THE UNITED NATIONS AND THE ECONOMY OF IRAQ

UNCLAS SECTION 01 OF 04 STATE 029981

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: IZ KU USUN PREL ECIN EFIN ECON UNSC
SUBJECT: THE UNITED NATIONS AND THE ECONOMY OF IRAQ

REF: STATE 29254


1. (U) Summary: This cable provides background, analysis, and
status on the programs and activities of the United Nations
(UN),UN agencies and the UN Assistance Mission in Iraq
(UNAMI) as they relate to the economy of Iraq. This review
is provided in support of the ongoing activities of USUN and
Embassy Baghdad. End Summary.


2. (U) The UN Security Council, acting under Chapter VII of
the UN Charter, passed resolutions which established many,
but not all, of the programs discussed in this cable.
Examples include the Oil for Food (OFF) Program, the UN
Compensation Claims Commission (UNCC),and the arrangements
(including immunities from legal attachments) for the
Development Fund for Iraq (DFI) and Iraqi oil and gas
revenues. In Article 25 of the U.S.-Iraq Security Agreement
signed on November 17, 2008, the U.S. pledged to use its
"best efforts" to help Iraq take the steps necessary to
restore its standing in the international community to where
it was before Saddam's invasion of Kuwait in 1990 (from UNSCR
661 onward). Background and guidance related specifically to
helping Iraq restore its legal and international standing are
being prepared separately. This cable focuses on economic
issues in Iraq as they relate to UN activities under UN
Security Council (UNSC) mandates.

The UN's Economic Partnership with the New Iraq
-------------- --

3. (U) Background: The UN and Iraq have built a strong and
multi-faceted economic partnership that has continued to grow
despite two horrific bombings of UNAMI's headquarters in

2003. The August 19 bombing killed the Secretary General's
Special Representative to Iraq, Sergio de Mello, and 21
others including his top staff. A second bombing on
September 22 injured dozens and led to the withdrawal of more
than 600 UN staff from Iraq.


4. (U) UN Presence in Iraq: UNAMI's ambitious agenda for
economic, humanitarian, electoral and political assistance
generally aligns with U.S. interests. The United States
would welcome increases in UNAMI staffing in Iraq, but
UNAMI's current compound in Baghdad can accommodate only 170
and head count is already up to 160. Construction has not
yet begun on UNAMI's new compound (adjacent to the new U.S.
Embassy compound). Moreover, the freedom of movement UN
staff in Iraq is constrained by UN security policy - which
assigns Iraq its lowest security ranking. This policy is up
for review in April and should take account of improvements
in security conditions in Baghdad and many of the provinces
where the UN is active.


5. (U) IMF Implications: For years, the U.S. has urged the
IMF to establish a Resident Representative (ResRep) office in
Baghdad, as the IMF already has in Kabul. By specifically
reserving an IMF slot under its Baghdad personnel cap, the UN
can help clear the way for the U.S. IMF Executive Director to
push the IMF to consult with the UN about establishing a
ResRep office in Baghdad. Despite space constraints at the
current UNAMI compound, there would appear to be room for at
least one IMF representative. The GOI has expressed its
desire to have a strong working relationship with the IMF, as
the program with the IMF ended in March. An IMF ResRep is
much needed in Baghdad to help Iraq manage its fiscal
situation and undertake much needed economic reforms.


6. (SBU) International Reconstruction Fund Facility for Iraq
(IRFFI): At the 2003 Madrid Conference for Iraq,
international donors (excluding the U.S.) pledged USD 4.5
billion in financial assistance to Iraq. The IRFFI was
established in February 2004 to provide a multi-lateral
mechanism for collecting donor deposits and administering
assistance projects. Two IRFFI Iraq Trust Funds (ITF) were
established - one operated by the World Bank and the other by
the UN Development Group (UNDG). The UNDG is a collection of
UN operating agencies such as the UNDP and UNESCO. Since its
inception, the UN-ITF has collected USD 1.35 billion in donor
deposits and committed all but about USD 200-300 million to
reconstruction and recovery projects in Iraq. The UNDG
headquarters and most of its staff are based in Amman.
Operating from Amman adds to IRFFI's costs and hampers
project implementation.


7. (U) In Naples on February 18, the IRFFI Donors' Committee

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(which oversees IRFFI policy) decided that the IRFFI ITFs
would stop collecting new donor deposits by the end of 2009,
stop entering into new contracts funded by the ITFs by the
end of 2010 and complete the contracts and terminate all
activities by the end of 2013. SCANTEAM, a Norwegian
consulting firm that specializes in evaluating multi-lateral
donor funds, recently gave UNDG good marks for its
contributions to improving the life of the people of Iraq,
although it cited some "uneven" performance. In its "Concept
Note" for ending the IRFFI, the UNDG recommended that any
remaining UN-ITF resources be directed to fund the ongoing
operations of UN agencies functioning under UNAMI and some
small technical assistance projects. The IRFFI has largely
accomplished its mission and the major donors to the IRFFI
(e.g., the EU) are now oriented toward conducting their
assistance activities on a bilateral basis or working
directly with individual UN agencies - no longer requiring
the IRFFI's multilateral mechanisms. In principle, the U.S.
could concur in this recommendation as a way to support
UNAMI's presence and programs, although before making such a
decision the UN will need to provide the U.S. and the other
IRFFI donors with more specific information about how it
would use any remaining UN-ITF resources.


