door is open for greater business activity and…engagement.”  In April, the Maliki government, in cooperation with London, held a high-profile international conference to encourage foreign investment. Sadly, these sightings of “green shoots” of economic rebirth are misleading. Something is indeed growing in Iraq’s political economy, yet its roots are venerable and sturdy, and it is far from healthy.
The ambient violence after the 2003 US invasion, whether resistance to occupation or sectarian infighting, has dismembered Iraq economically, creating local militia monopolies, criminal public-sector fiefdoms and regional capital havens. To say that corruption, bribery and intimidation are widespread would be an understatement; these practices are an integral part of many businesses. As with other complex civil conflicts in the era of globalization, the years of mayhem in Iraq unfolded within an unregulated regional market. And as with blood diamonds in Africa or the Mafia-controlled supply chains revealed by Roberto Saviano in Gomorrah (2008), the globalized marketplace has given a boost to violence and criminality in Iraq. The year of direct US rule from May 2003-June 2004 opened the Iraqi market to external predation, while the rise of competing Shi‘i Islamist and other powers in the south reached northward to reshape Baghdad’s political-economic relations with the neighborhood. The Gulf states, in particular the UAE and Iran, are now major players in Iraq’s economy. People and goods flow unregulated into Iraq while capital and resources flow out.
In a sense, Iraq’s political economy appears to be refashioning itself upon the familiar model of state patronage and graft established during the decades of Baathist rule. Many of the country’s import supply chains and distribution networks continue to depend upon ministries and state companies born in the 1970s. But the old edifice is inhabited by new patrons who are serving a new set of clients. Open borders and free trade, instead of building democracy and sparking socioeconomic development, as envisioned by ex-US proconsul L. Paul Bremer and his neo-liberal underlings, have been harnessed by these new powers to consolidate their increasingly authoritarian rule and to funnel profits into their own coffers.
Not for the Meek
On the morning of May 30, 2009, former Minister of Trade ‘Abd al-Falah Sudani, a member of Maliki’s al-Da‘wa Party, boarded a flight from Baghdad to Dubai. Only weeks before, Sudani had resigned from the ministry after allegations of massive fraud in the purchase of food imports, mostly from Iran. Initially, he was not legally implicated -- rather, 50 of his subordinates were -- but the benefits of sanctuary in Dubai were obvious. The plane was only in the air for 30 minutes before it turned around and headed back to Baghdad, where security officers placed Sudani under arrest. It was quite a change from the days when fallen Baathists and exiles would flee not south, but west to Amman.
For decades prior to the US invasion, the gateway to Iraq was Jordan. This history is well known.  The deep social, political and economic ties between the Baathist and Hashemite regimes managed to keep both of them afloat through the ravages of war, sanctions and international isolation in the 1980s and 1990s. Jordan is still an important point of entry into Iraq (see table), though exports have not returned to pre-invasion levels, which topped 800 million Jordanian dinars per annum.
The leaders who were chosen by the Americans from among former Shi‘i Islamist exiles and then elected in 2005 are hardly friendly to the government in Jordan or the Iraqi exiles resident there. Accordingly, a number of obstacles to the Jordanian trade have arisen. The demise of Baathist Iraq ended Amman’s trade protocol with Baghdad, by which oil was shipped to Jordan at cut-rate prices in exchange for exports and re-exports from Jordan. Without this guarantee, Jordanian exporters now have to rely on cash payments from Iraqi importers and state-owned enterprises. Lacking the legal and security framework of state-to-state trade, Jordanians must rely on Iraqi partners with connections in Baghdad to make deals. As one Jordanian exporter put it, “No Jordanian businessman will risk visiting Baghdad, so we have to hire often untrustworthy representatives there.” Perhaps the most overt expression of the changed political environment is the general refusal of Iraqi ministries to allow Jordanian companies to bid on tenders, when Syrian and Iranian companies reportedly face no such constraints.
Trade routes from Jordan have also become increasingly costly and risky since 2003. Prior to the invasion, a joint public-sector firm, the Jordan-Iraq Land Transportation Company, carried the goods. Jordanian and Iraqi drivers moved freely across the borders and delivered anywhere. That entity ceased to exist after the invasion and its trucks were looted. Neither the Americans, ideologically averse to the state sector, nor Iraq’s Shi‘i and Kurdish parties have been eager to resurrect the company. And if the cities are more secure than at the zenith of the civil war, Iraq’s roads are a different story, remaining plagued by bandits, many of whom have organized themselves to control stretches of asphalt as if they are the state. Moving stacks of cash and valuable cargo across al-Anbar province is not for the meek. As a result, since 2004, Jordanian trucks offload their merchandise at the border, where private Iraqi truckers pick it up for the trip to Baghdad. Today there are a handful of private trucking companies with offices in Jordan and Syria that have come to dominate transport between Baghdad and points west -- and their market share is not due to business acumen. As one private transport manager boasted, “Our company has the best delivery record because, with our contacts, no one will dare mess with our trucks.”
