IRAQ: MINISTER OF FINANCE ON POLITICAL DYNAMICS,

S E C R E T SECTION 01 OF 03 BAGHDAD 002453

SIPDIS

E.O. 12958: DECL: 06/08/2025
TAGS: EFIN ECON EAID PGOV PREL IZ SY LE ECON
SUBJECT: IRAQ: MINISTER OF FINANCE ON POLITICAL DYNAMICS,
BRUSSELS CONFERENCE, JEC, AND SYRIA/LEBANON ASSET RECOVERY

REF: STATE 106124

Classified By: Deputy Chief of Mission David M. Satterfield for
reasons 1.4 (b) and (d)


1. (S) SUMMARY: Describing his take on current maneuvering
within the Iraqi Transitional Government (ITG),Finance
Minister Allawi told the DCM June 8 he does not think Prime
Minister Ja'afari has done a good job in articulating a clear
political position and is having difficulty managing the
government. Allawi, who referred to himself and Planning
Minister Saleh as "cat's paws" in a larger political game
between Shia and Kurdish political figures, said he hopes a
final decision on where responsibility for donor coordination
will fall will be made within a few days. In any event,
Allawi stressed he and Saleh will work closely together to
make a successful Iraqi showing at the Brussels Conference.
In reply to the DCM's delivery of reftel talking points on
the importance of substantive reform deliverables for
Brussels and the JEC, Allawi noted he has already pitched a
strategy for reductions in food and fuel subsidies to the
Council of Ministers. MoF will try to re-engage with Syria
on return of frozen assets and provide Embassy with a
detailed read out of the problems it is encountering in
recovering the $140 million in assets that remain frozen in
Lebanese commercial banks. END SUMMARY.

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BOSNIAN SOLUTION
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2. (S) During a frank and open discussion with the DCM on
June 8, also attended by Treasury Attache and econoff,
Minister of Finance Allawi shared his thoughts on the current
state of debate within the ITG as to Iraq's political future.
While stressing it is too early to make definitive judgments
as to what can be constituted a trend, Allawi observed, it is
possible that Iraq may be headed, whether by design or not,
towards some kind of "Bosnian solution." Sunni Arabs are not
yet fully adjusted to their loss of status, but appear
resigned to the existence of a Kurdish Federation. Few Kurds
view Iraq as a natural, long-term entity, but are prepared to
give short-term support to the political process as long as
their principal interests and conditions are met. The Shias,
for their part, are prepared to concede much to get a
resolution to political stalemate, but will not go so far as
to accept an inequitable "Muslim-Croat" form of power
division.


3. (S) Allawi said he would only give the performance of the
ITG a C minus rating. Noting in the Prime Minister's defense
that he has only been in power for a few weeks, Allawi
stressed that Ja'afari has nevertheless failed thus far to
articulate a clear political position and vision. He
commented that Ja'afari is overloaded with trying to achieve
too many goals, rather than focus on a few that are doable, a
similar trap that the Iraqi Interim Government (IIG) fell
victim to. The ITG also suffers from over-centralization of
decision-making authority within the Prime Minister's office
and micro-management of even relatively minor administrative
issues.

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POLITICAL CAT'S PAWS
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4. (S) Noting that Ja'afari still has many issues to work out
with the Kurds, Allawi said Shias are divided in terms of how
they see relations with the Kurds developing. One view,
represented by Supreme Council of the Islamic Revolution in
Iraq (SCIRI) leader Abdul Aziz Hakim, is that the Kurds
should be developed as long-term allies. Others, however, do
not want to see the ITG made hostage to Kurdish demands.
Vice President and SCIRI member Adel Mahdi is very close to
the Kurds. Mahdi's candidacy to head the ITG was withdrawn,
Allawi continued, when SCIRI decided it would be best not to
have to take responsibility for a short-term government.
Dawa leader Ja'afari, on the other hand, was persistent in
his pursuit of the position ad it became clear that there
would be no viable alternative to Ja'afari.


5. (S) Referring to himself and Planning Minister Saleh as
"cat's paws" in a larger political game, of which the
struggle over which ministry is to control the donor
assistance portfolio is just a small reflection, Allawi said
he thinks there is a better than even chance (60/40) the
issue will be resolved within two days. According to Allawi,
Ja'afari is likely to "capitulate" to the Kurds and allow the
function to remain with Saleh as he will be unwilling to risk
the success of his government over the issue. Allawi
characterized Ja'afari's political style as one that always
leaves room for maneuvering, something that is sometimes
misinterpreted as being indecisive. In fact, Ja'afari enjoys
and is good at high stakes political poker. With regard to
PM spokesmen Laith Kubba, who has been less than careful in a
number of public statements (e.g., charges against Saddam and
Iraqi debt write-off),Allawi speculated that Ja'afari may
have had some unknown, byzantine reason for giving Kubba the
position. He added that Kubba is not trusted at all by the
Kurds.


6. (C) As he has "no ego involved" in the outcome, Allawi
stressed that, if a political resolution of the donor
coordination debate within the ITG is not achieved soon, he
will work out a mutually agreeable arrangement directly with
Saleh with whom he personally gets along very well. The DCM
interjected it is critical that Allawi and Saleh be united
and be prepared to present a strong message of the ITG's
commitment to economic reforms. To lose the opportunity
Brussels represents to line up international support would be
a major setback for the ITG. The United States will do
everything possible to make the conference a major success,
but in the end it will be up to Iraq. The DCM added that the
ITG Ministers of Defense and Interior have committed to work
together closely. Acknowledging the DCM's comments, Allawi
remarked an agreement to coordinate efforts for the Brussels
Conference had been reached by the relevant ministers during
a meeting earlier in the day at the Ministry of Foreign
Affairs.