8. (SBU) UN Agency Activities and Organization:
Notwithstanding SCANTEAM's generally positive report, the
organization and management of the UN agencies serving Iraq
from Amman have often been unstable, ineffective and
expensive. At the February 2007 Donors' Committee meeting,
Iraq and some donors strongly criticized UNDG's organization
and operations, pointed to a lack of transparency in UNDG
administered projects, and demanded changes on threat of
dissolving the IRFFI altogether. The UNDG changed its
management and reorganized itself to reflect Iraqi and donor
preferences. To recast the foundations of their
relationship, UNAMI recommended and Iraq accepted to adhere
to the principles of the Paris Declaration on Aid
Effectiveness, which emphasizes host country ownership of the
assistance process along with transparency and
accountability. In line with these principles, UNAMI and the
GOI undertook a formal "Joint Strategy for Economic
Assistance Through 2011" in August 2008. Since then, there
has been a marked improvement in UNAMI-GOI economic
cooperation, and UNAMI recently stepped forward to play a
leading role in coordinating the activities of all
international donors through monthly meetings of new Iraq
Partners Forum (IPF),which it co-chairs with the GOI and
World Bank. IPF meetings are held in Baghdad and Iraq's
Ministry of Planning and Development Cooperation is
represented.


9. (SBU) In spite of these UNAMI-led improvements in Baghdad,
concerns remain about the coherence and reliability of
particular Amman-based UN agencies. These problems are
evident in the poor execution by the United Nations
Development Program (UNDP) of two grants from the U.S. State
Department Office of Iraq Assistance for anti-corruption, and
one grant for the development of Al-Anbar province.
Reflecting poor management, these programs have fallen short
of meeting nearly all of the normal requirements associated
with grant execution - from adequately defining, planning and
staffing activities to providing timely progress reports.
The same problems have affected projects funded by the IRFFI
and bi-laterally by other donors. UN Ambassador David
Shearer (Deputy Special Representative of the Secretary
General - DSRSG - for economic and humanitarian affairs) has
established a new office in Amman and is working to rectify
these problems. The UN must work harder to address the
problems that the Amman-based UN agencies have with weak
management and poor project execution.


10. (U) The International Compact with Iraq (ICI): In July,
2006 UNSYG Kofi Annan and Prime Minister Maliki announced
that the UN and the GOI would lead a joint effort to
formulate and launch a new International Compact with Iraq
loosely modeled on the International Compact for Afghanistan.
The ICI was formally launched at Sharm El-Sheikh on May 3,
2007 at a Ministerial attended by more than 70 countries and
international organizations. Under the Compact, Iraq pledges
to implement comprehensive programs for political
reconciliation, security and economic initiatives and reforms
aimed at making Iraq economically self-sufficient by 2012.
In return, Iraq's ICI partners pledge to support Iraq in
achieving these goals with financial and technical
assistance, soft loans, debt relief and private sector trade
and investment. At the first annual ICI Ministerial Review
in Stockholm on May 29, 2008, which was attended by more than
90 countries and organizations, Iraq reported substantial

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progress meeting its ICI goals, while the ICI partners
reported more than $300 million in new assistance, $2 billion
in new soft loans and $20 billion in debt reduction. The ICI
provides the guiding goals and priorities and common points
of reference for assistance activities of the IRFFI, UN,
World Bank, EU, U.S. (in the new Iraq-U.S. Strategic
Framework Agreement),and Iraq's other major bi-lateral
donors and partners.


11. (SBU) Discussions are underway about where and when to
hold the second annual ICI Ministerial Review meeting.
Participants at the Stockholm Ministerial decided that the
meeting should be in Baghdad in May 2009 but an increasing
number of countries have expressed reservations in view of
the logistical difficulties (the lack of the flights, hotels,
communications and personal security options that are
appropriate for ministers). The ICI Secretariat cannot get
the meeting organized in this time frame. A May 2009 date is
too soon for Iraq's officials and their advisers to make
proper preparations. Alternative suggestions are to hold a
working level preparatory meeting in May to discuss the
agenda and format of the Ministerial, followed either by a
large ICI meeting at a major capital later in the summer, or
a smaller meeting in Baghdad (perhaps with most ministers
flying in and out the same day). Rushing the preparations
could have unwanted negative effects.


12. (U) The second annual ICI Ministerial Review meeting
would not be lacking for substantive objectives. The ICI
requires updating in view of the large number of benchmarks
in the original document, changed fiscal realities, and that
the ICI objectives should be re-prioritized to take account
of GOI's latest development objectives and the new global
realities (for example for reorganizing its oil sector and
improving its business and investment regimes). ICI
implementation has not gone as planned; the thematic working
groups and consultations with international partners in the
original ICI document have not materialized as envisaged.
Instead, the GOI has developed its own methods and
approaches. The ICI partners need to know more about how
these methods and approaches are working.


