LAUNCHING THE COMPACT WITH IRAQ

S E C R E T SECTION 01 OF 05 BAGHDAD 003058

SIPDIS

SIPDIS

FOR NEA/I, NEA/ARP AND C

E.O. 12958: DECL: 08/20/2016
TAGS: PREL EAID PGOV IZ
SUBJECT: LAUNCHING THE COMPACT WITH IRAQ


Classified By: CDA DAN SPECKHARD, REASONS 1.4 (B) AND (D)

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SUMMARY
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1. (C) Treasury Deputy Secretary Kimmitt and Department of
State
Counselor Zelikow met with Prime Minister Maliki, Deputy
Prime Minister Salih, Finance Minister Jabr, Oil Minister
Shahristani, Central Bank Governor Shabibi and other
foreign delegation members in Baghdad during the July 19-21
informal launch of the International Compact with Iraq. In
their meetings, DepSec Kimmitt and Counselor Zelikow
briefed on their Compact consultations in Berlin, Paris and
London and plans for subsequent stops to Kuwait, Saudi
Arabia, the UAE, Italy, and Brussels. Discussions focused
on moving forward with an ambitious agenda to prepare the
ground for the Preparatory Group meeting rescheduled for
early September. Iraqi interlocutors agreed that work
still needs to be done to bind Gulf Arabs to the Compact.
DepSec Kimmitt and Counselor Zelikow emphasized that the
Compact should not be viewed as donor/pledging exercise but
rather a comprehensive reform program that will move Iraq
to economic self-sufficiency in the next five years. The
international community's role in the Compact will be to
provide assistance to bridge the gap between Iraq's
resources and expenditure requirements and to encourage
private sector investment flows in a revitalized Iraqi
economy. End Summary.

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Prime Minister Maliki:
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2. (C) During a call by Deputy Secretary Kimmitt and Counselor
Zelikow, Prime Minister Maliki welcomed the prospect of strong
U.S. support for the Compact process. He acknowledged that
France and the Arab world had some hesitations about
participation,
but believed they would respond favorably. Maliki also took
note
of the close link of economic issues to reconstruction in both
its security and political spheres. It cannot be split. He
continued, investment will not come without increased security
and political reforms will encourage countries to offer
support.
He defined GOI-UN collaboration as an umbrella with the U.S.
contribution critical to ensure success.


3. (C) Deputy Secretary Kimmitt responded with a strong
statement
of support from the President and praised recent work by the
GOI to bring the new investment law to the parliament. He
also
gave credit to Iraqi work with the IMF and emphasized that the
international community would take note of such
accomplishments.
He also impressed upon the PM, and got his commitment, to get
the
full force of the GOI, i.e., a multi-ministerial effort behind
the compact. Counselor Zelikow took up the theme of
international
support and called the compact a contract between Iraq and the
world leading to political success and financial independence.
He also encouraged the PM to take tough decisions as required
and to overcome predictable resistance within his government.


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Oil Minister: Compact Needs Broad GOI Support
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4. (C) Oil Minister Shahristani told the Deputy Secretary
and Counselor that Iraq needed support from a broad spectrum
of countries, including China, India and Russia: It is now
time
for Iraq to engage directly with the world. Within Iraq, he
stressed that the Compact must be broadly supported across the
Iraqi political spectrum. Shahristani advised that the
Compact
must be seen as an Iraqi initiative, but also recommended that
the U.S. reach out to bring in the Ministers of Trade and
Planning and Development Cooperation (MoPDC),particularly as
MoPDC represents the Tawafuq faction in the government.
Shahristani acknowledged that DPM Barham Saleh has doing an
excellent job on the Compact, but cautioned that his

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association with it could become a weakness later
(presumably because of Saleh's Kurdish background).
Deputy Secretary Kimmitt suggested that sectoral working
groups might help address this, but promised to reach out
to both the Trade and Planning ministers during the
upcoming GOI visit to the U.S.

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Capital Budget Expenditures and Foreign Investment in Oil
Sector
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5. (C) In response to Deputy Secretary Kimmitt's question
as to whether MoO could spend additional funds that might
come to it under the Compact, Shahristani said that MoO
would not spend its $3.5 billion 2006 capital budget.
Under the current system, the Ministry of Finance (MoF)
does not release funds until approximately April; but
there was no cabinet in place to take decisions on spending
priorities until May 20. On top of this and in an attempt
to fight corruption, the GOI has tightened spending
procedures to such an extent that it is almost impossible
to spend any money at all. According to Shahristani, the
contracting committee
(which approves all contracts and purchases over $3
million) returns contracts repeatedly for the most minor
revisions and now is requiring both bid bonds and
performance bonds of all companies as a matter of course.
It is difficult enough doing business in Iraq, Shahristani
said. The cabinet must fix this, he concluded, as most oil
companies that MoO would like to see working in Iraq have
no need to fight for additional business here. In light of
these difficulties, Shahristani said that MoO is focused on
optimizing existing production this year, utilizing smaller
sums of money and finishing up existing projects.


