The Costs of Coalition Building

Foreign aid, foreign trade and foreign direct investment (FDI) have become weapons of mass persuasion, deployed in the building of both the pro-war, pro-American coalition of the willing and the French-led counter "coalition of the squealing".

By now it is clear that the United States will have to bear the bulk of the direct costs of the actual fighting, optimistically pegged at c. $40-50 billion. The previous skirmish in Iraq in 1991 consumed $80 billion in 2002 terms - nine tenths of which were shelled out by grateful allies, such as Saudi Arabia and Japan.

Even so, the USA had to forgive $7 billion of Egyptian debt. According to the General Accounting Office, another $3 billion were parceled at the time among Turkey, Israel and other collaborators, partly in the form of donations of surplus materiel and partly in subsidized military sales.

This time around, old and newfound friends - such as Jordan, an erstwhile staunch supporter of Saddam Hussein - are likely to carve up c. $10 billion between them, says the Atlanta Journal-Constitution. Jordan alone is demanding $1 billion.

According to the Knight Ridder Newspapers, an Israeli delegation, currently in Washington, has requested an extra $4-5 billion in military aid over the next 2-3 years plus $8 billion in loan guarantees. Israel, the largest American foreign and military aid recipient, is already collecting c. $3 billion annually. It is followed by Egypt with $1.3 billion a year - another rumored beneficiary of $1 billion in American largesse.

Turkey stands to receive c. $6 billion for making itself available as staging grounds for the forces attacking Iraq. Another $20 billion in loan guarantees and $1 billion in Saudi and Kuwaiti oil have been mooted. In the thick of the tough bargaining, the International Monetary Fund - thought by many to be the long arm of US foreign policy - suddenly halted the disbursement of money under a two years old standby arrangement with the impoverished country.

It implausibly claimed to have just unearthed breaches of the agreement by the Turkish authorities. This systemic non-compliance was being meticulously chronicled - and scrupulously ignored by the IMF - for well over a year now by both indigenous and foreign media alike.

Days after a common statement in support of the American stance, the IMF clinched a standby arrangement with Macedonia, the first in two turbulent years. On the same day, Bulgaria received glowing - and counterfactual - reviews from yet another IMF mission, clearing the way for the release of a  tranche of $36 million out of a loan of $330 million. Bulgaria has also received $130 million in direct US aid since 2001, mainly through the Support for East European Democracy (SEED) program.

But the IMF is only one tool in the administration's shed. President Bush seeks to increase America's foreign aid by an unprecedented 50 percent over the next three years to $15 billion. A similar amount will be made available over in the forthcoming five years to tackle AIDS, mainly in Africa.

Half this increase will be ploughed into a Millennium Challenge Account. It will benefit countries committed to democracy, free trade, good governance, purging corruption and nurturing the private sector. By 2005, the Account will contain up to $5 billion and will be replenished annually to maintain this level.

This expensive charm offensive is intended to lure and neutralize the natural constituencies of the pacifistic camp: non government organizations, activists, development experts, developing countries and international organizations.

The E10 - the elected members of the Security Council - are also cashing in their chips.

The United States has softened its position on trade tariffs in its negotiations of a free trade agreement with Chile. Immigration regulations will be relaxed to allow in more Mexican seasonal workers. Chile receives $2 million in military aid and Mexico $44 million in development finance.

US companies will cooperate with Angola on the development of offshore oilfields in the politically contentious exclave of Cabinda. Guinea and Cameroon will absorb dollops of development aid. Currently, Angola receives c. $19 million in development assistance.

Cameroon already benefits from military training and surplus US arms under the Excess Defense Articles (EDA) program as well as enjoying trade benefits in the framework of the Africa Growth and Opportunity Act. Guinea gets c. $26 million in economic aid annually plus $3 million in military grants and trade concessions.

The United States has also pledged to cause Iraq to pay its outstanding debts, mainly to countries in Central and East Europe, notably to Russia and Bulgaria. Iraq owes the Russian Federation alone close to $9 billion. Some of the Russian contracts with the Iraqi oil industry, thought to be worth dozens of billions of dollars, may even be honored by the victors.

Thus, the outlays on warfare will likely be dwarfed by the price tag of the avaricious constituents of president Bush's ramshackle coalition. New York Times columnist Paul Krugman aptly christened this mass bribery, "The Martial Plan". Quoting "some observers", he wrote:

"The administration has turned the regular foreign aid budget into a tool of war diplomacy. Small countries that currently have seats on the U.N. Security Council have suddenly received favorable treatment for aid requests, in an obvious attempt to influence their votes. Cynics say that the 'coalition of the willing' President Bush spoke of turns out to be a 'coalition of the bought off' instead."

But this is nothing new. When Yemen cast its vote against a November 1990 United Nations Security Council resolution authorizing the use of force to evict Iraq from Kuwait - the United states scratched $700 million in aid to the renegade country over the following decade.

Nor is the United States famous for keeping its antebellum promises.

Turkey complains that the USA has still to honor its aid commitments made prior to the first Gulf War. Hence its insistence on written guarantees, signed by the president himself. Similarly, vigorous pledges to the contrary aside, the Bush administration has allocated a pittance to the reconstruction of Afghanistan in this year's budget - and only after it was prompted to by an astounded Congress.

Macedonia hasn't been paid in full for NATO's presence on its soil during the Kosovo conflict in 1999. Though it enjoyed $1 billion in forgiven debt and some cash, Pakistan is still waiting for quotas on its textiles to be eased, based on an agreement it reached with the Bush administration prior to the campaign to oust the Taliban.

Congress is a convenient scapegoat. Asked whether Turkey could rely on a further dose of American undertakings, Richard Boucher, a State Department spokesman, responded truthfully: "I think everybody is familiar with our congressional process."

Yet, the USA, despite all its shortcomings, is the only game in town. The European Union cannot be thought of as an alternative benefactor.

Even when it promotes the rare coherent foreign policy regarding the Middle East, the European Union is no match to America's pecuniary determination and well-honed pragmatism. Last year, EU spending within the Euro-Mediterranean Partnership amounted to a meager $700 million.

The EU signed association agreements with some countries in the region and in North Africa. The "Barcelona Process", launched in 1995, is supposed to culminate by 2010 in a free trade zone incorporating the European Union, Algeria, Morocco, Tunisia, Egypt, Israel, Jordan, Lebanon, the Palestinian Authority, Syria and Turkey. Libya has an observer status and Cyprus and Malta have joined the EU in the meantime.

According to the International Trade Monitor, published by the Theodore Goddard law firm, the Agadir Agreement, the first intra-Mediterranean free trade compact, was concluded last month between Egypt, Jordan, Morocco and Tunisia. It will be signed next month and is a clear achievement of the EU.