Since the invasion, these trucks have also become a primary means of supply for US bases. The matter is very controversial in Jordan and unclear in the trade statistics, but it is commonly believed that US troops consume a large portion of Jordan’s exports to Iraq, particularly the large volume of foodstuffs.  Consequently, official Amman finds itself in a quandary. Reticence about the US invasion has yielded to nervousness about a US withdrawal, because that event is likely to reduce Jordan’s influence upon its neighbor to the east, as well as the profits its businessmen reap there. The Gulf, by contrast, is poised to benefit in any case.
Struggle for the South
As Iraq’s oil reserves are concentrated in the south, Basra is the country’s second largest city and the Gulf opens onto the Indian Ocean, maritime portal to the riches of South Asia and the Far East, the south has been a crucial economic conduit throughout Iraqi history. It is quickly regaining that status. In 2008, Iraq became the number three destination for re-exports from Dubai, behind only Iran and India. Prior to 2003, Iraq was not even in the top ten.
Kuwait, meanwhile, has leveraged its political and geographic position to become another major supplier of the goods flowing to US bases in Iraq. And Saudi officials are planning construction of a free trade and storage zone on the border with Iraq. Many of these new trade linkages intersect with the business interests of Iraqi militias or party-controlled public-sector monopolies.
The other heavyweight on the Gulf, Iran, now claims to be Iraq’s largest trading partner. Accurate data on Iran-Iraq commerce are elusive. Official estimates value the trade, composed overwhelmingly of Iranian exports, at $3 billion per year. Whether these estimates are accurate or not, no one disputes that there has been a substantial increase in this trade from the relative trickle that existed prior to the US invasion. And the linkages are expanding. In 2004 Iranian authorities established the Arvand Free Trade Zone in Khuzestan, on the Iraqi border. A February 2009 Iranian trade delegation to Baghdad agreed to boost trade to $5 billion. Many of the imports from Iran are the types of processed food and cheap consumer goods that once came exclusively from Jordan.
Aside from oil, the Shi‘i pilgrimage business, which exploded after the fall of the old regime, is the south’s most lucrative enterprise. It is estimated that some 1,500 Iranian pilgrims visit the shrine cities of Najaf and Karbala’ daily. In these cities, Iranian construction and management companies dominate hotel and tourist facility construction. And, for Iraqis suspicious of Iranian influence, rumors persist that a new road conduit is planned to expand the cross-border linkages. Reportedly, most if not all of this Iranian export business is controlled or managed by various companies answering to the Revolutionary Guard, a feature that greatly occludes precise measurement. What is most apparent to Iraqis is the vast array of Iranian manufactured goods present in markets and retail outlets throughout the country. At the height of the sectarian violence, there were reports that Sunni militias had banned the sale of Iranian goods in their areas. Naturally, the new dominance of Iranian trade and finance feeds the perception, among Iraqis and Americans alike, of a closer overall Iranian-Iraqi relationship overseen by a Maliki government monolith. In fact, however, Iran’s economic involvement in Iraq is an object of fierce competition among the country’s ascendant Shi‘i parties.
‘Ammar al-Hakim, son of the late ‘Abd al-‘Aziz al-Hakim, and head of the Islamic Supreme Council in Iraq (ISCI), has risen to become a particularly important figure in Iraqi-Iranian trade. Having been founded at the behest of the Islamic Republic of Iran in 1982, and having fought on Iran’s side during the bitter war of that decade, ISCI is the Shi‘i actor most credibly denounced in Iraq as a Persian cat’s paw. But the party has its own profit-making agenda. By 2005, it was reported that the junior Hakim had taken control of the Shahid al-Mihrab Corporation, an entity that, according to two former Iraqi trade ministers now exiled in Sharjah, was controlled by the intelligence services under Baathist rule. This previously little-known company managed what small amount of trade with Iran there was in the south and monitored the activities of the few pilgrims allowed into the country. As with many old Baathist institutions, after 2003 Shahid al-Mihrab was taken over by new powers to pursue new ends. Control of this company has facilitated ISCI dominion over construction permits and transportation related to the pilgrimage business, as well as Iranian retail imports into the southern towns of Kut, ‘Amara and Basra. It remains to be seen what effect the January 2009 provincial elections, in which ISCI performed poorly, will have on the party’s grip on these assets. Meanwhile, ISCI’s main rival, al-Da‘wa, profits from control of federal ministries and their business dealings with Iran.