6. (C) Shahristani said that, given the current level of
resources and given sufficient security, Iraq could be
producing some 3 million barrels per day (BPD) and
exporting 2.5 million BPD. Without additional resources,
Shahristani said that MoO could raise this by some 500,000
barrels per year. If, as he intends, the hydrocarbon law
is passed by the end of 2006, Shahristani said the
situation will improve markedly. With international oil
companies (IOCs) developing new fields and the GOI focused
on existing fields, Iraq could produce some 6-8 million BPD
within ten years. He predicted that, if the law is in
place, IOCs will negotiate contracts in the first half of
2007; they will need 5-7 years to develop and slightly
longer to optimize production. He added that many officials
in MoO still have a very limited mindset, not seeing the need
to reach outside world for assistance in developing Iraqi
resources.
This includes, he said, people in key positions.

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Oil's Woes: Politicos as well as Criminals
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7. (C) Shahristani said that influential political groups
cause as much difficulty in oil products and crude oil
distribution as criminals. In order to get the sector
going in the right direction, Shahristani said that it is
essential that the USG help pass the right message to all
groups that Iraq's development cannot be held hostage to
political agendas nor to corrupt officials. Deputy
Secretary Kimmitt welcomed Shahristani's emphasis on

SIPDIS
fighting corruption, noting that this helps the
administration make a case for Iraq with the U.S.
Congress. Shahristani asked whether the Compact could help
Iraq gather information from the U.S. and other Compact
members about past acts of corruption in an effort to
uproot existing criminal networks and net some big fish.
He also agreed that it would be useful to fold an emphasis
on corruption into the Compact and with a wider focus
than just the hydrocarbon sector.


8. (S) Shahristani referred to the kidnapping of the
Director General of the Northern Oil Company (NOC) Adil
Qazzaz as a concrete example. The U.S. has told the GOI
verbally that Qazzaz may have been moved to Kurdistan.
Calling this information explosive, Shahristani said U.S.
unwillingness to officially pass information to the GOI
that might indicate Kurdish involvement indicates U.S.
reluctance to upset the Kurds. You have to choose,
Shahristani said, and recognize that there are political
groups that benefit from the status quo and resent MoO's

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new, tougher line.

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CBI Shabibi on the Compact, Banking and Monetary Issues
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9. (C) Governor of the Central Bank of Iraq (CBI),Sinan
Shabibi discussed with DepSec Kimmitt and Counselor Zelikow
the importance of the International Compact in bridging the
gap between Iraq's budget and its resources. Governor
Shabibi agreed that commitment from Iraq's neighbors was
key and responded positively when DepSec Kimmitt shared
that he would be meeting with King Abdullah of Saudi Arabia
over the next week (Note: That meeting was subsequently
postponed.) Shabibi also noted that Iraq's debt with Saudi
Arabia had not been touched and that the public statement
of the Saudis to produce $100 billion (sic) is a generous
gesture that would contribute to good relations. Shabibi
also added that Iraq is using the Paris Club as a benchmark
and that international donors of the Compact should meet
these same terms in providing debt relief to Iraq.


10. (C) On Iraq's economic progress, Governor Shabibi
commented that he is in daily contact with the IMF and
Federal Reserve on many issues. He added that Iraq is
working in a brisk manner to restructure state-owned banks
as well as other reforms in the financial sector. When
Treasury DepSec Kimmitt noted that he thought the IMF
conditions were reasonable under the Standy-By Arrangement,
Governor Shabibi agreed and noted conditionality is
important on both sides.


11. (C) In regards to the recent signing of the Central
Bank audit by Governor Shabibi, Treas DepSec Kimmitt
commented that this was an important benchmark. Shabibi
agreed that the audit has opened his eyes to the process
weaknesses of the CBI. Governor Shabibi welcomed the
information from Treasury that there would be additional
help from Treasury's Office of Technical Assistance in the
upcoming month. Governor Shabibi emphasized in the meeting
he would like to see advisors in the Central Bank.


12. (C) In discussing monetary affairs, Governor Shabibi
said that the GOI is trying to create a market system. He
noted there is difficulty in transferring money from the
Federal Reserve to Baghdad. Treasury noted that it would
work with the Central Bank to put contractual arrangements
to help with these shipments of cash. On inflation,
Governor Shabibi said reviews with the IMF has led the CBI
to pursue a restrictive monetary policy, but the GOI has
not made any changes in its exchange rate. When pressed by
DepSec Kimmitt on this issue, Shabibi noted that it is a
sensitive and delicate issue that the GOI is watching
closely. He added that the GOI has a plan if inflation
continues to "rear its ugly head." On raising interest
rates, Shabibi commented that there have been two increases
of interest rates in two weeks, but that the GOI hasn't
publicly announced them yet. DepSec Kimmitt added that it
would be important to announce these increases before PM
Maliki's visit in late July to the U.S.


