THE DEPUTY SECRETARY'S MAY 19 MEETING WITH IRAQI

S E C R E T SECTION 01 OF 03 BAGHDAD 002454

SIPDIS

NOFORN

E.O. 12958: DECL: 06/08/2015
TAGS: PREL PGOV PINS ECON EPET EAGR KDEM KISL IZ
SUBJECT: THE DEPUTY SECRETARY'S MAY 19 MEETING WITH IRAQI
DEPUTY PRIME MINISTER CHALABI


Classified By: Charge d'Affaires James F. Jeffrey for reasons
1.4 (b) and (d)


1. (U) PARTICIPANTS:

U.S.
--------------
DEPUTY SECRETARY ZOELLICK
CHARGE D'AFFAIRES JAMES JEFFREY
DCM DAVID SATTERFIELD
AMBASSADOR JONES
CHRISTINE DAVIES
ROBERT WALLER
ADAM ERELI
SCOTT CARPENTER

IRAQ
--------------
DEPUTY PRIME MINISTER AHMED CHALABI


2. (S/NF) SUMMARY: In a May 19 meeting with the Deputy
Secretary, Deputy Prime Minister Chalabi noted limited

SIPDIS
progress on the constitution and voiced concern about meeting
the August 15 deadline and including Sunnis in a credible
way. He also opined that sectarian violence is a more
serious problem than is portrayed publicly and said he has
met Sunni leaders to discuss jointly condemning sectarian
strife. Chalabi noted Iraq also faces serious economic
challenges. Chalabi agreed with the Deputy Secretary on the
need to adjust pricing structures, but noted legislative
opposition to the idea. Other problems include bureaucrats
who are reverting to socialist tendencies and the undeveloped
agricultural and banking sectors. END SUMMARY.

-------------- --------------
CONCERNED ABOUT CONSTITUTION AND SECTARIAN VIOLENCE
-------------- --------------


3. (S/NF) In response to the Deputy Secretary's questions on
Iraq's political process, DPM Chalabi said he feared Iraqis
were making little progress on the constitution. Sunni
participation was weak and there was no agreement on a
mechanism for their credible inclusion. Chalabi asserted he
is pushing the United Iraqi Alliance (UIA) to add 14-15
members to the existing 55-member constitutional committee of
the Transitional National Assembly (TNA). PM Ja'fari is on
board and the Sadrists could be persuaded as well, however
SCIRI leader 'Abd al Aziz al-Hakim remains opposed to the
idea. Sunni Deputy Prime Minister 'Abid Mutlak al-Jabburi
has credible names to include on the committee and Chalabi
claimed he is also working to persuade the Iraqi Islamic
Party and the Muslim Ulama Council to sign on to the expanded
committee. (Note: Leaders of the Sunni Iraqi Islamic Party
have separately told Poloffs they support the idea. End
note.) Chalabi mentioned he will see Muslim Ulama Council
spokesma Haet al-Dhari next week, with whom Chalabi said
he has personal rapport because of past political connections
between al-Dhari's father and Chalabi's brother.


4. (S/NF) The Deputy Secretary stressed the importance of
making the August 15 constitution deadline to avoid giving
opportunities to terrorists to exploit. He asked whether the
TNA was making progress to meet the deadline. Chalabi
replied that he is concerned about the slow speed - the
process needs organization and a plan, but the committee had
no "movers" to set action plans. Using the TAL as a basis
would accelerate the process somewhat, although he believes
the Kurds' internal squabbling is also delaying movement.


5. (S/NF) On the Deputy Secretary's question about sectarian
violence, Chalabi said it was a very serious problem that was
under-reported. Chalabi claimed approximately 15-20 people
are killed each day; Iraqis are moving out of their
neighborhoods to escape this increasing violence. Chalabi
believes terrorists are inciting sectarian violence to
de-legitimize the government and derail the democratic
process.


6. (S/NF) Controlling entrances to Baghdad would help to
contain infiltrating terrorists, suggested Chalabi.
Extremists are killing Shia on their way to Karbala and
Najaf; as payback, the Shia are killing Sunnis in Baghdad.
(NOTE: Charge pointed out the Ministry of Interior has a new
plan to patrol the 23 entrances to Baghdad; however, the plan
does not extend to Babil province, which lies between the
Shia heartland and Baghdad. END NOTE) Chalabi opined that
encouraging citizens to use the highway rather than the
smaller, more dangerous roads would also diminish the number
of incidents.

7. (S/NF) Chalabi underscored the importance of getting Sunni
and Shia leaders to condemn the sectarian strife. He is
holding discussions with Sunni Endowment leader Adnan
al-Dulaymi and the Iraqi Islamic Party on issuing a joint
statement denouncing sectarian strife. Chalabi is not sure
the Muslim Ulama Council (MUC) will join the initiative given
their recent public statements that have heightened tensions.
Chalabi highlighted the problem of Sunni leadership. His
efforts to date have been focused on bringing Sunni religious
and tribal leaders into the process, but Chalabi noted the
bulk of Sunnis are not in these categories. There needs to
be outreach to the professional and technocratic cadre. Only
one Sunni minister, the Minister of Women's Affairs, Azhar
Abd al Karim al-Shaykhli, fits into this category, opined
Chalabi.


