UN Resolutions Mark Further Normalisation of Iraqi Finances and Intl. Relations

In a series of three seminal Security Council Resolutions, United Nations has signaled the imminent end of international oversight of Iraq’s oil revenues, imposed after the second Gulf war of 2003; lifted Iraqi obligations related to weapons of mass destruction, imposed in 1991 after the first Gulf War; ended the Oil-for-food program, introduced in 1995.

Taken together, the three resolutions mark one of the biggest steps towards the normalization of Iraq’s relations with the international community since Iraq was ostracized more than 20 years ago, following its invasion of Kuwait.

In recent years, the UN Security Council has adopted a single, end-of-year resolution on Iraq, re-affirming previous resolutions and tinkering with some of their provisions. Last month, three resolutions were adopted simultaneously (on 15 December), with each addressing a different aspect of Iraq’s international isolation.

  • UNSCR 1956 addresses Iraq’s obligation to deposit the proceeds of all oil exports into a special account – the Development Fund for Iraq (DFI) – which is overseen by an international body, the International Advisory and Monitoring Board (IAMB).
  • UNSCR 1957 lifts measures imposed in 1991 related Iraq’s weapons of mass destruction, including chemical, biological and nuclear programs. 
  • UNSCR 1958 terminates all residual activities of the “Oil-for-food” program though which the international embargo on Saddam Hussain’s Iraq was eased to enable Iraq to use proceeds of oil exports to buy designated “humanitarian” goods.

For the financial community, UNSCR 1956 is the most significant.

In 2003, the international community, in the guise of the Security Council, effectively struck a deal with Iraq regarding its oil revenues.[1] Everyone knew that Iraq needed the proceeds of oil exports in order to re-build its economy. The problem was that as soon as Iraq started selling crude oil in the international market, the country’s creditors and those with other claims (such as victims of the first Gulf war) would initiate legal actions to attach the proceeds of those sales. (Remember that since 1990, Iraq had been under an international embargo and had not been selling its oil in the international market.) So the deal was: Iraqi oil revenues would be given immunity from seizure so that they would reach Iraq and be used to rebuild the country, but in return, those revenues had to be deposited in a special vehicle, the Development Fund for Iraq (DFI) which would be overseen by the international community, to ensure that its funds were indeed being used to rebuild the country, rather than corruptly enriching private individuals. The International Advisory and Monitoring Board (www.iamb.info) was created to undertake that oversight role.  

These were meant to be temporary arrangements, lasting until two things happened: 1. the international community was confident that the Iraqis were themselves able and willing to conduct robust monitoring of oil revenues, and 2. Iraq had resolved all major financial claims and judgments against it. Iraq, of course, bridled at the international oversight of its sovereign revenues, but until it resolved most of the outstanding financial claims it could not afford to lose the immunities – and the Security Council made sure that the two issues remained linked.

UNSCR 1956 is unequivocal in setting a date to terminate these arrangements. In paragraph 1 it, “decides to terminate, on 30 June 2011, the arrangements…” and in paragraph 3 “decides that after 30 June 2011” the requirement to deposit oil proceeds in the DFI shall no longer apply (with one exception, see below). The immunities, obliquely referred to in paragraph 1 as the “provisions of paragraph 22 of resolution 1483 (2003), will continue until the same date.

(The exception is that Iraq must continue to pay 5% of all proceeds into a fund to compensate victims of the first Gulf war.)

And the significance of this for the international financial community? When financial immunities are lifted, and, by implication Iraq no longer fears the seizure of its international assets, then Iraq will be able to start developing a more diverse asset allocation strategy for its international reserves and assets. That will apply not just to the placement of state reserves but also to the international activities of state-owned entities, including banks. (In recent years, the possibility that immunities could be lifted before claims had been resolved limited the number of counterparties with whom the Iraqis felt comfortable entrusting their money.)

Another interesting point will be to see who gets to oversee the oil revenues once the IAMB falls away. Of course, the money belongs to the Ministry of Finance – it does now and it will do after 30 June 2011. But the Security Council is insisting that some form of successor arrangement be put in place to replace the IAMB and the DFI itself. Will the Ministry of Finance get unfettered control of the funds, or will the Iraqi government put in place some form of independent oversight? The Committee of Financial Experts (www.cofe-iq.net) was established by Iraqi ministerial decree in 2006 to fulfill this role, but year after year, until now, the Security Council has apparently not had sufficient confidence in its abilities to allow it to replace the IAMB.

[1] Strictly speaking the arrangements cover “petroleum, petroleum products and natural gas” but in practice, Iraq is exporting only crude oil.