13. (U) In line with Iraq's goal for achieving greater
economic integration within its region and the world, a
special ICI working group for regional economic integration
could be established in support of the Neighbors process and
other regional coordination and integration efforts. If the
event is held in a major capital, the Ministerial could be
followed the day after by an event for business people and
investors to create some excitement about opportunities in
Iraq and encourage GOI to follow-through on improving its
trade and investment policies.

Saddam-Era Legacy Issues
--------------

14. (U) Iraq faces several challenges having substantial
potential to affect the economy and complicate restoring
Iraq's legal and international standing to its pre-First Gulf
War status.


15. (U) The Development Fund for Iraq (DFI): UNSCR 1483
established the DFI to collect all of Iraq's Saddam-era
financial assets from around the world and receive, hold and
disburse from its ongoing oil and gas revenue streams. The
actual DFI accounts reside at the U.S. Federal Reserve Bank
of New York. They are owned by the Ministry of Finance and
operated by the Central Bank of Iraq. UNSCR 1483 and
subsequent resolutions (most recently UNSCR 1859 of December
2008) established the requirements to deposit Iraq's oil and
gas revenues into the DFI after deducting 5 percent for the
UNCC, maintain oversight by the International Monitoring and
Advisory Board (IAMB),and provide immunities against legal
actions (attachments and seizures) of these financial
holdings and flows in order to ensure that these funds will
be available for reconstruction.


16. (SBU) We do not want Iraq to continue rolling-over the UN
DFI immunities, and another roll-over attempt when the
current UN immunities expire at the end of 2009 could
encounter resistance from within the UNSC. Since these
exceptional and temporary immunities were established, the
USG strategy has been to help alleviate Iraq's need for the
immunities through formal debt reduction agreements,
settlements of commercial claims, and by resolving the claims
litigation for deaths and injuries from Saddam's terrorism
and torture. All Paris Club and many non-Paris Club official
and commercial creditors have reached formal debt reduction
agreements or claims settlements - substantially reducing

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threats of attachment from those sources.


17. (SBU) To address the claims of American victims of
terrorism, L, NEA and representatives from other concerned
agencies met recently with Prime Minister Maliki's legal
adviser. In those meetings, the U.S. team described the
claims and cases, discussed the U.S. legal framework in which
they arose, and explored some options for approaches to
resolving the claims. Key elements of any option the US and
Iraq may pursue are likely to include: (1) Iraq's payment of
a sum of money sufficient to compensate victims within the
scope of any agreement (including the Gulf War POW/human
shield cases that have attracted Congressional attention);
(2) U.S. extinguishment of known and possible future claims
related to the Saddam-era government; and (3) Congressional
action to restore Iraq's immunity from such claims in the
U.S. so that its immunity status is the same as that of other
U.S. friends and allies. The Iraqi legal adviser plans to
return to Washington in April or May accompanied by a
delegation representing the concerned ministries empowered to
negotiate a settlement package.


18. (U) Oil-for-Food (OFF): Although no new oil proceeds
were allocated to the OFF program after Saddam's ouster,
many contracts remained and the OFF program did not formally
end until December 31, 2007. However, about USD 190 million
of OFF contracts written during the Saddam era remain
unsettled. The current procedures for settlement involve
obtaining sign-offs from the Iraqi ministries that initiated
the contracts - a process that has been fraught with delays
and prone to corruption from the concerned Iraqi officials
demanding kick-backs for their approvals. To rectify the
problem, the P-5 have signed a letter instructing that the
outstanding contracts should all be settled within 45 days
except if Iraq raises specific objections and has evidence to
substantiate their objections. The Government of Costa Rica
objected to this action over concerns that payment may be
made to companies that did not fulfill their obligations.
Demarches have been delivered in San Jose and New York urging
Costa Rica to withdraw its objections. The Iraqis have also
urged against issuing the letter, promising fresh efforts to
expedite settlements - but to no effect so far.


19. (SBU) UNCC: Initial claims for compensation for Iraq's
role in the First Gulf War exceeded USD 160 billion. Through
rigorous vetting the UNCC qualified approximately USD 52.4
billion for payment. All but USD 25.5 billion has been paid
- of which USD 1.5 billion is for environmental restoration
and USD 24 billion is owed to oil-sector entities of the
Government of Kuwait. Pursuant to UNSCR 1483, 5 percent of
all Iraqi oil and gas revenues are diverted to the UNCC
Compensation Fund created by UNSCR 687 to pay claims. Given
its budget difficulties, Iraq wants its contribution to be
reduced to 1 percent, and for some of Kuwait's claims to be
canceled altogether. The USG has repeatedly urged Iraq to
meet with Kuwait under UNCC auspices to negotiate settlement
of the oil-sector awards, but Iraq has so far failed to agree
on a date to meet. The next UNCC meeting will be April
28-29, and we are urging Iraq to send a duly authorized
representative to negotiate with Kuwait. (Reftel State 29254
is a demarche cable requesting Embassy-Baghdad's assistance
in urging Iraq to send duly authorized representatives to
negotiate with Kuwait alongside the upcoming UNCC meeting.)
CLINTON