July 2007 Monthly Forecast

Posted 28 June 2007
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MIDDLE EAST

Iraq

Expected Council Action
In November 2003 the Iraq “oil-for-food” programme was terminated. Since then, the Council has been overseeing completion of the programme’s remaining activities.

The Council receives notes from the Secretary-General on progress with terminating operations related to outstanding letters of credits. The next note is due by 30 June. An experts’ meeting may be held in July. This is expected to result in an agreed letter from the Council president to the Secretary-General requesting the Iraqi government to resolve the problem of authentication documents expeditiously.

As of 30 April, 184 letters of credit to suppliers amounting to approximately US$182 million could not be honoured because the Iraqi government could not authenticate delivery of the goods. Some suppliers allege that authentication documents have been withheld. The Iraqi government has not responded to these allegations, nor to requests from the Council to proceed with the remaining letters of credit.

Key Facts
The oil-for-food programme was established on 14 April 1995 by resolution 986 to relieve the suffering of civilians caused by economic sanctions imposed on Iraq. It allowed Iraq to sell oil on the world market via a UN managed programme in exchange for humanitarian goods.

Purchasers of Iraqi oil had to settle transactions with BNP Paribas and the funds were held in a UN Iraq escrow account. Funds in that account were apportioned according to Security Council resolutions to pay war reparations to Kuwait, the UN Compensation Commission in Geneva and various UN operations within Iraq. The majority of the revenue was available to the Iraqi government to purchase regulated items.

Following the invasion of Iraq in March 2003, the Council adopted resolution 1483, which lifted all sanctions established in resolution 661 of 1990 (with the exception of the sale of weapons). It also created the Development Fund for Iraq (DFI) to meet humanitarian needs and assist with economic reconstruction. This resolution also envisaged the termination of the oil-for-food programme within six months, when surplus funds would be transferred from the Iraq escrow account to the DFI. The resolution also transferred responsibility for the administration of any remaining programme activities to the Coalition Provisional Authority (CPA) representing the occupying powers.

The programme was officially terminated on 21 November 2003. Consultations among the CPA, Iraqi experts and the UN led to the cancellation of some contracts. About 86 percent, however, were maintained (3,168 contracts for a value of more than US$8.5 billion). Funds to cover these contracts were retained in the Iraq escrow account, with payment subject to confirmation of delivery of supplies.

However, many contracts-such as for construction projects-were long-term, so it was envisaged that letters of credit would continue.

In mid-2005, the new Iraqi government assumed responsibility from the CPA for verifying delivery and authenticating documents for disbursing money from the Iraq account.

The Secretary-General undertook to monitor progress in the completion of the programme and the UN controller regularly met with Iraqi experts. The Secretary-General regularly reports to the Council on the status of deliveries, authentication, cancellation or request for prolongation of letters by the Iraqi government, and also on payments.

The Council usually reviews developments at experts’ meetings and communicates acceptance of the Secretary-General’s recommendations in an agreed letter from the Council president. (Please see the Selected UN Documents chart below for details of the exchanges of letters between the Secretary-General and the Council from 2003 to 2007.)

As of 31 July 2005, funding was being retained for 549 letters of credit and 249 of these had expired by 31 December 2004. Subsequently, 253 expired between 1 January and 31 July 2005. A further 33 were due to expire between 1 August and 31 December 2005, and 14 during 2006 and 2007 (S/2005/535). Because authentication could not be made for expired letters despite claims of delivery, funding was retained in the account.

The Iraqi government made numerous requests for cancellations and extensions of letters of credit. The absence of delivery authentication by the Iraqi government has now become a major problem. In 2006, the Secretary-General urged prompt resolution, fearing that delays in Baghdad could affect perceptions of the UN by suppliers (S/2006/510). Another consequence of the delay is that the UN is unable to transfer the funds for Iraqi development to the DFI. There is a risk that the issue may not be resolved before the last letter of credit expires on 31 December 2007.

The last time that the UN controller consulted with Iraqi authorities to resolve pending issues was on 6 March (S/2007/241). At that point, 55 letters of credit were cancelled at Iraq’s request. The Iraqi government requested cancellation of 59 other letters, but this was accepted because of claims by vendors of delivery. The Iraqi government requested the extension of 85 letters. The Council agreed but stipulated 31 December as the final date.

Options
At this stage, no specific Council action is required. When outstanding issues are resolved, the Council may consider a press statement or a presidential statement.

If it seems that pending issues cannot be resolved quickly the Council could extend further the letters of credit for which authentication of delivery has not been provided. Alternatively, it could allow the letters to expire and simply transfer all remaining funds on the Iraq account to the DFI.

In the short term, the Council has the option in its letter to the Secretary-General to include strong encouragement to Iraq to resolve authentication problems.

Council Dynamics
Council members are keen to conclude remaining activities as soon as possible. The issue may become contentious if, by the end of the year, deliveries are not completed or authentications remain outstanding. Countries where companies involved in the programme are based (including France, Russia and China) may support a further extension of letters of credit. US and British companies, on the other hand, have not contracted with the Iraqi government under the oil-for-food programme. They may be more inclined to let the letters expire and transfer the money to the DFI. Any subsequent litigation between suppliers and the Iraqi government would therefore become a bilateral matter not involving the UN.

Underlying Problems
The problem of authentication may be connected to the deteriorating security situation and lack of capacity in the Iraqi ministries receiving the goods. The accusations of improper withholding by several companies prompted the Council to request explanations, but the Iraqi government has not yet responded.

UN Documents

Selected Security Council Resolutions
  • S/RES/1483 (22 May 2003) recognised the occupying powers, requested the Secretary-General to appoint a Special Representative for Iraq, created the DFI and envisaged the termination of the oil-for-food programme within six months.
  • S/RES/986 (14 April 1995) established the oil-for-food program.
  • S/RES/687 (3 April 1991) Iraqi sanctions were now linked to removal of weapons of mass destruction.
  • S/RES/661 (6 August 1990) imposed economic sanctions on Iraq after it invaded Kuwait, providing for a full trade embargo, excluding medical supplies, food and other items of humanitarian necessity, to be determined by a sanctions committee.
Selected Letters from the Secretary-General and the Council  
Reports of the Board of Auditors on the UN Iraq Escrow Account 
  • S/2006/673 (21 August 2006) report for the biennium ended 31 December 2005
  • S/2006/672 (21 August 2006) report for the financial year ended 31 December 2004

Useful Additional Sources

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