The successful maintenance of a near total embargo on Iraq owes to a number of factors, ranging from geography to post-Cold War global economies. Iraq’s limited access to the sea can be easily monitored, while its record of regional aggression has deprived Baghdad of local friends. Despite some breaches of the export embargo involving high-ranking officials in both countries, Iran is not going to give Iraq much economic relief. The same goes for Syria. Turkey and Jordan, Iraq’s two lifelines to the outside world, cannot risk more than limited and calibrated breaches of the embargo because of their own susceptibility to US pressures.
Beyond Iraq’s neighborhood, a number of countries would like to renew trade ties with Baghdad. Applications to the UN for exports to Iraq rose sharply last year, especially from China and South Korea. Both were willing to ship goods to Iraq in return for future promises of payment in oil. Needless to say, the Iraqi troop movements in October 1994 indefinitely postponed any chance of these deals going through. India would like to recover the $3 billion Iraq owes it and capture a piece of a potentially lucrative construction and heavy machinery market (and perhaps light arms). Brazil is another old trading partner waiting in the wings to renew ties.
Russia has been a main proponent of at least a limited lifting of the embargo. Its motivation is also partly economic: Iraq owes Moscow substantial sums for previous arms and other purchases, and Baghdad has promised lucrative contracts for Russian oil companies. The Russian oil company Lukoil has been tentatively awarded the development of the West Qurna oil field, which may be large enough to produce up to 2 million barrels per day (b/d) — equivalent to Kuwait’s current production. But Russia has to be careful. First, Boris Yeltsin’s government is beholden to the US, especially on foreign aid and investments; second, a rapid return of Iraqi oil would depress oil prices, thus hurting Russia’s own major exchange earner.
The other members of the Organization of Petroleum Exporting Countries (OPEC) would be quite content if Iraqi oil sat in the ground indefinitely. With the exception of the UAE and Saudi Arabia, most OPEC countries were already producing at the limits of their capacity on August 2, 1990, and therefore could not raise output to take advantage of the sudden disappearance of Kuwaiti and Iraqi oil. Domestic financial constraints have kept them that way for the most part. Since the Gulf war, only Saudi Arabia among the OPEC states has made major gains in oil production capacity.
Saudi rulers were truly surprised that Iraq invaded Kuwait, given Saudi Arabia’s massive support for Baghdad during the Iran-Iraq war and the personal prestige (and even more money) that King Fahd invested in the Saudi-Iraqi Non-Aggression Pact of 1989. At first, the Iraqi assault was almost a relief, to the extent that the Saudis believed it would be no more than a raid across the border. Riyadh’s equanimity must be seen in the context of intra-OPEC dynamics of the period. Saudi Arabia and Kuwait had been the biggest antagonists at OPEC meetings during 1988 and 1989. The Saudis had forged a series of OPEC agreements during this period which helped oil prices to recover from the lows of 1986 and at the same time secured for themselves just under 25 percent of OPEC’s market share. The spoiler was Kuwait, which proceeded to “cheat” (i.e., produce over its OPEC-assigned quota) before the ink had dried on the agreements. Riyadh saw Iraq’s verbal tirades against Kuwait in the spring of 1990 as just desserts for a renegade.
The invasion, Iraq’s annexation of Kuwait and some considerable prodding from the US changed Riyadh’s position. Saudi production jumped from 5 million b/d in 1989 to 8.2 million b/d by 1991-1992. Consequently, Saudi Arabia’s average annual income doubled from $20-25 billion in 1987-1989 to around $45-50 billion in 1990-93 .
But this windfall did not translate into long-term financial stability. During the war and thereafter, the Saudi royal family embarked on a major arms buying spree, largely from the US. (Saudi purchases and the downturn in US military spending have meant that Saudi Arabia has replaced the Pentagon itself as the largest customer for US military industries.) Several Saudi princes placed orders without informing the country’s financial authorities. Personal gain in the form of commissions was one reason for this profligacy; pressure from the US to “recycle” the revenue windfall was another. In 1991, when some US senators questioned their right to the windfall, the Saudis took out a loan from the New York-based J. P. Morgan Bank just to show they were short of cash.