The European Union signed a Cooperation Agreement with Yemen and, in 1989, with the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates and Oman. A more comprehensive free trade agreement covering goods, services, government procurement and intellectual property rights is in the works. The GCC has recently established a customs union as well.

A similar set of treaties may soon be inked with Iran with which the EU has a balanced trade position - c. $7 billion of imports versus a little less in exports.

The EU's annual imports from Iraq - at c. $4 billion - are more than 50 percent higher than they were prior to Iraq's invasion of Kuwait in 1990. It purchases more than one quarter of Iraq's exports. The EU exports to Iraq close to $2 billion worth of goods, far less than it did in the 1980s, but still a considerable value and one fifth of the pariah country's imports. EU aid to Iraq since 1991 exceeds $300 million.

But Europe's emphasis on trade and regional integration as foreign policy instruments in the Mediterranean is largely impracticable. America's cash is far more effective. Charlene Barshefsky, the former United States trade representative from 1997 to 2001, explained why in an opinion piece in the New York Times:

"The Middle East ... has more trade barriers than any other part of the world. Muslim countries in the region trade less with one another than do African countries, and much less than do Asian, Latin American or European countries.

This reflects both high trade barriers ... and the deep isolation Iran, Iraq and Libya have brought on themselves through violence and support for terrorist groups ... 8 of (the region's) 11 largest economies remain outside the WTO"

Moreover, in typical EU fashion, the Europeans benefit from their relationships in the region disproportionately.

Bilateral EU-GCC trade, for instance, amounts to a respectable $50 billion annually - but European investment in the regions declined precipitously from $3 billion in 1999 to half that in 2000. The GCC, on its part, has been consistently investing $4-5 billion annually in the EU economies.

It also runs an annual trade deficit of c. $9 billion with the EU. Destitute Yemen alone imports $600 million from the EU and exports a meager $100 million to it. The imbalance is partly attributable to European non-tariff trade barriers such as sanitary regulations and to EU-wide export subsidies.

Nor does European development aid compensate for the EU's egregious trade protectionism. Since 1978, the EU has ploughed only $210 million into Yemen's economy, for instance. A third of this amount was in the form of food support. The EU is providing only one fifth of the total donor assistance to the country.

In the meantime, the USA is busy signing trade agreements with all and sundry, subverting what little leverage the EU could have possessed. In the footsteps of a free trade agreement with Israel, America has Having concluded one with Jordan in 2000.

The kingdom's exports to the United States responded by soaring from $16 million in 1998 to c. $400 million last year. Washington is negotiating a similar deal with Morocco. It is usurping the EU's role on its own turf. Who can blame French president Jacques Chirac for blowing his lid?

Is It All About Oil?

If the looming war was all about oil, Iraq would be invaded by the European Union, or Japan - whose dependence on Middle Eastern oil is far greater than the United States'. The USA would have, probably, taken over Venezuela, a much larger and proximate supplier with its own emerging tyrant to boot.

At any rate, the USA refrained from occupying Iraq when it easily could have, in 1991. Why the current American determination to conquer the desert country and subject it to direct rule, at least initially?

There is another explanation, insist keen-eyed analysts.

September 11 shredded the American sense of invulnerability. That the hijackers were all citizens of ostensible allies - such as Egypt and Saudi Arabia - exposed the tenuous and ephemeral status of US forces in the Gulf.
So, is the war about transporting American military presence from increasingly hostile Saudis to soon-to-be subjugated Iraqis?

But this is a tautology. If America's reliance on Middle Eastern oil is non-existent - why would it want to risk lives and squander resources in the region at all? Why would it drive up the price of oil it consumes with its belligerent talk and coalition-building? Why would it fritter away the unprecedented upswell of goodwill that followed the atrocities in September 2001?

Back to oil. According to British Petroleum's Statistical Review of World Energy 2002, the United States voraciously - and wastefully - consumes one of every four barrels extracted worldwide. It imports about three fifths of its needs. In less than eleven years' time, its reserves depleted, it will be forced to import all of its soaring requirements.

Middle Eastern oil accounts for one quarter of America's imports. Iraqi crude for less than one tenth. A back of the envelope calculation reveals that Iraq quenches less than 6 percent of America's Black Gold cravings. Compared to Canada (15 percent of American oil imports), or Mexico (12 percent) - Iraq is a negligible supplier. Furthermore, the current oil production of the USA is merely 23 percent of its 1985 peak - about 2.4 million barrels per day, a 50-years nadir.

During the first eleven months of 2002, the United States imported an average of 449,000 barrels per day (bbl/d) from Iraq. In January 2003, with Venezuela in disarray, approximately 1.2 million bbl/d of Iraqi oil went to the Americas (up from 910,000 bbl/d in December 2002 and 515,000 bbl/d in November).

It would seem that $200 billion - the costs of war and postbellum reconstruction - would be better spent on America's domestic oil industry. Securing the flow of Iraqi crude is simply too insignificant to warrant such an exertion.

Much is made of Iraq's known oil reserves, pegged by the Department of Energy at 112 billion barrels, or five times the United States' - not to mention its 110 trillion cubic feet of natural gas. Even at 3 million barrels per day - said to be the realistically immediate target of the occupying forces and almost 50 percent above the current level - this subterranean stash stands to last for more than a century.

Add to that the proven reserves of its neighbors - Kuwait, Saudi Arabia, the United Arab Emirates - and there is no question that the oil industry of these countries will far outlive their competitors'. Couldn't this be what the rapacious Americans are after? - wonder genteel French and Russian oilmen. After all, British and American companies controlled three quarters of Iraq's mineral wealth until 1972 when nationalization denuded them.

Alas, this "explanation" equally deflates upon closer inspection. Known - or imagined - reserves require investments in exploration, development and drilling. Nine tenths of Iraq's soil are unexplored, including up to 100 billion barrels of deep oil-bearing formations located mainly in the vast Western Desert. Of the 73 fields discovered - only 15 have been developed. Iraq's Oil Minister, Amir Rashid, admitted in early 2002 that only 24 Iraqi oil fields were producing.

The country has almost no deep wells, preponderant in Iran, for instance. Though the cost of production is around $1-1.5 per barrel, one tenth the cost elsewhere - while Texas boasts 1,000,000 drilled wells, Iraq barely sports 2000. The Department of Energy's report about Iraq concludes:

"Iraq generally has not had access to the latest, state-of-the-art oil industry technology (i.e., 3D seismic), sufficient spare parts, and investment in general throughout most of the 1990s, but has instead reportedly been utilizing questionable engineering techniques (i.e., overpumping, water injection/"flooding") and old technology to maintain production."