Since ministries and the state-owned companies under their auspices remain the buyers and distributors for most of the items that Iraq needs, and since corruption is a given, positions of power in the public sector mean getting rich quick. State-owned companies once imported raw materials to produce consumer goods (importing fabric, for example, to make shirts), but two decades of neglect during wars and sanctions and then willful destruction of physical plants since 2003 have left most factories without machine tools, so Iraq now simply purchases finished goods. (This is another reason why Iraqi labor unions have been laid low. Workers whose factories do not manufacture anything have little bargaining power.) Perversely, even though rehabilitating these factories would pay off in development terms, generating jobs and upgrading Iraqi workers’ skills, ministry officials have little interest in doing this. Investment in factories might benefit the geographic areas controlled by rival parties, so the officials would rather dole out millions each month in import contracts. The contracts deliver cash in hand; businessmen who deal with ministries and state-owned companies report that kickbacks are a requirement at all levels. For those with the right militia or party contacts, bribery can be well regulated and streamlined, albeit costly. For others, graft demands can come from all directions. “Without the right contacts,” says a Turkey-based Iraqi trader, “I experience bribery demands from everyone, from the guard at the door to the quality control officers in the back.” Even if one secures a contract, rival businessmen backed by other groups can spoil the deal. On top of all this, many ministry officials and director-generals of state-sector companies have little civil service experience and nepotism is widespread. A week prior to former Trade Minister Sudani’s arrest, his brother Sabah Muhammad Sudani was apprehended on suspicion of corruption linked to the ministry. But Sudani and his ministry were hardly an exception.
Iraq’s business environment, to quote one participant, “is about getting your money as fast as you can and getting out.” Corruption was certainly prevalent before the US invasion (a fact commonly used as a defense by US officials), and the sums involved are relatively comparable, but the greater political chaos has multiplied the number of players and the risks. Under the 1990s sanctions regime, Baathist cronies became millionaires when the state protected their smuggling operations from competition. Today, observers say, there are more new millionaires, linked to the Shi‘i religious parties and assorted militias, who are more ruthless than the Baathists in guarding their turf. As one Iraqi trader put it, “Under Saddam you could be robbed by the public sector or forced to pay bribes. Now you can lose your money and your life or your brother’s.” Few serious businessmen in the country work without some form of organized backing or protection. Family connections help, but operating outside one’s home base requires an added insurance policy. Protection rackets were the bread and butter of Muqtada al-Sadr’s Mahdi Army militiamen in Baghdad, for instance, from 2004 through 2007. As the Mahdi Army’s control over the capital broke down, Sunni traders hired Shi‘i representatives, and Shi‘i traders hired Sunni front men. Such cooperation suggests to some that the sectarian divide is narrowing, but equally it might be an expression of how deep those divisions run and how institutionalized they have become.
In decades past, Dubai and its fellow United Arab Emirates were home to an Iraqi expatriate community that was tiny compared to the communities of Amman or Damascus. That has changed. Behind Iran, Dubai and the UAE have become Iraq’s most important trading partners in the Gulf. The ease of transit in go-go Dubai facilitated a boom in direct trade with Iraq, as well as a significant, though unreported, re-export trade through Iran. The first business to be exploited after the fall of the old regime was used cars. Oil smuggling followed.
Under the Baathists, automobile ownership was restricted and all purchases went through the state-owned car company. By late 2003, entrepreneurial UAE car dealers began shipping older and poor-quality models to the ports of Basra and Umm Qasr. With demand skyrocketing, eager private buyers on the Iraqi side scrambled to accommodate the ships and move the cars northward. The poor condition of the port facilities at Basra and Umm Qasr limited the size of vessels that could safely dock. So, to keep pace with demand, Iraqi importers opened a number of smaller, quasi-legal spots for loading and unloading along the Shatt al-‘Arab waterway. According to shippers in Dubai, these makeshift ports often amounted to little more than wooden jetties across which cars could be driven to shore one at a time. And the buyers were no run-of-the-mill used car dealers. Some were militia heads with the contacts and the guns to get truckloads of cars to the capital. Others were connected to smaller criminal gangs looking to make quick profits as Iraq’s city streets were snarled with the influx. In Dubai, cars ten and 20 years old could be shipped north for as little as $135 apiece and then sold for several thousand dollars in Basra. Residents of Dubai began turning over used cars of any quality to agents for a hefty cut of the resale price in Iraq. Rumors began circulating in Dubai that the wreckage of car bombs carried vehicle identification numbers from the UAE, yet this did little to dampen the trade. Maliki’s reassertion of power in the south in 2007 was advertised as heralding an end to corruption at the ports. A year later, Baghdad banned the import of older cars, but enforcement has been weak. As of 2009, Iraqi ports remain a regulatory free-for-all. With the right political contacts and money for bribes, importers can still get their goods past marine patrols, unloaded in port and transported to market.