By 1993 and 1994, oil prices were substantially lower than in the boom days of the crisis. Despite higher revenues from producing nearly 50 percent more oil than in 1989 — now almost one third of total OPEC production — the Saudis have spent so lavishly that they had to reschedule some $9.2 billion in payments to US military contractors in 1994, and further rescheduling is likely for payments due in 1995. By the end of 1994, total internal and external Saudi government indebtedness equaled $80 billion, and foreign assets had fallen to under $20 billion (from a high of $120 billion in 1982). Without this increased production and revenue, though, the Saudi financial situation would be notably worse. Prolongation of the embargo against Iraq allows the Saudi rulers to postpone the day of reckoning. On this issue, Washington and Riyadh think as one.
One other oil issue makes it imperative to keep Iraq out of the oil markets: control over OPEC. Being the largest producer in OPEC by far, and with sizable excess capacity of a further 2 million b/d, Saudi Arabia has considerable leverage over the other producers. Iran does not have the capability to produce more than 3.7 million b/d, and so is beholden to Riyadh to maintain oil prices at a certain level. The main troublemaker in OPEC is, once again, Kuwait, with its reconstructed capacity of 2.5 million b/d. Constrained by its OPEC-dictated level of 2 million b/d, Kuwait caused a mini-crash in oil prices in June 1993, when its output rose faster than most OPEC countries were comfortable with. It is once again threatening to raise output unilaterally if its higher quota demands are not met. So far, political pressure has helped keep Kuwait in line.
Iraq’s return to the market today would upset the Saudi balancing act of maximizing its own production and stabilizing global oil prices at a relatively high level. Iraq has vowed to produce all it can once it returns, which could be as high as 3 million b/d a short time after sanctions are lifted. Over the next decade, it is likely that most new global oil supplies will come from Iraq, whose output could rise to around 6 million b/d if foreign investment is permitted. The Saudis cannot do much about that long-run situation, but for the time being they have every economic incentive to delay Iraq’s return as long as possible, with the hope that increases in global demand can eventually accommodate both Iraq’s return and Saudi Arabia’s larger output level.
If two countries epitomize the opposing sides of the debate over the Iraq embargo, they are Saudi Arabia and France. Both were staunch allies of Iraq during the Iran-Iraq war, fought on the same side in Desert Storm, and had constructed sizable trade and commercial partnerships (Aramco and Total were even going to swap oil assets at one time). But while Saudi Arabia has supported US efforts to maintain the embargo, France has not. The French decision in early January to open an interests section in Baghdad illustrates its disagreement with Clinton administration policy.
The French announcement, and periodic bickering regarding Iraq’s compliance with Security Council resolutions, are part of a larger French effort to reposition its foreign policy in the Middle East and regain a voice in the region. French officials also resent exclusion by the US and Britain from the contract bonanza following the war while simultaneously facing the indefinite loss of their main market, Iraq. Iraqi officials have recently promised Total and Elf two giant oil fields, Majnoun and Nahr ‘Umar. No agreements have been signed yet, but the contracts are ready and could be finalized just days after sanctions are lifted. These two fields, with a combined capacity conservatively assessed at 1 million b/d, will almost double the worldwide oil production of both companies, raising them to the same league as the largest US majors.
It is, however, simplistic to see French policy as dictated by purely economic advantage. Longer term geopolitical concerns underlie their approach. France perceives “Islamic fundamentalism” as the main threat to its interests in the Middle East and North Africa, and fears above all the breakup of Iraq, of which Iran would be the main beneficiary. Moreover, French policymakers maintain, Saddam Hussein can be monitored and controlled even with economic sanctions lifted. Easing the embargo on Iraqi exports fits all these concerns, and Paris is worried enough to make its voice heard.
