Big Bucks in Iraq
By Tim Shorrock
From the Monday 10 November 2003 issue
In early October, Iraq's US-appointed Governing Council awarded the country's first mobile phone licenses to three companies from the Middle East. The decision was widely interpreted as a signal that Paul Bremer's Coalition Provisional Authority (CPA) was expanding its contracting base beyond US corporations like Bechtel and Halliburton to give local companies a break. In particular, analysts pointed out that the networks will be using a technology known as GSM, used widely in Europe and the Middle East, rather than the rival CDMA technology developed by Qualcomm of San Diego for North America and Asia. Qualcomm, joined by Lucent Technologies and South Korea's Samsung, even complained to the Financial Times that the bidding process "was designed to exclude CDMA from the beginning."
But any concerns about a US shutout from Iraq's telecom market were grossly exaggerated. The biggest winner in Iraq's largest foreign investment deal since the US invasion turned out to be Motorola, the US electronics giant. Motorola has had a long relationship with US intelligence and was saved from financial disaster three years ago when the Pentagon, in a deal brokered by one of Bremer's top advisers, leased Motorola's Iridium global satellite network; that network later became the backbone of the US military's communications system in Iraq and Afghanistan.
Motorola has close financial ties with Egypt's Orascom Telecom, which won the rights to serve Baghdad and central Iraq, and Mobile Telecommunications Company of Kuwait, which will build the mobile network for southern Iraq. Motorola, with the French vendor Alcatel, has agreed to invest up to $100 million in both companies and could gain up to $200 million in sales by delivering GSM equipment over the two years of the contract, said Lucy Norton, a telecom analyst with the World Markets Research Center. Siemens of Germany could win major supply contracts as well. "Motorola has positioned itself as the primary infrastructure provider for two of Iraq's three mobile market players," said Norton, in an e-mail interview from London. Looking beyond the next two years, Motorola could also be in the "pole position, ahead of the other global vendors, as the key infrastructure provider for one of the fastest-growing markets in the Middle East."
The story illustrates how the financial and trade policies the Bush Administration is pursuing in Iraq are not only benefiting well-connected US corporations but are also slowly integrating Iraq into the global economy and transforming its largely state-run economy into a captive market for foreign multinationals. And it underscores Iraq's economic importance to countries like France and Germany, which opposed the war but voted October 16 to extend US control over Iraq in exchange for vague promises that power will quickly be transferred to the Iraqi people.
The blueprint for Iraq's economic future was unveiled by Iraq's US-appointed finance minister, Kamel al-Gailani, on September 21. The new laws, drafted by the CPA, allow foreign investors to own 100 percent of any Iraqi asset except oil and real estate and to remit profits and royalties when they choose. They also reduce import tariffs to 5 percent and allow foreign banks to take over the country's banking system. Iraq is now "one of the most open countries in the world," proclaimed Gailani. But his reforms were denounced by Iraq's leading business association, which warned that the new laws would "destroy the role of the Iraqi industrialist."
Many observers, including even US businessmen and Iraqis who favored "regime change" in Iraq, agree. They say the shock therapy being applied in Iraq will concentrate wealth in the hands of large US and Iraqi corporations, particularly the family-owned businesses that have won the majority of subcontracts from Bechtel and Halliburton. "I like the analogy of Wal-Mart coming into a town," says Timothy Mills, an attorney in the Washington law firm Patton Boggs who represents several US and foreign corporations that have contracted with the US government and are doing business in Iraq. "The downtown dies, Wal-Mart grows and the owners of local businesses are displaced. The effect of Iraq's new foreign investment law for the medium and small-sized Iraqi business could be very detrimental and could result in even more concentration of capital in Iraq." With the US Export-Import Bank providing $500 million to insure US investors, he added, "If I was an Iraqi and I was political, I'd say this was a ploy to favor US companies and let them steal the riches of Iraq." In a similar vein, Fareed Yasseen, an adviser to Adnan Pachachi, a member of the Governing Council, says that the CPA has made its economic plans "completely out of the Iraqi context." He worries that the CPA will sell state-owned assets to cronies of the previous regime and create a "new class of oligarchs" in Iraq. "They haven't taken into account Iraq's reality at all," he says.
Not so, says a US official working with CPA. The 100 percent ownership rules are needed to attract foreign firms to a country where security and basic services are in question. "If you can't have majority ownership, you won't invest," he says. "But are US firms going to get a distinct advantage? No question about it."
The CPA's mishmash of economic ideas is not simply a result of poor planning, as many in Congress have charged. Most of Bremer's advisers are either veterans of Washington's revolving door or financiers steeped in the details of corporate buyouts. Dave Oliver, one of Bremer's senior financial advisers, recently took a leave from his consulting business to draft the budget for the Governing Council. Oliver, who was advising Northrop Grumman, Raytheon and Booz Allen before taking his position, remains on the board of Stratos Global, which does marketing for Iridium, now an independent company. In 2000 Oliver, then President Clinton's Deputy Under Secretary of Defense for Acquisitions and Technology, brokered the $250 million deal for the Pentagon to lease Iridium's global satellites, in which Motorola had invested more than $5 billion. (As a Stratos director, "I stayed away from Iridium because I was so close to it," Oliver says.)
Another key figure on Bremer's economic team is Thomas Foley, an investor and Bush campaign donor who specializes in mergers and acquisitions, a business he learned as head of Citicorp's leveraged buyout division and, later, founder of the NTC Group, which acquired a string of US textile and manufacturing companies in the 1980s. As director of the Office of Private Sector Development, he will manage the privatization of Iraq's 200 state-owned enterprises.
In September, someone in Foley's office had the bright idea to invite fourteen Eastern European finance officials to Baghdad to give advice about privatization. They included the notorious Yegor Gaidar, who presided over the Russian mass privatizations of the early 1990s. Gaidar's policies "led directly to the ruination of the Russian middle class, the collapse of industry, the loss of savings and widespread poverty," says Stephen Cohen, professor of Russian studies and history at New York University. Not surprisingly, the Iraqis weren't impressed. Mowafaq Mahmood, managing director of the Bank of Baghdad, rejected every suggestion about privatization. "I must say I haven't learned any lesson from your experience," he said, signaling that Iraqis may want to preserve parts of their socialist economy.
Bremer has already shown that he can change course when decisions go bad. After thousands protested his decision to demobilize the Iraqi military without paying them, for example, he slowed the pace of privatization and agreed to keep many employees on the payrolls of state-owned enterprises until they could be sold off to foreign buyers. That flexibility goes only so far, however; Bremer will allow dissent from the Governing Council, a US official says, "as long as it doesn't violate one of the red lines we told them about." That could give Iraqis little room to maneuver when confronted with unilateral decisions coming from Washington.
When ideology drives policy, as it does in Iraq, pragmatism is swept aside and generals and bureaucrats hop to the beat of the Commander in Chief. If Bush truly wants to transform Iraq's economy into what his aides describe as a beacon of free enterprise for the Middle East, his good soldiers will go along. Unfortunately, the outcome is likely to be more bloodshed, more chaos and more deals for American companies like Motorola.
Jump to TO Features for Monday 27 October 2003