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03KUWAIT1381 2003-04-13 06:18:00 SECRET//NOFORN Embassy Kuwait
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					  S E C R E T SECTION 01 OF 02 KUWAIT 001381 



E.O. 12958: DECL: 04/11/2013


Classified By: Ambassador Richard H. Jones for reason 1.5 (D)

1. (C) SUMMARY: Decisions will be made soon about
distributions of Iraqi oil revenues that may have significant
political as well as economic ramifications. Our GOK
contacts accept in principle the idea of reducing the
percentage of Iraqi oil revenues paid into the UN
Compensation Commission (UNCC) fund, but any attempt to
change the mechanisms for adjudication and payment of claims,
or a deep cut in the revenue flow, will alienate our Kuwaiti
coalition partners. Therefore it is of vital importance that
we work closely with the GOK as we develop our thinking.
Moreover, it will be better for both of us if any new
proposals are seen as Kuwaiti proposals. This message is
intended to provide food for thought as Washington policy
makers develop U.S. positions on these issues. It argues
that a more stable flow of oil exports from Iraq will allow
for cuts in the percentages for the Oil for Food program and
the UN Compensation Committee without a concomitant fall in
revenues for those programs, while at the same time providing
sufficient funds for reconstruction and humanitarian needs.

2. (C) The GOK fully understands and supports the need to
quickly rebuild Iraq, realizing that a prosperous and stable
state on its Northern border is vital to its own prosperity
and stability. However, GOK officials are also adamant that
any new Iraqi government must fully comply with all UN
Security Council resolutions. Thus, they are wary of any
plan to drastically reduce UNCC payments in a way detrimental
to adequate compensation for very real damages inflicted by
Iraq's 1990-1991 invasion and occupation of Kuwait. Kuwait
has been the USG's most indispensable partner in the fight
against Saddam's regime, and therefore the USG should now
work closely with the GOK to ensure its views are taken into
account. Indeed, GOK officials have told us that they would
like any proposals regarding changes in the distribution of
Iraq's oil revenue to come from Kuwait. We believe that such
a step would have important positive domestic, bilateral, and
regional implications. Domestically the GOK will be able to
demonstrate that it stood up for Kuwaiti rights; bilaterally,
Kuwait can demonstrate its concern for Iraqi reconstruction;
and regionally, the GOK will be able to say that it is not a
passive bystander but an active architect of regional policy
initiatives. All of these factors also serve U.S. interests.



3. (S/NF) The current formula divides revenues 72 percent
to the Oil for Food (OFF) program, 25 percent for UNCC funds,
and 3 percent for UNIKOM and other miscellaneous expenses.
The problem is how to carve out funds for reconstruction from
this mix without compromising UNCC payments. First, it should
be noted that Iraq sold around 400,000 barrels of oil per day
(bpd) to neighbors like Jordan and Syria at heavily
discounted prices. Further, illicit oil trade (also over
400,000 bpd for most of the past years) can be expected to
cease. Given relatively light damage to key Iraqi oil
installations, this suggests an additional 800,000 bpd of oil
and oil products will be available for export through the OFF
program almost immediately. (One estimate we've seen is that
restoring such trade at international market prices alone
would have generated an extra $1.1 billion in 2001 and an
extra $1.5 billion in 2002.)

4. (S/NF) Beyond restoring this illicit and discounted Iraqi
oil to the revenue stream, we should recall that over the
years Saddam continually manipulated the flow of Iraqi oil
for his political purposes. Again, given the relatively
light damage to Iraqi oil facilities, it is entirely possible
that Iraq could relatively quickly return to its pre-invasion
production capacity of 3.1 million barrels per day (mmbd).
With an estimated 300,000 bpd consumed domestically, Iraq
could have 2.8 mmbd of oil to sell at international prices.

5. (S/NF) 2.8 mmbd at a projected price of $22.50 a barrel
(assuming a likely fall in prices to historical averages
after the end of the war) yields nearly $23 billion a year.
In 2002, according to numbers we've seen, Iraq sold about 2.0
mmbd at a similar price, which would have yielded total
revenue of just under $16.5 billion. $16.5 billion in 2002
divided according to the previous formula yields $11.88
billion for OFF, $4.125 billion for UNCC, and $0.495 billion
for UNIKOM/Misc. (Caveat: Note that these and all following
figures are post estimates; even if the actual amounts differ
slightly, the same principle should hold.) If the same
formula is applied to our estimate of $23 billion for
post-war oil revenues, we could expect $16.56 billion for
OFF, $5.75 billion for UNCC, and $0.69 billion for
6.(S/NF) However, if one assumes that the actual dollar
contributions to OFF, UNCC and UNIKOM in 2002 were adequate
to meet current needs for those programs, then the
distribution formula could be altered significantly, and
still leave enough revenues for their needs. For example
(see table), on these assumptions, a distribution of 52
percent for OFF, 18 percent for UNCC and 2 percent for
UNIKOM/Misc. should provide ample funding for these programs
and still leave 28 percent (or over $6.2 billion) for

Current Current New New
Distr. Revenue Distr. Revenue
Formula Distr. Formula Distr.
(percent) ($bn) (percent) ($bn)

OFF 72 11.88 52 11.96
UNCC 25 4.125 18 4.14
UNIKOM 3 0.495 2 0.69

Total Revenues 100 16.5 100 23.0

7.(C) As can be seen, Kuwait could actually propose a seven
percentage point cut in the UNCC contribution and still
expect to see a slight gain in UNCC revenues. More
importantly, this formula allows 28 percent of Iraqi oil
revenues to flow to reconstruction costs ($6.21 billion).
Although Iraq's long-term needs are enormous, we doubt that
the country could absorb higher levels of reconstruction
investment efficiently.



8.(C) One of the most important areas for early
reconstruction and investment efforts must be agriculture.
Iraq has a history of being a bread-basket for the region,
but decades of mismanagement have devastated the sector.
Reversing the damage caused by draining marshes, and
rebuilding irrigation systems damaged by years of neglect,
may take years, but early gains are possible. (One key step
will be quickly resolving questions of land ownership.)
Reviving agriculture will have many benefits, including
providing jobs for the Iraqi people, but one of the most
important will be reducing reliance on imported food and
therefore freeing up OFF funds to be shifted to



9.(C) The Government of Kuwait has also expressed to us its
support for a debt relief program, but with an important
caveat; the program should concentrate on debts incurred
during the period UN sanctions were in place. Their argument
is that loans incurred during that period reduced the effects
of sanctions and helped keep Saddam in power. We believe
that such a debt relief proposal could be a useful complement
to any package to change the UNCC contribution formulas. It
could also be used as a foil to fend off any aggressive raids
on the UNCC by the French, Germans, etc.



10.(C) Beyond generating funds for governmental
reconstruction efforts, it is vital that the private sector
is brought in to do its part. Reftel contained post
suggestions on rapidly building trade and investment
promotion plans to revive private sector interest in Iraq, a
country we and the Kuwaitis have been locked out of for
nearly 13 years. Beyond this, septel will suggest specific
mechanisms to encourage Iraq's closest and wealthiest
neighbors, the six states of the Gulf Cooperation Council, to
play their part in the reconstruction effort.