VZCZCXRO2647
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHC #9981/01 0862048
ZNR UUUUU ZZH
P 272029Z MAR 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 5054
RUCNDT/USMISSION USUN NEW YORK PRIORITY 5444
INFO IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY 2903

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 
 
STATE 00029981  002 OF 004 
 
 
(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 
 
STATE 00029981  003 OF 004 
 
 
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 
 
STATE 00029981  004 OF 004 
 
 
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