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UN: Process Under Way To Deal With Iraq's Massive Debt Burden

As the UN Security Council starts debating the U.S. proposal for administering postwar Iraq, attention is focusing on control of the country's oil wealth. But before Iraq's oil revenues can be used for reconstruction, as the United States has pledged, Iraq's massive debt burden must be addressed. The draft resolution under consideration in the council contains some provisions that could signal how the issue will be resolved.

United Nations, 14 May 2003 (RFE/RL) -- The regime of Saddam Hussein amassed hundreds of billions of dollars in debt to governments and companies during the past two decades.

They will need to be sorted out before Iraq -- and the U.S.-led coalition administering the country -- will be able to use its oil wealth to invest in reconstruction.

The draft resolution Washington introduced in the UN Security Council on 9 May proposes some initial ways to address the debt burden. For example, the resolution, which will be formally discussed by the 15 Security Council ambassadors today, calls for reducing the amount of oil revenues diverted to the Gulf War reparations fund from 25 percent to 5 percent.

Iraq's debt has been estimated to be as high as $383 billion (, more than half of it coming from claims related to the first Gulf War. The UN Compensation Commission has awarded $43 billion in claims, about one-third of which have been paid.

If agreed by the council, the proposed 5 percent of oil revenues would go to paying claims that have already been settled. That would appear to defer any decision on the rest of the claims to a later date, according to Bathsheba Crocker of the Center for Strategic and International Studies in Washington.

"It's a very politically sensitive issue, and there may have been a decision that it's just too politically sensitive to address it right now. So we would just maintain the status quo but decrease the amount of payback for the time being," Crocker told RFE/RL.

The majority of claims in the UN Compensation Commission come from Kuwait, which endured the 1990 invasion of Iraqi forces and the burning of its oil fields when those forces departed.

A U.S. diplomat told RFE/RL that U.S. and Kuwaiti officials have discussed reducing the percentage of oil revenues going to compensation and that Kuwait has not indicated any objections. The diplomat said, "I think everyone felt that because some of the other needs were so great in regard to Iraq, it would make sense to reduce that amount."

But it is not clear how many of the unsettled claims Kuwait will be willing to defer or forgive. Kuwait's UN ambassador did not return calls this week seeking comment.

Crocker, of the CSIS, notes the complexity in dealing with Iraq's debt because it is divided among creditors from the government and private sectors, as well as war victims. She told RFE/RL that there needs to be greater urgency in Washington and other capitals about restructuring Iraq's debt.

"The international community really needs to come together and think about what makes the most sense, and [we have to cover] humanitarian needs, we have to cover basic government services for the Iraqi people, we have to cover these reconstruction needs in Iraq and try to address some of the things that we have promised we're going to bring to the Iraqi people. And at the end of the day, there simply will not be enough money to cover all those things and also pay back all of the debt that Iraq owes," Crocker said.

The challenge is heightened by the fact that three of Iraq's biggest bilateral creditors -- Russia, France, and Germany -- sit on the UN Security Council. Russian Finance Minister Aleksei Kudrin has said Moscow may be willing to consider a restructuring of Iraq's debts, but he said Russia opposes a "complete write-off."

U.S. Secretary of State Colin Powell is in Moscow today and is expected to discuss a range of postwar issues with Russian leaders. He will later travel to Berlin for talks with German leaders.

The debt issue has also been taken up by the influential Paris Club, an informal group of rich creditor nations owed about $26 billion by Iraq. The group held preliminary talks about Iraq's debts last month and agreed to a comprehensive study of the issue.

The Paris Club could include in its talks nonmembers in the Gulf states, which are owed a significant sum of money by Iraq. Those states are also high on the list of states claiming reparations from the Gulf War, leading some observers to suggest that there are opportunities for trade-offs in both sets of negotiations.

The main intent of all these efforts is to ease Iraq's debt burden, said Edwin Truman, a senior fellow with the Washington-based Institute for International Economics. "The overall proposition is that Iraq's debt is going to have to be rescheduled, restructured, written down -- whatever word you want to use -- in line with its capacity to pay," he said.

The draft resolution in the Security Council calls for the immediate lifting of sanctions against Iraq but continuing the oil-for-food distribution system for four more months. It assigns control of Iraq's oil revenues to the U.S.-led coalition occupying the country. But it says these revenues should be expressly for the benefit of Iraqis, in reconstruction and in setting up new institutions.

To facilitate Iraq's ability to sell its oil freely, the resolution proposes that oil sales be immunized against attachment by international creditors or others with claims against the former regime. This addresses concerns that creditors might be able to block the use of Iraqi oil reserves for the Iraqi people.

An expert on sovereign bankruptcy at Princeton University, Patrick Bolton, told RFE/RL that the U.S. proposal, if accepted, would be significant. "That's going to have a huge effect. That's going to be very important to encourage private creditors around the bargaining table," he said.

The UN Development Program estimates that Iraqi reconstruction -- excluding humanitarian aid -- could cost $10 billion per year. Iraq's oil revenues, if they are freed from creditor claims, are expected to play a crucial role in funding reconstruction and attracting further investment.