As the imports pot sweetened, officials of the interim, transitional and elected Iraqi governments gravitated toward Dubai. With fistfuls of dollars from the government till, they were able to secure UAE residency permits with no questions asked. Family relations and front men of party leaders and sitting ministers sank their dollars into Dubai’s booming real estate sector, set up trading companies, invested in shipping firms or did all three. Most have looked in Amman, Beirut and Damascus to find the estimated $17 billion in Iraqi capital that has fled the country since 2003, but Dubai, Abu Dhabi and Sharjah are now the preferred tax havens. (The UAE does not report the nationality of foreign investments, so there is no way to know how much Iraqi capital is there.) Dubai, known internationally for money laundering and smuggling, is a good place to shelter ill-gotten gains. Cash is welcome, even in large transactions. Aside from a few private banks, Iraq has no functioning banking system and so capital flight means the physical transport of heaps of cash across borders. Iraqi businessmen active in the UAE since 2003 speak of “Fort Knox packages” -- pallets of shrink-wrapped $100 bills arriving on charter flights. Coincidentally or not, Bremer’s Coalition Provisional Authority and the US military’s provincial reconstruction teams disbursed untold numbers of such packages in the aftermath of the invasion.
The ministry corruption, the import business, the offshore companies and the capital flight together make up what might be called the “Iraqi triple dip.” Dip: A minister’s trade company representative in Dubai “wins” a contract to supply spare parts for vehicles to that ministry. Dip: Sitting in Baghdad, the minister receives a kickback on the deal. Dip: That kickback finds its way to Dubai, where, along with the exporter’s fee from the ministry, it is invested in real estate or the company. Shadowy but well organized, this system guarantees everyone a cut, except of course the Iraqi public. Yet triple-dip corruption pales in comparison to the fabulously lucrative oil smuggling racket, which has done the greatest damage by far to the Iraqi economy.
Out in the Open
US officials typically finger insurgents and criminal gangs as the villains in the massive theft of Iraqi oil since 2003, preferring to ignore the links of smugglers to political parties. Regional capital havens, like the UAE, are crucial to the smuggling. As many goods as have been re-exported to Iraq, a much higher dollar amount has come back to the Emirates in the form of black-market crude. Prior to the US invasion, Iraq pumped 2.6 million barrels per day; in 2003, the volume plummeted, recovering to 2.4 million barrels per day only in 2008, just in time for world oil prices to drop precipitously. Of these barrels per day, an estimated 200,000 to 500,000 are smuggled. Some American auditors doubt the estimates, given the logistics of transporting such a gargantuan haul every day. Much of the missing crude, they suggest, is simply pumped back into the ground rather than processed.  As so often in post-invasion Iraq, there is no way to determine exactly how much has been stolen, but seen from the vantage point of the money made in the UAE, the amount is considerable.
Oil was smuggled through the south under the Baathists, but it was the US invasion that made the criminal enterprise widespread. Smuggling is now out in the great wide open, and it has evolved into something of a self-regulating system. Interviews with Iraqis who capture the oil and dhow captains who carry the contraband sketch a picture of modest first steps in late 2003 and early 2004. After Iraqi port authorities dissolved in 2003, local groups allied with ISCI and al-Fadhila, a Shi‘i Islamist splinter of the Sadrist trend, took control of Iraq’s two main offshore oil-loading terminals at Basra and Khawr al-Amaya. As in the car business, however, it was the quasi-legal ports along the Shatt al-‘Arab that took the lead. The most infamous such oil port is the island of al-Dakir.  Here, in 2003, businessmen and militia representatives set up repair facilities for dhows and other small ships, as well as simple docks and oil storage units. Al-Dakir promised quick service, competitive fees and a minimum of awkward questions. Iraqi crude was siphoned from inland pipelines and trucked to the island. The same businessmen sent agents to the UAE or Iran to find buyers. The first shipments went out on converted barges, which had plodded to al-Dakir from Dubai and Sharjah. Oil drums were rolled on board and the floating fire hazards headed home. Some of the barges disgorged their contents in Dubai, at Port Rashid or smaller facilities like Hamriyya. Dubai’s leaders never tire of pointing out that the city-state has no oil reserves, but it is home to several oil service and storage companies. Stolen Iraqi crude was sold to these companies (using falsified documentation or none at all), which simply “disappeared” it into the regional storage system. A barrel sold at al-Dakir for $8-10 could triple in price upon arrival in Dubai. As officials from the successive post-Saddam Iraqi governments moved into the Emirates, the business expanded exponentially.