The quality of Iraqi oil deteriorated considerably in the recent decade. Its average API gravity declined by more than 10 percent, its water cut (intrusion of water into oil reservoirs) increased and its sulfur content shot up by one third. The fields date back to the 1920s and 1930s and were subjected to abusive methods of extraction. Thus, if torched during a Gotterdammerung - they may well be abandoned altogether.

According to a report published by the United Nations two years ago, Iraqi oil production is poised to fall off a cliff unless billions are invested in addressing technical and infrastructural problems. Even destitute Iraq forks out $1.2 billion annually on repairing oil facilities.

The Council of Foreign Relations and the Baker Institute estimated, in December last year, that the "costs of repairing existing oil export installations alone would be around $5 billion, while restoring Iraqi oil production to pre-1990 levels would cost an additional $5 billion, plus $3 billion per year in annual operating costs."

Not to mention the legal quagmire created by the plethora of agreements signed by the soon to be deposed regime with European, Indian, Turkish and Chinese oil behemoths. It would be years before Iraqi crude in meaningful quantities hits the markets and then only after tens of billions of dollars have been literally sunk into the ground. Not a very convincing business plan.

Conspiracy theorists dismiss such contravening facts impatiently. While the costs, they expound wearily, will accrue to the American taxpayer, the benefits will be reaped by the oil giants, the true sponsors of president Bush, his father, his vice-president and his secretary of defense. In short, the battle in Iraq has been spun by a cabal of sinister white males out to attain self-enrichment through the spoils of war.

The case for the prosecution is that, cornered by plummeting prices, the oil industry in America had spent the last ten years defensively merging and acquiring in a frantic pace. America's twenty-two major energy companies reported overall net income of a mere $7 billion on revenues of $141 billion during the second quarter of last year. Only forty five percent of their profits resulted from domestic upstream oil and natural gas production operations.

Tellingly, foreign upstream oil and natural gas production operations yielded two fifths of net income and worldwide downstream natural gas and power operations made up the rest. Stagnant domestic refining capacity forces US firms to joint venture with outsiders to refine and market products.

Moreover, according to the energy consultancy, John S. Herold, replacement costs - of finding new reserves - have soared in 2001 to above $5 per barrel. Except in the Gulf where oil is sometimes just 600 meters deep and swathes of land are immersed in it. In short: American oil majors are looking abroad for their long-term survival. Iraq always featured high on their list.

This stratagem was subverted by the affaire between Saddam Hussein and non-American oil companies. American players shudder at the thought of being excluded from Iraq by Saddam and his semipternal dynasty and thus rendered second-tier participants.

According to the conspiracy minded, they coaxed the White House first to apply sanctions to the country in order to freeze its growing amity with foreign competitors - and, now, to retake by force that which was confiscated from them by law. Development and production contracts with Russian and French companies, signed by Saddam Hussein's regime, are likely to be "reviewed" - i.e., scrapped altogether - by whomever rules over Baghdad next.

An added bonus: the demise of OPEC. A USA in control of the Iraqi spigot can break the back of any oil cartel and hold sway over impertinent and obdurate polities such as France. How would the ensuing plunge in prices help the alleged instigators of the war - the oil mafia - remains unclear. Still, James Paul propounded the following exercise in the Global Policy Forum this past December:

"(Assuming) the level of Iraqi reserves at 250 billion barrels and recovery rates at 50% (both very conservative estimates). Under those conditions, recoverable Iraqi oil would be worth altogether about $3.125 trillion. Assuming production costs of $1.50 a barrel (a high-end figure), total costs would be $188 billion, leaving a balance of $2.937 trillion as the difference between costs and sales revenues. Assuming a 50/50 split with the government and further assuming a production period of 50 years, the company profits per year would run to $29 billion. That huge sum is two-thirds of the $44 billion total profits earned by the world’s five major oil companies combined in 2001. If higher assumptions are used, annual profits might soar to as much as $50 billion per year."

The energy behemoths on both sides of the pond are not oblivious to this bonanza. The Financial Times reported a flurry of meetings in recent days between British Petroleum and Shell and Downing Street and Whitehall functionaries. Senior figures in the ramshackle exile Iraqi National Congress opposition have been openly consorting with American oil leviathans and expressly promising to hand postwar production exclusively to them.

But the question is: even if true, so what? What war in human history was not partly motivated by a desire for plunder? What occupier did not seek to commercially leverage its temporary monopoly on power? When were moral causes utterly divorced from realpolitik?

Granted, there is a thin line separating investment from exploitation, order from tyranny, vision from fantasy. The United States should - having disposed of the murderous Saddam Hussein and his coterie - establish a level playing field and refrain from giving Iraq a raw deal.

It should use this tormented country's natural endowments to reconstruct it and make it flourish. It should encourage good governance, including transparent procurement and international tendering and invite the United Nations to oversee Iraq's reconstruction. It should induce other countries of the world to view Iraq as a preferred destination of foreign direct investment and trade.

If, in the process, reasonable profits accrue to business - all for the better. Only the global private sector can guarantee the long-term prosperity of Iraq. Many judge the future conduct of the USA on the basis of speculative scenarios and fears that it is on the verge of attaining global dominance by way of ruthlessly applying its military might. This may well be so. But to judge it on this flimsy basis alone is to render verdict both prematurely and unjustly.

The Axis of Oil

Success is the best proselytizer. Faced with the imminent demise of Saddam Hussein's regime, both Russia and Germany - erstwhile champions of peace and the sanctity of international law - expressed their hope yesterday for a swift victory of the hitherto much-decried coalition forces.

But this may be too little and way too late, as far as the United States is concerned. The two prostrates are firmly included in the victors' grey list - if not yet in their black one. The friction is not merely the outcome of sanctimonious hectoring about human rights from the Chechen-bashing Russians. It runs deeper and it turns on more than a dime.

Another German-Russian collaboration may shortly attain the limelight: the $800 million, 1000 megawatt light water reactor in Bushehr, an Iranian Persian Gulf port facing southern Iraq. Abandoned by West Germany in 1979, following the Iranian revolution, it was adopted by the Russians in the 1990s. A second reactor is in the offing. More than 2000 Russians are employed in the site.

Following the discovery by the International Atomic Energy Agency (IAEA) of a uranium enrichment facility near the city of Natanz and an Iranian admission that they are mining their own ore, Alexander Rumyantsev, the Russian Atomic Energy Minister, acknowledged that his country lost control over Iran's nuclear program.

