Iraq Used US Loans to Finance Military Machine

KEY officials of the United States Agriculture, Commerce, and State Departments ignored years of warnings from the US Export-Import Bank (Exim) that Iraq was using credits to build its military machine, say Treasury Department sources. From 1987 to 1989, the officials were present at Exim's scheduled board meetings where it documented concern over Iraq's priority defense financing and policy of only paying back creditors who issue fresh money first.

According to Exim documents obtained by the Monitor, Iraq's primary goal since the early 1980s was to acquire high-tech military superiority through international credits. Exim repeatedly warned of Iraq's ``ruthless strategy of securing strategic financial partners, [and] employing financial secrecy, private bilateral negotiations, and blatant unequal treatment of creditors.''

June 1989 Exim documents state that ``Iraqi leaders believe that advanced military technologies - bombers, missiles, chemical and bacteriological weapons, and nuclear capability - are the key to military power.''

Anxious to buttress US-Iraqi ties, State Department policy makers cast Exim's warnings aside in favor of US exports and financing to Baghdad. A general past ``policy of engagement,'' now is broadly acknowledged by Bush administration officials.

In its October 1989 risk assessment of Iraq, Exim issued a stern warning about the Iraqi military threat: ``Iraq is expanding purchases of foreign military equipment and technical assistance in order to beef up its forces for possible future combat.'' Iraq's defense spending - $5 billion annually - continued unabated after the cease-fire with Iran. Exim also pointed to mounting financial pressures confronting Saddam Hussein's regime: rising demands of Iraq's population, which expected more consumer good s and better services after fighting an eight-year war with Iran.

US officials took their cue from Iraqi government ministers, who insisted that expanded trade and financial links with Washington were the only means of improving bilateral political relations.

Deputy Foreign Minister and former Ambassador to Washington Nizar Hamdoon - founder of the US-Iraq Business Forum, a group composed of leading American corporations which aggressively pursued Iraqi contracts - delivered Iraq's offer to the US: ``In order to stabilize political ties you should start stabilizing the trade ties.... Involvement of US companies should have a substantial impact on US-Iraqi ties.''

Iraqi planners boasted a $35 billion postwar reconstruction opportunity for American and other Western suppliers in 1988. According to Exim documents, Iraqi planners grossly miscalculated the oil revenues that would be available to meet their needs.

In fact, Iraq's revenues were slashed by a series of events: Syria's closure of two important Iraqi pipelines, the collapse in oil prices during the mid-1980s, and Iraq's counterproductive efforts to increase its OPEC (Organization of Petroleum Exporting Countries) quota, which actually depressed world oil prices instead of increasing Baghdad's export receipts.

By 1988, Iraq had become almost completely dependent on external financing. Its overall foreign debt soared to $80 billion.

Precisely at this time, according to Exim documents, Iraq - joined by US government and big business - exerted heavy pressure on Exim to extend more credit beyond the $200 million short-term fund set up for Iraq in 1987.

``Iraq is currently cultivating Eximbank as a new source of long-term external financial support,'' says Exim's July 18, 1988, country review report on Iraq. ``Baghdad hopes to appeal to US national-security interests in obtaining yet another strategic financial partner. Also, Baghdad is dangling large high-technology projects in front of well-known US firms, but with only one caveat: They can go forward only with Eximbank support.''

``Iraq's trade people wanted great relations with the US, because they needed official credit. The US-Iraq Business Forum saw Exim as an obstacle to increased financing,'' says a senior Treasury official.

US-Iraq Business Forum chairman Robert Abboud, chief of First City Bancorporation of Texas, led the lobby in Washington for official US backing. He pointed to oil as the basis for Iraq's credit-worthiness and dismissed Iraq's debt as ``a war-related cash-flow crisis.''

The Treasury official says US corporations - from Bell Helicopter/Textron to Westinghouse Electric Corporation - ``supported by State,'' descended on Exim and challenged its analysis.

``For most countries, Exim doesn't do special country reviews,'' says the Treasury official. ``But for Iraq, we did four in just 15 months because of all the pressure from State, Commerce, and exporters.'' Exim came up with the same conclusion every time, he says: ``Iraq's vast oil reserves don't mean Iraq can or will pay its bills. Iraq doesn't think it has to. And it's wrong for creditors to think that oil is impervious to political risk.''

While Exim's board stood by its credit analyses, the Agriculture Department's Commodity Credit Corporation rejected them. The CCC doled out $1 billion a year in credits to Baghdad. Until Aug. 2, 1990, Iraq was the largest market for US rice exports, and a big buyer of US wheat.

For all its prudence, Exim was left with less than $50 million in exposure to Iraq when it invaded Kuwait Aug. 2. The Commodity Credit Corporation, by contrast, must absorb $1.9 billion in bad loans to Iraq, leaving US taxpayers to pick up the bill. ``CCC saw all of Exim's risk assessments,'' says Dan Bond, Exim's vice president for country risk analysis. ``But CCC didn't want risk assessments in their way.''

Several State Department officials declined to comment on US export policy to Iraq, pointing to criminal and congressional investigations into Iraq's illegal diversion of CCC credits to finance defense procurement. Next Wednesday, the House Banking Committee will examine US credits to Iraq and implications of the State Department's rejection of Exim assessments.