Baker's mission impossible
By Hussain Khan

TOKYO - If generalities can be regarded as a success, James A Baker III, US special envoy responsible for easing Iraq's US$120 billion foreign debt, has had his first reward in the form of France and Germany agreeing on Tuesday that international creditors should lay aside their differences over the Iraq war and tackle Baghdad's debts in 2004.

A spokesman for German Chancellor Gerhard Schroeder said that Berlin and Paris had agreed on cutting Iraqi debt. Baker said that the two countries agreed that the specifics of the deal should be reached next year among the Paris Club of creditor states.

Gaining agreement with France - as well as with Germany and Russia - is viewed as crucial to US efforts to reduce Iraq's sovereign debt. US officials say that excessive debt payments would stifle any Iraqi economic recovery.

The three nations were among Iraq's biggest lenders in the 1970s and 1980s, when most of the debt was amassed. Figures vary, but Iraq owes France around $3 billion, excluding interest. It owes Germany as much as $4 billion and Russia anywhere from $3 billion to $8 billion.

The three are also key members of the Paris Club, an informal grouping of the most important creditor nations, including the US, the European Union states and Japan. Any debt forgiveness for Iraq would likely have to be worked out among the club's 19 members. Reports say that the US may be seeking to have as much as two-thirds of Iraq's debt written off. This would be similar to a deal made by the Paris Club with Yugoslavia after the fall of Slobodan Milosevic.

Despite these positive words on Iraqi debt, though, the mood in France, Germany and Russia is still sour following a Pentagon directive last week that bans companies from the three nations from participating as prime contractors in US reconstruction projects in Iraq. The directive said that only companies from the US, Iraq and 61 other countries judged sympathetic to the US-led coalition can bid for contracts worth a total of more than $18 billion.

Debt reduction linked to contracts
And during this week's swing through Europe, Baker has yet to offer any hope for France, Germany or Russia to bid for the contracts, leaving the way open for these countries to use the outstanding debt as a bargaining chip in gaining access to reconstruction contracts.

Further, the Paris Club can only change debt terms with internationally recognized governments. As France told Baker, any offer that it makes on debt relief will be conditional on a fully sovereign government being in place in Baghdad - something that won't happen before July 2004, at the earliest.

The International Monetary Fund puts Iraq's debts at about $120 billion, of which about $40 billion is debt and arrears to the 19 countries in the Paris Club, and $80 billion is owed to other countries, most of them Arab. Observers have said in private that countries such as Germany and Japan are less keen than others about adding a heavy dose of flexibility to strict Paris Club rules on debt relief.

US officials say that Baker, a trusted friend of the Bush family, wants to put across the message that France, Germany and Russia still have an opportunity to secure lucrative sub-contracts, hinting that his real mission is much broader than the debt issue: he wants to negotiate with France and Germany to bring them into postwar Iraq.

Baker also faces differences over Washington's Iraq policies, despite efforts in recent months to rebuild relations damaged by the war. France, for example, wants a bigger role for the United Nations in Iraq.

When Baker was appointed on December 5 as an special US envoy, administration officials said that the portfolio of Baker, 73, would be much broader than seeking an international agreement to restructure the debt, and that he would serve as an unofficial ambassador to explain the administration's plans for Iraq to skeptical nations in Europe and the Middle East.

Baker accustomed to the limelight
Officials noted that Baker, who as a powerful White House chief of staff and treasury secretary in the Ronald Reagan administration, and an equally powerful secretary of state for the first president Bush during the 1991 Gulf War, was not a man accustomed to remaining in the background. Baker's appointment also raises questions about the role of Treasury Secretary John W Snow, who has been leading the administration's efforts on Iraqi debt. At the same time, the appointment gives Baker diplomatic responsibility and visibility that would ordinarily be accorded to Secretary of State Colin Powell.

Whatever State Department officials may say for face-saving reasons, the following statement by President George W Bush clearly implies that he was in need of a man with better qualifications than Powell to act as his private and personal "secretary of state" for the job Powell could not perform to get international consensus on Iraq. "James Baker's vast economic, political and diplomatic experience as a former secretary of state and secretary of the treasury will help forge an international consensus for an equitable and effective resolution of this issue," Bush said in a statement.

Baker is said to have accepted the job only after being convinced that he would have direct access to Bush as his envoy, just as he had with George Bush's father, H W. The White House said that the appointment had been made at the request of the Iraqi Governing Council.

One difficulty for Baker might be that he is tangled in a matrix of lucrative private business relationships that leave him looking like a potentially interested party in any debt-restructuring formula. The obvious solution is for him to sever his ties to all firms doing work directly or indirectly related to Iraq.

Baker is senior counselor to the Carlyle Group, a global investment company that has done business with the Saudi royal family. He is also a partner in Baker Botts, a Houston law firm whose client list includes Halliburton, the US construction giant with highly lucrative contracts already won in Iraq. Baker Botts has an office in Riyadh, the Saudi capital, and a strategic alliance with another firm in the United Arab Emirates, and it deploys Baker's name and past government service on its website to solicit Middle East business.

It would appear inappropriate, therefore, for Baker to remain attached to these businesses, whose clients and potential future clients could be affected by the decisions made about Iraq's official debt. If the administration needs a political reason for doing the right thing, it need only look at the deep suspicion raised about the Iraqi construction contracts doled out to Halliburton, a company that was run by Dick Cheney before he became vice president.

Of all the countries excluded from bidding, Russia ultimately may have the most at stake because it wants to develop the oil-rich West Qurna fields in Iraq. These contain some of the largest deposits in the world, and Saddam Hussein in 1997 awarded LukOil, Russia's second-largest oil producer, a contract to develop them and drill for oil. Saddam's government canceled the contract in February, just before the war. LukOil insists that the contract is still valid.

Earlier this year, LukOil's president Vagit Alekperov said that he was "grateful" to Russian President Vladimir Putin for bringing up its Iraq concessions at high-level meetings with Bush. Mikhail Mikhailov, a spokesman for LukOil, which owns the rights to the concession, said that the deal was "not affected" by the Pentagon's decision to bar "non-allies", and that "a contract was signed between LukOil and the government of Iraq". He continued: "It exists, it is legitimate, and no one is trying to annul it. War often complicates these things."

Another Russian company, GAZ, an auto maker, said that it had already begun shipping 5,000 Volga passenger cars to Iraq for Baghdad's taxi fleet under a 2001 contract. "In principle, it's not a huge amount," said GAZ's spokesman, Sergei Lugovoy, noting that the contract represented less than 10 percent of GAZ's annual Volga production. "But all the same, Iraq will be one of the strongest export markets."

How can Baker subdue all this resentment without committing to lift the ban on certain countries' participation in bidding for Iraq reconstruction contracts? The world is watching this "mission impossible" with interest.

(Copyright 2003 Asia Times Online Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)