Iran, like Iraq, is a celebrated member of the "Axis of Evil". Thus, the atomic complex, though protected by at least 10 SAM batteries, may well be the target of an attack, Israeli and Russian officials told the Bellona Foundation, a Norwegian environmental group. This will not be without precedent: in a daring air operation, Israeli jets pulverized an Iraqi nuclear power plant in Osirak in 1981.

Ironically, it is America's aggressive stance towards Iraq that drives the likes of Iran and North Korea back into the arms - and nuclear technologies - of the Russian Federation. Russia is positioning itself to become an indispensable channel of communication and intermediary between the USA and what the State Department calls "rogue states".

On March 17, Russia's State Property Minister, Farid Gazizulin, met Iran's Defense Minister, Ali Shamkhani, during a session of the Iran-Russia Economic Commission in Tehran. The host's message was unequivocal: "Cooperation between Iran and Russia is to contribute to sustaining peace and prevent conflicts in the region."

According to Asia Times, in an earlier visit to Tehran, Russia's Foreign Minister, Igor Ivanov, pledged to continue to collaborate with Iran on nuclear energy projects. "Iran has no plans to produce nuclear military projects, this is a fundamental truth." - he insisted.

Nor is the teamwork limited to commercial goods and services. An October 2001 bilateral framework agreement has since fostered more than $400 million in Russian annual military exports to Iran, including air defense systems and fighter jets.

Russia is also increasingly involved in the crisis in the Korean Peninsula. South Korean President Roh Moo-hyun's security adviser, Ra Jong-il, have held talks earlier this week with their counterparts in Moscow and Beijing. Russia, like the United States, opposes the military nuclear efforts of North Korea.

Though vehemently denied by all parties, South Korea floated last week, in an interview Ra granted to the Financial Times, the idea of supplying Pyongyang with Russian natural gas from Siberia or Sakhalin through a dedicated pipeline, as a way to solve the wayward regime's energy problems.

According to the Korean daily, The Chosun Ilbo, Russian Ambassador to Seoul, Teymuraz Ramishvili, revealed that discussions have been held on posting Russian or South Korean troops in the North to protect such a pipeline

North Korea insists that its atomic reactors are intended merely to forestall severe power shortages, now that the 1994 Agreed Framework, to provide it with fuel and two proliferation-resistant reactors financed by the West, is effectively annulled. Even Beijing, hitherto an unflinching supporter of the Dear Leader, halted oil supplies to the North last month.

The scheme is not new. In February 2002, Russian Deputy Energy Minister Valentin Shelepov declared in Moscow at a
meeting of the Russian-South Korean Committee for Cooperation in the Sphere of Energy and Natural Resources that Russia seeks South Korean investments in the coal industry and in oil and gas extraction in Eastern Siberia and the Far Eastern regions.

The Russian daily, Nezavisimaya Gazeta, notes that, together with China, South Korea is already involved in LNG ventures in Irkutsk and the Yurubcheno-Tokhomskaya oblast.

According to Stratfor, the strategic forecasting consultancy, Russia offered in the past to construct nuclear power stations on its side of the border and supply North Korea with electricity.

Russia is close to North Korea. In its previous incarnation as the Soviet Union, in 1965, it built North Korea's infamous Yongbyon facilities. Russia was also instrumental in convincing the North to agree to reactivate a railway line connecting it to South Korea. Kim Jong-il, the North's enigmatic leader, celebrated his 61st birthday, in February, in the Russian embassy in Pyongyang.

The mooted pipeline may be nothing but a pipe dream. Even optimists admit that it would require 4 years to construct - more likely 8 to 10 years. But Russia is in no hurry. Russian gas to the pariah state could yet prove to be a key ingredient in any settlement. Russia intends to drive a hard bargain. It is likely to try to swap gas supplies to the Koreans for the preservation of Iraqi oil contracts signed by Saddam's regime with Russian energy behemoths.

Regardless of geopolitical vicissitudes, Russia views Asia - mainly China, Japan and South Korea - as growth markets for its energy products. By 2008 or 2010, Russia plans to sell 20-30 billion cubic meters a year of gas from the Kovykta field, co-developed by Interros, the Tyumen oil company and British Petroleum, to China, South Korea and, possibly, Mongolia.

According to Asia Times:

"Russia is looking at two competing plans. One, backed by Russia's top oil firm Yukos and China, is a $2.5 billion, 2,400- kilometer extension of the existing network from near Irkutsk to Daqing, China. The other, backed by Rosneft and Japan, would cost $5.2 billion and circumvent China, running 3,800 kilometers to the Russian Far East city of Nakhodka on the Sea of
Japan ... The Russian Energy Ministry eventually recommended that the Japanese and Chinese proposals be combined into one project, a third option to build the (1.6 million barrel a day) pipeline to Daqing and then extend it to Nakhodka."

Extending the network eastward is by no means the consensus. Prime Minister Mikhail Kasyanov opened a cabinet meeting last month with the confident - but speculative - declaration that there is enough oil in Siberia to justify a pipeline. Russia's Energy Minister, Igor Yusufov, observed correctly that, in the absence of sufficient exploration, oil and gas reserves in Siberia and the Far East, pegged at 1 billion tons, are, at best, guesstimates. If these are smaller than projected, the eastern thrust would prove to be a costly error.

More than $12 billion are needed in order to explore the vast swathe and to develop it to a profitable level of production - about 100 million tons a year by 2020. The pipelines will funnel 70-80 million tons of crude and 30 billion cubic meters of natural gas a year to Asian buyers.

Still, Russia cannot ignore the Asian markets, nor can it wait a decade or two to avoid commercial risks. Last week, Russia's Energy Ministry concluded the negotiation of a 10-year collaborative effort with Japan involving the construction of oil and gas pipelines, the development of hydrocarbon fuel reserves in Siberia and other projects.

Yesterday, Russian Ambassador to China, Igor Rogachev, told Interfax, the Russian news agency, that "in the past three years, the dynamic growth of merchandise turnover (between Russia and China led to a) volume (of) close to $12 billion last year. This year the volume of bilateral trade grew 37 percent for the first two months and exceeded $2 billion."

Russian exports to China since the beginning of the year soared by 27 percent and Russian imports by 62 percent. China is an avid consumer of Russian electricity generation, aviation, space, laser, and nuclear technologies. Russian firms made inroads into the construction of Chinese hydroelectric plants and railways.

The two countries have "plans for the construction of the Russia-China oil pipeline, and delivering up to 30 million tons of oil a year in it, and a gas pipeline from eastern Siberia to the northeast of (North Korea), and to consumers in third countries." Russia is constructing "a number of major, modern facilities ... in China, (including) the first and second (generating) units at the Tianwan nuclear power plant." China has also signed a contract to buy Russian Tu-204 civil aircraft.