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Finance Minister Jabr
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13. (SBU) During a lunch meeting with Finance Minister Jabr
and Ambassador Khalizad, Deputy Secretary Kimmitt began by
noting that Iraq had recently taken some steps in connection
with Iraq's Stand-By Arrangement, including increasing fuel
prices and advancing oil import liberalization and investment
legislation. Jabr noted that mitigating the pension law
passed
at the end of 2005, which he described as very bad, was also
an important issue for Iraq's SBA, but indicated that the
issue
was legally and politically difficult to resolve
straightforwardly.
He said that the MoF had been working on a priority basis in
consultation with the IMF and World Bank to prepare amendments
to the law that would mitigate the budgetary effect. However,
Jabr reported the World Bank had recently made some further,
sweeping requests that were difficult to accommodate and asked
for U.S. help with the World Bank.


14. (SBU) Turning to the International Compact, Kimmitt noted
that the fact that Iraq has performed so well under the SBA
has

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made people hopeful that Iraq will take the Compact as
seriously.
Jabr said that Iraq did not need easy money as much as
project finance.
Kimmitt indicated that the U.S. anticipated that financial
support
beyond Iraq's revenues would likely be required and that Iraq
should
not give up on additional international financial support.
Counselor Zelikow observed that in light of the Compact it
will be helpful to present Iraq's budget differently than it
has
in the past. Once the full cost of Iraq's security forces are
taken into account (including those costs currently borne
directly or indirectly by the Coalition),Zelikow noted a
financing gap is likely to remain.


15. (SBU) Kimmitt noted that Jabr's discussions with Saudi
Arabia about sending a technical delegation to discuss debt
matters was important to making progress not only on debt
relief but to Iraq's important relationship with the KSA,
including in connection with the International Compact.
Kimmitt noted that it is important for Iraq to take the lead
in initiating a closer relationship with Saudi Arabia and
the other Gulf states. Jabr agreed but emphasized that Iraq
needs
the help of the U.S. and Ambassador Khalilzad. Kimmitt noted
that Saudi Arabia is unlikely to move on debt relief unless it
sees that other countries are also supporting Iraq. Jabr said
that along with debt Iraq wished to address Kuwait
warreparations as a priority matter.


16. (SBU) Also on debt relief, Jabr said that the MoF had
recently had contact with China and had received an indication
that China might be willing to provide 100 percent relief on
official/bilateral debt and 80 percent on private debt.
Kimmitt noted that one of the criteria discussed for
membership in the Compact Preparatory Group is providing
$4 billion or more in debt relief and that China might qualify
if debt relief could be confirmed. (Note: While China-Iraq
debt figures have not been reconciled, the total has been
estimated as high as $10 billion.) Jabr also noted that Iraq
and Russia had recently confirmed the terms of their bilateral
agreement providing debt relief in accordance with the
November
2004 Paris Club agreement. Kimmitt encouraged Jabr to
conclude
the formal signing of the bilateral agreement with Russia as
soon as possible.


17. (SBU) Kimmitt noted that while the government was paying
subsidies,
wages and pensions it had been less successful at executing
investment budgets. In response, Jabr noted that he had
recently
approved the release of additional funds allocated to the 2006
budget to the provinces, bringing the total released to date
to 40 percent. Jabr also noted that Iraq's 2007 budget would
include more than $10 billion in investment: $4 billion for
oil, $2 billion for electricity and $4.5 billion for other
reconstruction ($2 billion direct to ministries and $2.5
billion to the provinces).


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Meeting Participants
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18. (U) U.S. Delegation:

Zal Khalilzad, Ambassador to Iraq
Robert Kimmitt, Deputy Secretary of the Treasury
Philip Zelikow, Counselor, State Department
Robert Moeller, CENTCOM
Evangelia Bouzis, NSC
Tom Delare, Embassy Baghdad
Jeremy Pam, Embassy Baghdad
Karen Bronson, Embassy Baghdad (notetaker)
Martha Patterson, Embassy Baghdad (notetaker)


19. (U) Separate meetings were held with the following
Iraqi officials:

Prime Minister Nuri al-Maliki
Deputy Prime Minister Barham Salih
Minister of Finance Bayan Jabr
Minister of Oil Husayn al-Shahristani
Central Bank Governor Sinan Shabibi


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20. (U) This cable was cleared by DepSec Kimmitt and
Counselor Zelikow.



SPECKHARD
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