Procurement: The Past Comes Back To Bite Iraq In The Ass

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October 13, 2009: Last year, Iraq ordered over $4 billion worth of American weapons, mainly on the strength of high (over $100 a barrel) oil prices. The price of oil has since plummeted, and Iraq is seeking to get better payment terms. Many of the weapons ordered had to be paid for in advance, or on delivery. Now, many of these orders are at risk, because Iraq has a lousy credit score. Despite all that oil revenue, and a large chunk of global oil reserves, Iraq has a very bad credit history with just about everyone. So the country cannot finance the huge weapons purchases. The U.S. weapons firms will not extend credit, and expect to be paid. It's the past coming back to bite Iraq in the ass.

While Iraq paid cash for billions of dollars in weapons and ammo during their war with Iran in the 1980s, they defaulted on over $10 billion in loans from Arab neighbors. Russia was stiffed for over $5 billion in military material, and recently wrote off those debts (in return for access to oil field development deals and other opportunities). In the last decade of Saddam's rule, he burned up what little fiscal credibility Iraq still had. When Saddam was overthrown in 2003, Iraq was not only broke, but possessed one of the lowest credit ratings on the planet. Saddam screwed everyone, and the international banks have a long memory for that sort of thing.

If Iraq really wants it's American weapons (M-1 tanks, Stryker armored vehicles, helicopters and lots of other equipment), they can pay cash. But they haven't got that kind of cash. This is very inconvenient, as Iraq also wants to order up dozens of F-16 fighters. That's out of the question as well, considering the current financial condition.

A desperate Iraq wants credit terms from U.S. weapons suppliers. If they don't get it, the only alternative is to take the low (price) road, and buy Russian or Chinese gear, or second hand U.S. stuff (like pre-owned F-16s). Many attractive deals are available, and the only neighbor Iraq really has to worry about is Iran (which has a ramshackle military after decades of embargoes.) Russia and China probably won't offer credit, although they are willing to accept deals providing control over some of Iraq's oil reserves.

Iraq is, technically, deep in debt, and has been for decades. Two years ago, they began asking nations to cancel over $50 billion in debts, incurred during Saddam Husseins rule. The implication here is that, if the debts are not cancelled, Iraq would simply renounce the debts as being those of dictator Saddam Hussein and his henchmen, and not an obligation of a democratic Iraq. That would put Iraq's international financial status at risk for several years, as lawyers battled it out and banks retaliated. Most foreigners feel that Iraq should pay, if only because the country sits atop over a trillion dollars worth of oil, and that most of the money went to pay for a war with Iran, a war started when Saddam invaded in an attempt to steal Iran's oil fields.

Iraq borrowed nearly $60 billion over the last three decades, most of it used to pay for the 1980s war with Iran. After the initial 1980 invasion failed, Iran struck back. It was only because of generous gifts and loans from other Arab states, and generous credit terms, from Russia and China, for weapons purchases, that Saddam was able to survive.

The largest creditor was Saudi Arabia, which was owed $17 billion. Saudi officials were willing to forgive 80 per cent of the debt. Saudi Arabia sees Iraq as its main defense against Iranian aggression, and wants to develop good relations with the new Iraqi government.

Kuwait was owed $15 billion. Because of the 1990 Iraq invasion (partly in an attempt to cancel that debt), the Kuwaitis refuse to cancel the debt. Kuwait's ruler could just forgive the debt, but the elected parliament has enough power, and popularity, to rally public opinion against the Emir. While the elected officials have a lot of power, the unelected emir still has more. Other Arab states in the Gulf see Kuwaits quasi-democracy as a mistake, as it seems to create more arguing and conflict, than anything else. In Kuwait, the elected officials dare not risk offending their constituents by showing any willingness to forgive the Iraq debt.

Russia is owed $13 billion, and was willing to forgive the debt, in return for guarantees that new business will be forthcoming. Russia has worked out similar deals with other Arab nations that bought lots of weapons from the Soviet Union, and then were unable, or unwilling, to pay. These days, Russia is much stricter when it comes to getting paid for weapons. China was owed $8 billion, has said little, but was believed to want whatever deal Russia gets. The rest was owed to a collection of Western and Moslem states, all of whom wanted Iraq to survive its war with Iran in the 1980s.

Iraq was able to get some, but not most, of that debt forgiven. But the rampant corruption in the Iraqi government still makes supplier uneasy about selling Iraq anything on credit.

 


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