Nor is the cooperation limited to heavy or military industry, explained the Ambassador:

"Agreements between Chinese and Russian companies that provide for the assembly in Russia color televisions and household air conditioners are being successfully implemented."

Twelve years after the demise of communism, Russia is regrouping. It is patching the torn fabric of its diplomacy. In the best American tradition, it is leveraging its growing pecuniary clout - now that it is poised to become the world's leading energy producer. It is reorienting itself - emphasizing Asia over Europe. It is building new bridges and forming new alliances, both commercial and strategic.

As long as these serve the interests of the sole superpower - as may be the case with North Korea - Russia's revival as an important regional player is tolerated. But, following its sudden swing to the Franco-German camp in the run-up to the Iraqi campaign, it is on probation. Should it engage in anti-American activities, it may find that American patience and tolerance are rather strained.

Saddam's One Thousand Nights

Iraq is preparing for yet another war and yet another seemingly mortal blow to its eerily resilient economy. According to Fred Horan of Cornell University, Iraq's GNP per capita contracted by one third in the aftermath of its protracted and bloodied war with Iran.

Similar drops in gross national consumption and government spending were recorded by Dr. Kamil Mahdi of the Center for Arab Gulf Studies in Exeter University. The CIA pegs the cost of the Iran-Iraq conflict at $100 billion. This was three years before the Gulf War and the decade of debilitating sanctions that followed it.

Mahdi provides an overview of the devastation:

"A decade of war followed by a major air campaign against Iraq's infrastructure and eight years of severe and comprehensive sanctions have devastated the country's economy. Lost production and diversion of resources to military activities are far from being the only economic costs. Accumulated effects on society include the loss of life, physical impairment, breakdown of societal institutions, declining morale, emigration, and all the associated hemorrhage of skills and intellectual capabilities. The effects of induced technological backwardness, of destruction and accelerated degradation of the infrastructure, and of the increased environmental damage of short-term palliative solutions need also be mentioned."

Still, the Wall Street Journal, Time Magazine, and the BBC have all reported recently that the streets of Baghdad are teeming with new cars and Chinese double-decker buses, its bustling markets replete with luxury products, restaurants are making a brisk business, and dozens of art galleries are prospering where two languished only 4 years ago.

The razed bridges and airport have been rebuilt. Electricity has been mostly restored. Sumptuous mosques have sprouted everywhere. Almost $2 billion were devoted to new palatial mansions for Saddam and his family, wrote the "Washington Post" on February 27, 2001. Kurdish media related how 250 kilograms of gold were applied by imported Indian and Moroccan craftsmen in two of the palaces. Iraqi state television reported in June that Saddam exhorted his ministers to avoid corruption and nepotism.

Reconstruction reached the much-neglected Kurdish north as well. The year 2001 report of the "Ministry" of Reconstruction and Development (MORAD) in Irbil lists thousands of housing units, dormitories, schools, and guest houses built this year with an investment of $70 million hitherto.

The "Kurdistan Regional Government" announced proudly the $6 million completed restoration of the landmark Sheraton. It joins half a dozen other luxury hotels constructed with allocations from the oil-for-food program administered by the UN on behalf of the Iraqi government and money from Turkish investors.

But not all is rosy in the "safe zones". Irrigation projects, electricity, the telephone system, schools, teacher training, health provision, hospitals, clinics, roads, and public transport - are all in dire need of cash infusions. UPI reported that Arab employees of the UN are pressured by Saddam Hussein "to do his bidding" in the north. Iraq refuses to collaborate with UN authorities to release from its warehouses heavy equipment destined for the Kurdish parts, reports Radio Free Europe.

Iraq also continues to pursue it program of weapons of mass destruction. It is in the market for components and materials for nuclear bombs, warned the "Washington Times". Iraqi defectors confirmed the information and delineated a blood-curdling - and expensive - effort to reinstate the country's capacity to produce nuclear, chemical, and biological armaments.

According to Stratfor, "Iraq is procuring weapons systems - such as advanced conventional weapons rather than nuclear capabilities - that would more immediately affect the outcome of a war with the United States. It is specifically seeking to enhance its air-defense capabilities, improve its ground-to-ground missiles and upgrade major battlefield weapons systems for ground forces."

Iraq felt sufficiently affluent to declare a one month oil embargo in April at a cost of $1.2 billion, to protest US partiality towards Israel. It also generously supports the families of Palestinian "martyr" suicide bombers with grants of $25,000 plus another $25,000 per each house demolished in the Jenin refugee camp by the Israelis. Smaller amounts are distributed as disability and recuperation benefits, mostly through the "Arab Liberation Front", reports the "Daily Telegraph".

Family members of the "heroes" get free enrollment in Iraqi institutions of higher education. Iraq recently donated 10 million euros to the Intifada. Radio Free Europe/Radio Liberty estimates that this display of Arab solidarity has hitherto cost Iraq $1 billion.

This hoary bravado masks a dilapidated infrastructure, decrepit hospitals and schools, spiraling prices, malnourished and diseased children, and a middle class reduced to penury. According to the World Bank, Iraq's population grows by 2.9 percent annually, from a base of 23 million citizens.

Infant mortality is 61-93 per thousand live births, depending on the source. Of those who survive, another 121 children perish by the age of 5. UNICEF estimates that at least 500,000 children died that shouldn't have under normal circumstances. The Iraqi Mission to the United Nations put the number at 713,000 plus a million adults. The CNN describes an ominous shortage of clean water. Inflation hovers around 100 percent.

But none of these data is reliable. Estimates vary widely. The CIA says that the trade deficit in 2000 was $1 billion and the external debt amounted to a whopping $139 billion. Not so, countered the Economist Intelligence Unit (EIU) - external debt was a mere $53 billion last year. The EIU also forecasts a 2 percent drop in GDP this year - but a growth of 6 percent next year commensurate with a recovery in oil production.

Still, things are not as bad as relentless Iraqi propaganda makes them out to be. Infant mortality figures are suspect as are most other Iraqi statistics. The BBC interviewed an Iraqi defector whose two year old daughter was maimed by interrogators. He claimed to have participated in fake "baby funerals". There is no telling if this is true or a part of the propaganda war waged by the would-be combatants.

According to the BBC, Iraqi life expectancy for men is 66 years. Women outlive them by 2 years on average. Annual income per capita is c. $600. GDP per capita is $715, down from $3000 only a decade ago - or maybe double that per the Economist Intelligence Unit.