7. (C) With regard to division of responsibility on donor
coordination issues, Allawi said a "technical solution" would
be to spin off to MoF the capital budget function of the
Ministry of Planning and Donor Coordination (MoPDC) and
establish donor coordination as a new unit under the Prime
Minister's office to be headed by Saleh. Such a solution
would help Ja'afari to save face since he has already
announced publicly that donor coordination would go to MoF.
The new unit would be responsible for accelerating the flow
of aid and project implementation. Allawi said that Saleh
himself favors dismantling the MoPDC. Its remaining
functions could serve to perform data collection and
statistical analysis.

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PREPARING FOR THE JEC
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8. (C) Transitioning to the topic of the upcoming Joint
Economic Commission to be held in Amman in July, the DCM
delivered reftel talking points (a copy of which was left
with Allawi as a non-paper). He stressed the high-level
composition of the US delegation and noted the success of
Iraqi participation will be judged by how much progress on
economic reform can be announced. Allawi, the DCM
reiterated, should come prepared to announce subsidy cuts in
Brussels, in preparation for the JEC. At a minimum, it is
imperative Iraq's intent to proceed with specific cuts be
declared.


9. (C) In response, Allawi noted he has already been doing
the groundwork for cuts in food and fuel subsidies and
discussed his thinking at a recent meeting of the Council of
Ministers. While there is consensus within the ITG that
reform of Iraq's system of subsidies is critical, some in the
government are wary about the lack of a sufficient social
safety net and any raise in fuel prices at a time of
political stress. Many Iraqis already pay higher prices for
gasoline on the black market, but many others still wait in
line to get it for free. Allawi believes he will be able to
achieve political agreement to proceed with phased-in
increases in the price of gasoline, leading to a 20 percent
cut in expenditures in fuel subsidies, a measure that should
satisfy the IMF Iraq is being faithful to its Emergency Post
Conflict Arrangement (EPCA) commitments.


10. (C) As to cutting the cost of the Public Distribution
System, Allawi said he favors eliminating some of the items
currently handed out and focusing the system on key
commodities only, thereby saving up to $500 million. Allawi
agreed with the DCM that from a budgetary standpoint, there
is little wriggle room for Iraq to meet large security
expenditure needs except through subsidy cuts. Allawi also
concurred on the importance of close budget coordination with
the Ministries of Defense and Interior and the need to
protect pipeline infrastructure so that oil revenues are not
lost.

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ASSET RECOVERY: SYRIA
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11. (C) Reviewing with the DCM the status of Iraq's asset
recovery discussions with Syria and Lebanon, Allawi confirmed
nothing substantive has taken place since the return of an
Iraqi technical team in mid-April. Out of an almost $2
billion in total Iraqi frozen assets abroad, Syria holds the
largest single share at $262 million. (Note: although a
specific amount was not given, Allawi also noted Bahrain for
its holdings of Irqi assets. End note). Despite requests
in writing from Iraq to do so, Syria has refused to transfer
any of the funds from the Commercial Bank of Syria or the $71
million sitting in its Lebanese subsidiary, the
Syrian-Lebanese Commercial Bank.


12. (C) Allawi said he was thinking of advising Prime
Minister Ja'afari to try to solve the issue personally in
Syria, but concurred with the DCM's recommendation that it
would make more sense for Iraq to send a technical team. The
Syrians are extremely isolated diplomatically and would
likely try to turn a Ja'afari visit to their political
advantage. Iraq should hold Syria's feet to the fire and
insist upon agreement of asset transfer and an actual
significant flow of funds before any high-level visits to
Damascus are considered. Especially in light of Syria's
looming June 15 deadline to achieve progress on this and
other issues or face potential Section 311 sanctions, the DCM
continued, now is a perfect time for Iraq to press for
resolution of the issue. Allawi agreed and noted the DCM's
comments came at a timely moment.

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ASSET RECOVERY: LEBANON
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13. (C) Allawi said Lebanese banks still hold approximately
$140 million out of what had once been $300 million in Iraqi
frozen assets. He asserted it is not true that Iraq has not
contacted the Lebanese Central Bank Governor about the
assets. The difficulty in getting the assets back appears to
be that the Lebanese banks (e.g., Mourad and First Bank of
Lebanon) that hold the Iraqi ministerial accounts do not
operate according to strictly international standards and
appear to be trying to bargain over transfer terms. The DCM
volunteered the USG is willing to assist, but it would be
necessary to have specific information on a bank-by-bank
basis as to the problems Iraq is running into in Lebanon.
The USG has been receiving very conflicting information over
whether the ITG had or had not requested transfer of funds in
Lebanese commercial banks. Allawi agreed that there was
internal ITG confusion on the issue which needs to be
resolved and indicated he would try to work with the Central
Bank and get us visibility on DFI account information to
analyze possible transfers into it of frozen assets.


14. (C) COMMENT: Embassy will follow up soonest with the head
of MoF's asset recovery team to determine what specific steps
the Ministry intends to take next week on recovery of Iraqi
assets from Syria. Embassy will also engage the Central Bank
directly. END COMMENT.


15. (U) REO Hillah, REO Basra, REO Kirkuk, and REO Mosul
minimize considered.
Jeffrey