It seems that to make really big money in smuggling Iraqi oil one needs capital and means of transport more than cheap merchandise. Whoever can match cash with port contacts and guaranteed shipment wins. By 2005, the big winners were Iraqis with friends in high places among the parties and militias that owned a piece of the ports and locals (both Emiratis and Iraqi expatriates) with ready cash flow. The business graduated from barges to larger ships that could travel directly to the offshore facilities. Knowing the man at the pump or his superiors allowed ship captains to take on thousands of barrels at a time from the offshore pipes. Until 2008, there were no functioning meters at Basra or Khawr al-Amaya. (The meters were either out of order before the US invasion or destroyed afterward, depending on with whom one speaks.) Even after meters were supposedly installed, smuggling continued apace. By 2007 there was a frenzied market in pilfered Iraqi crude in Dubai and Sharjah. As operating costs increased, so did the required amounts of cash up front, attracting bigger fish, both wealthy individuals and consortia that pooled money, to the business. At Hamriyya and Port Rashid, stevedores were simply rolling barrels of oil off ships of all kinds onto trucks, night and day. As one port manager recounted, “There were just too many ships and different arrival times and locations to monitor or regulate these transactions.” Everyone along the route got a piece of the action. The pump managers at the oil terminal, the laborers, the shippers and those who staked the money were all openly involved. The US Navy, whose cruisers patrolled these waters and who hired the contractors that guarded the offshore pipelines, probably knew a great deal about the illicit trade.
Of course, there is no honor among thieves and bandits suffer bad luck just as honest traders do. Facilitators among the powers that be at Basra would take the smugglers’ money and then fail to grease the skids, leaving ships waiting too long to load or denying them oil on a whim. In 2007, some of the unwieldy barges capsized, spilling oil onto Gulf beaches. UAE officials could not ignore the viscous threat to tourism, and eventually they banned the offloading of oil at commercial ports. This belated measure of policing did little to stop the smuggling operations, which were already mature. Dealers set up an offshore facility -- a kind of floating oil spot trading market -- just outside the territorial waters of Sharjah. Not only did this facility exchange crude oil but it also sold smuggled fuel oil and diesel for dhows at significantly reduced rates. Dhows leaving UAE ports would dock there, fill up and then continue to other destinations. Occasionally, remembered a dhow captain, US Navy ships would “pass by and we would wave.” Since the global financial crisis and the plunge in oil prices, oil smuggling has slowed, yet become more centralized. Maliki’s extension of the writ of the state over Basra has pushed rivals out of the offshore terminals there in favor of al-Da‘wa. On the UAE end, the days of hiring one’s own shipper to head north appear to be over; instead, a single shipping authority (again, reportedly connected to figures in al-Da‘wa) makes the trip and loads the oil.
In 2007, as the civil war raged, a customs official told the press: “Those who smuggle oil belong to the centers of power, both presently and formerly during the old regime, and they are capable of filling the mouths of anyone who opposes them with bullets.”  Two years later, with the Obama administration bent on implementing the phased withdrawal promised in the presidential campaign, US officials argue that Iraqi politics is becoming more normal. But the reality is that bullets fly less freely only because certain Iraqi factions, those in charge of the ministries in the Green Zone, no longer require inordinate violence to back up their words. They are en route to extending the writ of the state to the frontiers of the country’s war economy. But the state is built upon a foundation of corruption cemented in the civil war years. As Baghdad awaits an inflow of legitimate foreign investment from multinational oil conglomerates thirsting after the vast fields that remain untapped, the idle factories and the non-resident professional class suggest that the prospect of productive investment of those funds is slim. And though certain classes of Iraqis are riding high amidst the rampant smuggling and other illegal economic activity, 28 percent of young men are out of work. The people of Iraq have been left behind in the windfall.
 Reuters, February 15, 2009.
 See Pete W. Moore and Christopher Parker, “The War Economy of Iraq,” Middle East Report 243 (Summer 2007).
 Ibrahim Saif and David DeBartolo, The Iraq War’s Impact on Growth and Inflation in Jordan (Amman: Jordan Institute for Strategic Studies, 2007), p. 8.
 See Luke Mitchell, “The Black Box: Inside Iraq’s Oil Machine,” Harper’s (December 2007).
 Jasim Dakhil, “Squandered Wealth: Oil Smuggling in Basra,” al-Sharq al-Awsat, September 22, 2007.