But these figures are misleading. According to the CIA 2001 World Factbook, Iraq's GDP per capita in terms of purchasing power is a more respectable $2500. GDP has grown by 15 percent in 2000 - or 4 percent according to The Economist Intelligence Unit - though admittedly from a dismally low base.

An efficient rationing system keeps Iraqis well fed at 2200-2500 calories per day, according to the UN. A thriving black market facilitates the smuggling of cigarettes, software, home appliances, video films, weaponry, food, carpets - and virtually every other necessity or luxury - into Iraq from Syria, Jordan, Turkey, Iran, Cyprus, and the West Bank.

UN reports consistently accuse Iraq of under-utilizing the funds at its disposal.

Between June and December 2000 - as the US State Department gleefully announced - Iraq disposed of only 13 percent of the money allocated to health supplies, 6 percent of the allotment for education, and 3 percent of the cash available for spare parts for its crumbling oil industry.

It neglected to mention, though, that, during the same period, more than 1150 contracts were still pending approval in a nightmarish bureaucratic battleground between the US and the UK and other members of the Sanctions Committee. This was before the introduction of "smart sanctions" earlier this year. The new scheme allows Iraq to import all things civilian not itemized in a 332-page dual use "Goods Review" list.

Iraq receives over $4.5 billion of food and medicines a year through the UN-administered oil for food and medicines program. Another $13 billion are in the pipeline. According to the UN, Iraq has sold more than $56 billion of oil since 1996. Iraq's export income cannot be used to defray the costs of local goods and services or to pay salaries. The UN dispensed with $15 billion in Iraqi oil proceeds since 1991 to compensate countries and individuals affected by Iraq's aggression.

Another unsupervised source of income is the surcharges Iraq levies on its oil. Middlemen and trading companies pay the official - bargain - price into a UN account and hidden commissions to Saddam's regime. The UN told the "Wall Street Journal" that between 20 and 70 cents per barrel have accrued in these illicit accounts since December 1, 2000.

The Congressional General Accounting Office stated that "conservatively ...  Iraq has illegally earned at least $6.6 billion since 1997 -  $4.3 billion from smuggling and $2.3 billion in illegal surcharges on oil and commissions from its commodities contracts."

This translates to c. $1 billion per year. Yet, it may be a wild over-estimate. The typical surcharge has long been more like 15 cents a barrel. Moreover, downward pressure on oil prices coupled with renewed UN vigilance may soon put a stop to this lucrative arrangement. Retroactive pricing of Iraq's oil by the UN has already considerably damaged Iraq's exports to Russian and other amenable lifters of its oil. There is a "substantial shortfall in the funds available for programme implementation", as the UN puts it.

The UN Secretary General himself criticized the program last June:

"The programme has continued to suffer because of a number of factors, including:  the cumbersome procedures involved in formulating the distribution plan, and the late submission of the plan which has seem subjected to thousands of amendments; slow contracting for essential supplies by the Iraqi Government and the United Nations agencies and programmes; and the inordinate delays and irregularities in the submission of applications for such contacts to the Secretariat by both the suppliers and the agencies and programmes concerned."

In a letter addressed to the Acting Chairman of the Security Council’s 661 sanctions committee on 1 August 2002, the Executive Director of the Iraq Programme, Benon Sevan, expressed “grave concern” regarding the cumulative shortfall in funds and warned of “very serious consequences on the humanitarian situation in Iraq”.

Mr. Sevan appealed to the members of the Committee and the Government of Iraq to “take all necessary measures to resolve the difficulties encountered in improving the critical funding situation, including, in particular, the long outstanding question of the pricing mechanism for Iraqi crude oil exports ... The cooperation of all concerned is essential”.

The UN registers the outcomes:

"As at 2 August, the revenue shortfall had left 1,051 approved humanitarian supply contracts, worth over $2.25 billion, without available funds. The sectors affected by the lack of funds were: food with $356 million; electricity with $353 million; food handling with $325 million; agriculture with $297 million; housing with $286 million; water and sanitation with $216 million; health with $159 million; telecommunication and transportation with $152 million and; education with $111 million."

Iraq bribes countries near and far with cheap oil. It recently signed nine free trade or customs agreements with, among others, Lebanon, Oman, and the United Arab Emirates as well as with Syria, an erstwhile irreconcilable foe. According to the "Washington Post", 200,000 barrels a day flow through the re-opened pipeline to the Syrian port of Banias - in breach of UN Resolution 986 (i.e., the oil for food program).

Syria sells Iraq goods worth at least $100 million a month, including, according to the "Times" of London, tanks and other weaponry. The two countries agreed to establish a joint telephone company and to abolish capital controls. Syria and Jordan are the only two countries with air links to Baghdad and other Iraqi destinations.

Iraq also pledged to construct an oil refinery in Lebanon and re-open a defunct pipeline running to Lebanon's ports. It inked $100 million worth of import contracts with Algeria and removed 14 Jordanian enterprises from its blacklist of companies which trade with Israel. Iraq caters to Jordan's energy needs by supplying it with heavily discounted oil carried by trucks across the border. A 100,000 barrels-per-day pipeline is slated to become operational by October 2004. A free trade agreement is being negotiated.

Not surprisingly, the Jordanians protested vocally against renewed inspections of freight in the porous Red Sea port of Aqaba. Even Iraq's mortal enemies are mellowing. A border crossing between Saudi Arabia and Iraq was recently inaugurated with great pan-Arabic fanfare. It was inundated by more than $1 billion in bilateral trade, according to the London-based Arabic daily, "al-Hayat".

The list of renegades continues. Iraq and Sudan vowed to establish a free trade zone. Until it clamped down on the practice recently, Turkey turned a blind eye to a $1 billion annual diesel-against-everything market on its border with the rogue state. Egypt allowed more than 90 of its companies to participate in a commercial fair in Baghdad in April.

Egyptian business concluded contracts worth $350 million with Iraq between December last year and May, trumpeted the Egyptian news agency, MENA. This on top of more than $4 billion of contracts signed since 1996. Residential and commercial projects with Egyptian construction groups are on track.

Russia peddled to Iraq more than $5 billion of goods since 1997, confirmed Middle East and North Africa department head in the Russian Foreign Ministry, Mikhail Bogdanov. The Iraqis put the figure higher, at $30 billion in bilateral trade. Even American companies were able to hawk $230 million worth of food and pharmaceuticals, according to the Wall Street Journal. Iraq sold $90 million of oil to South Africa's Strategic Field Fund, charged the South African opposition Democratic Alliance.

The Ukrainian UNIAN news agency reported the purchase of technical equipment by Baghdad even as the "Financial Times" aired the allegations of a former Ukrainian presidential security guard that his country sold a sophisticated $100 million radar system to the outcast regime.