8. (S/NF) Iraqis would soon find the Shia/Sunni divide less
important than the division between Arabs and Kurds,
predicted Chalabi. Mosul is "explosive" due to Kurdish
encroachment, and Arabs also fear the Kurds are taking over
the city of Sinjar in Ninewa province. Chalabi noted that a
key task is to instill in Kurds the notion they are part of
Iraq, while restraining them from assuming disproportionate
power.

-------------- --------------
ECONOMIC PRIORITIES: PROVIDE SERVICES, UP REVENUES
-------------- --------------


9. (S/NF) Chalabi remarked on Iraq's abysmal economic
situation, with $36 billion spent since the fall of the
regime resulting in no improvements. He said problems are
clearly not fixed by "throwing money at them," and the
corruption problem has exacerbated conditions. (NOTE:
Chalabi noted the Board of Supreme Audit recently released a
report on corruption within the Defense Ministry. END NOTE)


10. (S/NF) Chalabi said government priorities should be to
provide services: electricity, sewage, and water. For
electricity, the current goal is four hours on, one hour off.
Iraq has the reserve capacity of 11,000 megawatts, but it
currently generates only 4,200 megawatts. Two years have
failed to improve this output, complained Chalabi. As a
short-term solution, the government has focused on using
expensive fuel. Currently Iraq is importing 4 million liters
per day of diesel fuel costing $150 million/month to power
generators.


11. (S/NF) The Deputy Secretary suggested that Iraq could
harness the estimated $5 billion of natural gas currently
flared to power electricity generators rather than crude oil
- and thus free up oil for export. Fuel pricing structures
need to be adjusted, added the Deputy Secretary. Chalabi
agreed, noting that gasoline is basically free (50 dinar or 3
cents per liter) and diesel is even cheaper than gasoline.
Electricity is also free since the collection process is more
expensive than the governmental income that would be gained
by collecting tariffs, complained Chalabi. One idea is to
charge citizens for extra usage after a minimum amount.
Chalabi said he and the Finance Minister support adjusting
pricing structures, but the UIA remains reluctant. He
suggested the USG could help educate UIA parliamentarians by
leading a seminar for the TNA on economic incentives.
Chalabi would also like to cut food subsidies, at least
partially. Ending subsidies for soap and beans, for example,
would save $500 million per year.


12. (S/NF) Iraq's second economic priority should be to
increase revenues through oil exports, but Iraq suffers from
both production and export problems, noted Chalabi. Iraq
only exports 1.4 million barrels per day. Iraq could
increase exports from Kirkuk, but would need security for the
pipeline. For example, the oil pipeline through Mosul is
under threat, and it would require 18 fully trained and
equipped battalions to protect it. Iraq loses $600 million a
month because the northern export lines are unprotected and
not functioning. In addition, Iraq's oil refining capability
is half what it needs to be; the country needs 20 million
liters gas per day and must import 10-11 million liters per
day.


13. (S/NF) The country's economic problems are exacerbated by
an increasing tendency (on the part of bureaucrats rather
than ministers) to revert to socialist practices, continued
Chalabi. Because of their experience, the bureaucrats'
default response defies to enact protectionist tariffs and to
restrict the percentage of foreign investment. Not one
economic activity in Iraq is profitable, including
agriculture, which is heavily subsidized, yet their
inclination is to increase subsidies to address the problem,
complained Chalabi.

-------------- --------------
ADDITIONAL SECTORS: AGRICULTURE, BANKS, JOB CREATION
-------------- --------------

14. (S/NF) Chalabi noted two issues affecting the
agricultural sector: land ownership and irrigation. Iraq
needs to farm large tracts of land to have a profitable
agro-sector. However, there is still a law preventing
private land ownership of more than 800 hectares. Modern
irrigation techniques are needed, but such improvements are
capital intensive. Banks present a unique challenge with
less then 500 operating branches in Iraq -- one branch per
40,000 Iraqis.


15. (S/NF) The Deputy Secretary asked about the usefulness of
micro-credit loan programs in Iraq, to which Chalabi
responded that such a program would help greatly since it "is
impossible to get loans now." Chalabi said agriculture and
services were key elements to creating jobs, much more than
manufacturing. Expanding housing would also create immediate
jobs. Most land belongs to the government, which it could
section off for residential areas that would create jobs in
construction. Further, increasing home ownership would
contribute to political stability. Chalabi also asked to
increase the number of scholarships to the U.S. and
subscriptions to useful periodicals.


16. (U) The Deputy Secretary's office cleared on this cable.


17. (U) Minimize considered for REOs Basrah, Hillah, Kirkuk,
and Mosul.
Jeffrey