May 2008 Monthly Forecast

Posted 30 April 2008
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Iraq (Oil-for-Food)

Expected Council Action
The Iraq oil-for-food programme came to an end on 31 December 2007. However, many issues concerning letters of credit remain outstanding and the Council continues to receive progress reports from the Secretary-General on the processing of those issues. The next progress report is expected in May. It will contain a summary of activities of a joint Iraqi-UN Working Group established in November 2007 to speed up the processing. The Council is expected to respond by way of a letter to the Secretary-General.

Key Facts
Established by the Council in 1995, the oil-for-food programme allowed Iraq a limited exemption to the sanctions regime and to sell oil 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. The majority of the revenue in the account was made available for the purchase of regulated items (e.g.: food, medicines and equipment for agriculture, housing, oil production, food processing, electricity, water and sanitation, etc.).

Following the fall of Saddam Hussein’s regime in March 2003, the Council adopted resolution 1483, which envisaged the termination of the oil-for-food programme within six months, after which surplus funds would be transferred from the Iraq escrow account to the Development Fund for Iraq (DFI). This fund was established by the same resolution to meet Iraq’s humanitarian needs and economic reconstruction. The oil-for-food programme was officially terminated on 21 November 2003 and no new contracts could be made. However, many existing contracts remained (3,168 contracts for a value of more than $8.5 billion). Funds to cover obligations under these contracts were retained in the Iraq escrow account.

Each contract between the Iraqi government and a foreign company had a corresponding letter of credit, issued by BNP Paribas, guaranteeing that payment to the companies would be made on time and for the correct amount. In order for the payment to occur, the companies had to present the bank with the necessary shipping documents confirming the delivery of goods, and the Iraqi government had to provide authentication proving that the goods were received.

The Council agreed to extend some letters of credit for delayed deliveries but with a deadline of 31 December 2007. However, not all of these outstanding letters (with corresponding funds in the escrow account) could be processed by that date. Some letters have no evidence of delivery by the suppliers. Those letters are likely to be cancelled and the corresponding amount transferred to the DFI. And there are claims of delivery for a majority of the outstanding letters, but payment has not been released because of a lack of Iraqi authentication documents.

Key Recent Developments
A joint Iraqi-UN working group (composed of representatives of the Iraqi government, the Central Bank of Iraq and the UN Secretariat) met in Amman on 20 and 21 November to resolve issues relating to the unpaid letters of credit. They concluded that a claims’ settlement mechanism should be established for all letters missing an authentication document ninety days after the 31 December termination of the oil-for-food programme.

The Council in November requested the Secretary-General to develop proposals for arbitration or mediation mechanisms for commercial disputes between the Iraqi government and companies for all outstanding letters after the 31 December 2007 deadline. He did so in a report he presented to the Council on 12 December, and proposed the creation of a Council subsidiary organ, the oil-for-food , to be established by 1 July 2008. The Council in a 29 February letter took note of this proposal but was reluctant to act, preferring instead to request a further report. It seems that the hesitation within the Council was based on a concern about establishing a potentially complex and costly mechanism.

As of 7 December 2007, there were 215 outstanding letters of credit that had already expired or were expiring on 31 December 2007. In 179 of those letters, there were claims of delivery of goods from suppliers, but no authentication documents from the Iraqi government necessary to release the corresponding funds from the UN Iraq account (approximately $206 million).

In a letter to the Council on 23 January, the Secretary-General noted that the number of outstanding letters of credit with claims of delivery was reduced only from 179 to 162. He also identified 14 cases of commercial disputes that may not be resolved by 1 April 2008. Confirmation of the past arrival of goods continued to be slow or not forthcoming (this has been a major concern for the Council). However, the Iraqi government said that it would urgently transmit all authentication documents for outstanding claims of delivery.

The latest Secretary-General’s report dated 11 March revealed continuing slowness in the authentication process (148 authentication documents were still outstanding at the end of February). He recommended that the working group review the situation early in May.

It seems that the letters of credit that had no claims of delivery have all been cancelled and the associated funds (approximately $161 million) were transferred to the Development Fund for Iraq on 27 December 2007. The Secretary-General’s report in May will also discuss letters that have expired without claims of delivery.

At press time the Council was considering a response to the 11 March report in the form of a draft letter which would:

  • decide to give the Iraqi government 45 days to transmit the authentication documents allowing payment to the suppliers or to provide documents contesting the claims of delivery, in the absence of which the Council would authorise the Secretariat to proceed with the payment of suppliers;
  • request that all disputes be handled according to mechanisms established in each contract or, if there are none, according to other existing commercial arbitration mechanisms; and
  • endorse cancellation of letters of credit with no claims of delivery, and transfer of associated funds to the DFI.

Council Dynamics
There is a consensus within the P5 on the necessity to process all remaining letters of credit as soon as possible. French, Chinese and Russian companies in particular still have unpaid contracts under the oil-for-food programme. But both the UK and the US also believe that it is not in the Council’s interest micromanage the oil-for-food programme’s outstanding issues.

Historically the elected members of the Council have tended to pay only limited attention to these issues. However, this time around Costa Rica is expressing concern at the process which has tended to leave the drafting exclusively to the P5. At press time, Costa Rica was blocking the adoption of the latest Council letter arguing that there had not been enough time to consider this issue (the draft letter was circulated by the UK on 28 March) and that it would be best to wait for the results of the next Iraq-UN Working Group in Amman on 28 April. It seems that Costa Rica’s interest is also driven by wider concerns at the Council’s handling of the oil-for-food programme in the past (it had requested in 2005 that the General Assembly follow-up on the recommendations of the Inquiry Committee into the oil-for-food programme and never received any reply).

UN Documents

Selected Resolutions

  • S/RES/1483 (22 May 2003) requested that the Secretary-General terminate within six months the ongoing operations of the oil-for-food programme, transferring responsibility for the administration of any remaining activity to the Coalition Provisional Authority, and decided that until 31 December 2007, unless the Council decides otherwise, sales proceeds of Iraqi oil products shall continue to enjoy privileges and immunities equivalent to those enjoyed by the UN.

Latest Reports by the Secretary-General on the Termination of the Oil-for-Food Programme

  • S/2008/175 (11 March 2008)
  • S/2007/725 (7 December 2007) also enclosed a proposal for the establishment of a Claims Settlement Committee.
  • S/2007/476 (25 July 2007)

Selected Letters

  • S/2008/140 (29 February 2008) was a letter from the Council requesting a further progress report by 15 March.
  • S/2008/41 (23 January 2008) was a letter from the Secretary-General enclosing a summary of the latest Working Group meeting outlining progress made with respect to the termination of operations relating to letters of credit.
  • S/2007/661 (8 November 2007) was a letter by the Council requesting the Secretary-General to develop proposals to address unresolved issues, including the possible need for the establishment of mechanisms to deal with outstanding issues, and to report again to the Council on such issues within three weeks, bearing in mind the non-negotiable termination date of 31 December 2007 for the programme.
  • A/60/235 (22 November 2005) was a letter from Costa Rica to the President of the General Assembly requesting the General Assembly to follow-up on the recommendations of the Inquiry Committee into the oil-for-food programme

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