Iraqi largesse comes with strings attached. ITAR-TASS reports that the "Ural" auto works ships 400 trucks to Iraq every month. Interfax said in April that a Russian oil company, Zarubezhneft, was invited to develop an oil field in southern Iraq with proven reserves of more than 3 billion barrels.

According to Stratfor, Iraq still owes Russia $10-12 billion for Soviet era materiel. But Iraq is open about its conditioning of future orders on Russian anti-American assertiveness. Similarly, it has cut wheat imports from Australia by half due to the latter's unequivocal support of American policies.

Iraqi business, both current and prospective, is alluring. The country is vast, mineral-rich, and with a well-educated and sinfully cheap workforce. Hence the decision by 185 multinationals, recounted by the "Wall Street Journal", to forgo almost $3 billion in Gulf War related reparations claims - in return for aid contracts under the oil-for-food program.

Still, Iraq's financial clout is constrained by the rundown state of its oil fields. Lacking spare parts and investments in exploration and development, it produces c. 2 million barrels per day - about two thirds its capacity. According to the US government, one third of this quantity is smuggled, in contravention of the oil-for-food program. Iraq's pipelines lead to Turkey and to the south of the ravaged country. This makes it vulnerable to Turkish or Saudi-Arabian and Kuwaiti collusion in in a US-led campaign against its regime.

Moreover, U.S. oil companies, such ExxonMobil, ChevronTexaco, and Valero Energy purchase nearly half of Iraq's oil exports. Iraq is trying to diversify but its interlocutors are currently confined to the likes of Belarus with whom it recently held talks about revamping its oilfields and petrochemicals industry. With 100 billion barrels in proven reserves, Iraq is bound to attract the attentions of Western oil companies following a regime change brought on by either war or nature. Iraqi citizens must be holding their breath.

Turkey's Losing Streak

In emphasizing its "special relationship" with Turkey, the United States conveniently overlooked the fact - confirmed yet again by a recent Pew Global Attitudes Project survey - that 84 percent of Turks view America "unfavorably".

According to the Anadolu news agency, the Chairman of the Union of Chambers and Commodity Exchanges in Turkey, Rifat Hisarciklioglu, cajoled his countrymen on Monday to rid themselves of their dependence on "foreign" assistance - common euphemism for handouts from America and, as the Turks firmly believe, its long arm, the International Monetary Fund.

A country's foreign policy stature, he averred, is conferred by its domestic product. Somewhat implausibly, he pegged Turkey's war-related damages this year at $16.2 billion and between $70-150 in the following decade. It will have to resort to more expensive alternative sources of oil. Tourism, its second largest foreign exchange earner, will wither.

If true, Turkish refusal to be used by U.S. troops as a launching pad for a second, northern, Iraqi front - was nothing short of suicidal.

Turkey could have ended up with $30 billion in sorely needed aid and loan guarantees - now reduced, perhaps, to a mere $8.5 billion in commercial debt in return for overflight rights. Moreover, future IMF aid and even disbursements from an existing standby agreement are in jeopardy.

Last year, at the behest of the United States, Turkey received another dollop of $17 billion in multilateral funds to shore up its ailing economy. According to the Washington Post, it already owes the Fund five times the ordinary borrowing limit under the lending agency's rules.

The country's finances are in dire straits. Its foreign debt catapulted from $50 billion in the wake of the first Gulf war - to more than $130 billion in the run-up to the second. The government's economic policies are still founded on the defunct assumption that U.S. aid will be allotted, despite Turkey's denial of service.

Inflation, at more than 25 percent, is rising as are real interest rates - at 30 percent above inflation - and an already unsustainable $95 billion in domestic public debt, a sizable chunk of it extremely short term. Financial markets and the currency are plummeting. The yield on Turkish bonds is a stratospheric 70-80 percent. An incredible three quarters of the budget are earmarked for debt repayments.

The country should service $80 billion in obligations in the remainder of this year. Not surprisingly, Standard and Poor's is contemplating a lowering of Turkey's country rating, currently below investment grade at B1. Fitch went ahead and reduced Turkey's rank to B minus with a negative outlook to boot - akin to destitute and near-default Moldova.

According to Stratfor, the strategic forecasting consultancy, risk premiums on Turkish treasuries leaped 90-122 basis points on March 17 alone - to 9.5 percent above comparable U.S. bonds. This spread narrowed by 0.85 percent the following day when Turkey came up with the offer to allow U.S. planes to make use of its air space.

Closer integration with the European Union, warned EU enlargement commissioner, Günter Verheugen, will be adversely affected by any unilateral Turkish move in north Iraq. The acrimonious breakdown of reunification talks between the Greek and Turkish-sponsored parties in Cyprus did not help either.

Turkey has been allocated $1.1 billion by the EU as pre-accession aid. Unruly behavior on its part may endanger this carrot as well. To complicate matters further, America may drop its staunch political and pecuniary support for the Baku-Ceyhan Main Export oil Pipeline (MEP).

Nor is the domestic situation less ominous.

The new, hitherto popular, prime minister, Recep Tayyip Erdogan, vowed on Sunday to "carefully and diligently" implement the IMF's agonizing austerity program which calls for spending cuts of $2 billion by the end of the month, the privatization of the tobacco and alcohol monopolies and tax reform. The 2003 budget envisages a primary surplus of 6.5 percent of gross national product. It aims to raise revenues by $5 billion and cut expenditure by $3 billion.

Such prescriptions ill-fit with promises to help the poor and fiscally boost growth. But a mid-April loan tranche of $1.6 billion - of the $3.5 billion left to be disbursed - is dependent on strict adherence. Nor is a new agreement with the IMF in the offing without considerable U.S. pressure or its implicit guarantee, both now unlikely.

The threat of dispatching troops to northern Iraq is Turkey's last, desperate, card in a depleted deck. To avoid this cataclysmic scenario, the United States may yet, teeth gnashing, revive the moribund economic aid package it has seethingly withdrawn. The alternative is an Argentina-style default with a shock wave cruising through a volatile and ignitable Middle East - or a military dictatorship in Ankara.

Turkey's Jewish Friend

It is ironic that relations between Turkey and Israel have never been better. The former is ruled by yet another Islamic government - though constrained by secular-minded generals. The latter is increasingly nationalistic-Messianic and theocratic - though its newly elected Prime Minister, a former army general, Ariel Sharon, has just put together a largely secular coalition government.

Each year, more than 300,000 Israelis spend their vacation - and more than a quarter of a billion dollars - in scenic and affordable Turkish resorts. A drought-stricken Israel revived a decade-old plan to buy from Turkey up to 400 million cubic meters a year, instead of expensively desalinating sea water.

Israeli land use, hydrological and agricultural experts roam the Texas-sized country. The parties - with a combined gross domestic product of $300 billion - have inked close to thirty agreements and protocols since 1991. Everything, from double taxation to joint development and manufacturing of missiles, has been covered.

Buoyed by a free trade agreement in force since 1997, bilateral trade exceeded $1.5 billion last year, excluding clandestine sales of arms and weapons technologies. According to the Turkish Ambassador to the United States, "Turkish exports to Israel consist mainly of manufactured goods, foodstuffs and grain, while Israel's main export items to Turkey are chemical products, plastics, computers and irrigation and telecommunications systems technologies."

A sizable portion of Turkey's $3-5 billion in annual spending on the modernization of its armed forces is rumored to end in Israeli pockets. This is part of a 25-year plan launched in 1997 and estimated to be worth a total of $150 billion. Israeli contractors are refurbishing ageing Turkish fighter planes and other weapons systems at a total cost exceeding $2 billion hitherto.

Last May, the Israeli Military Industries and Elbit secured a $688 million contract to upgrade 170 M-60A1 tanks. There are at least another 800 pieces in the pipeline. Small arms, unmanned aerial vehicles and rockets originating in Israel make only part of a long shopping list. Israeli pilots regularly train in Turkey. Joint military exercises and intelligence sharing are frequent. The Israeli backdoor allows friendly American administrations to circumvent a rarely Turkophile Congress.

The American-Israel Public Action Committee (AIPAC), the Jewish Institute for National Security Affairs (JINSA) and, more generally, the almighty Jewish lobby in Washington, often support Turkish causes on the Hill. Three years ago, for example, Jews helped quash a resolution commemorating the Armenian genocide perpetrated by Turkish forces during the first world war.

This exercise in hypocrisy did not endear the Jewish community or Israel to either Armenians or to European Union cardholding Greeks who have long permitted Palestinian terrorists to operate from the Greek part of Cyprus with impunity. The friend of my enemy is my enemy and Israel is clearly Turkey's Jewish friend.

But Israeli hopes that Turkey will reciprocate by serving as a conduit to Arab regimes in the Middle East proved to be ill-founded. Only one tenth of Turkish trade is with its neighbors near and far. Turkey's leverage is further limited by its chronic economic distress and its offensive designs to monopolize waterways shared by adjacent countries.

Though Moslem, like the Iranians, Turkey is not an Arab nation. It counts Syria, Iraq and Iran as potential enemies and competitors for scarce water resources - as does Israel. The recent rebuff by its parliament of America's request to station troops on Turkish soil notwithstanding, the country is defiantly pro-American against a backdrop of anti-Western virulence.

Turkey aspires to join the European Union because it regards itself as an island of civilization in an ocean of backwardness and destitution. This counter-regional orientation is another thing it has in common with the Jewish state. In an effort to differentiate themselves, both polities were early adopters of economic trends such as deregulation, equities, venture capital, entrepreneurship, privatization and hi-tech.

Turkey was the first Moslem state to recognize an ominously isolated Israel in 1949. Both Israel and Turkey are democracies though they are implicated in systemic human rights violations on a massive scale. The political class of both is incestuously enmeshed with the military.

The two countries face terrorism on a daily basis and feel threatened by the rise of militant Islam, by the spread of weapons of mass destruction - though Israel is hitherto the only regional nuclear power - and by global networks like al-Qaida.

In his travelogue, "Eastward to Tartary", published in 2001, Robert Kaplan notes:

"Turkey's more friendly position toward Israel was the result of several factors. (Turkey) became tired of diplomatic initiatives that failed to induce the Arabs to end their support of the Kurdish Workers' party, which was responsible for the insurgency in southeastern Turkey. The Turks felt, too, that the Jews could help them with their Greek problem (via the Jewish lobby) ... (The Turks realized) they might never gain full admittance to the European Union. Thus, they required another alliance."

This confluence of interests and predicaments does not render Israel the darling of the Turkish street, though. Turks, addicted to conspiracy theories, fully believe that the second Iraq war is being instigated by the Israelis. They also decry the way Israel manhandles the Palestinian uprising. Flag-burning demonstrations are common occurrences in Ankara and Istanbul. Suleyman Demirel, Turkey's former president, nearly paid with his life for the entente cordiale when a deranged pharmacist tried to assassinate him in 1996.

Turkey's power behind the throne and future prime minister, Recep Tayyip Erdogan, called Israel's Ariel Sharon a terrorist. The previous prime minister called Israel's behavior in the occupied territories "genocide" - hastening to reverse himself when faced with the possible consequences of his Freudian slip.

Indeed, the looming conflict in Iraq may well be the watershed of the Turkish-Israeli love fest. Turkey is growing increasingly religious and more pro-Arab by the year. The further the United States - Israel's sponsor and unwavering ally - pushes into the region, the less aligned are its interests with Turkey's.

Consider the Kurdish question. Turkey is committed to preventing, if need be by force of arms, the emergence of independent Kurdish polity in Iraq. It would also wish to secure oil-rich northern Iraq as a Turkish protectorate. But the Kurds - America's long-standing and long-suffering collaborators - are the United States' "Northern Alliance" in Iraq. It cannot abandon them for both military and moral considerations.

But even in the absence of such blatant conflicts of interests, Turkey's shift is inevitable, a matter of geography as destiny.

Turkey continues to ignore the Arab world at its peril. Regional conflicts fail to respect international borders - as the country is discovering, faced with the damaging Iraqi spillover. Until 1998, Syria, another restive neighbor, actively aided and abetted the rebellious Kurds. It may yet resume its meddling if Israel, its bitter enemy, is neutered through a peace accord. The dispute over precious water sources is embedded in Turkish-Syrian topography and is, therefore, permanent.

It may have been in recognition of these facts that Abdullah Gul, Turkey's prime minister, embarked on a tour of Arab capitals in January. Simultaneously, the Turkish Trade Minister, Korsad Touzman, led a delegation of 150 businessmen in a two day visit to Baghdad to discuss trade issues. Turkey claims to have sustained damages in excess of $30 billion in the 1991 Gulf War - a measure of its regional integration.

Turkey has also recently begun considering the sale of water in the framework of the "Manavgat Project for Peace" to Egypt, Jordan and even Libya. Turkey's foreign minister, Bashar Yakis, is a Turkish diplomat who knows Arabic and had served in Damascus, Riyadh and Cairo.

Turkey's Occidental orientation has proven to be counterproductive. As the European Union grows more fractured and indecisive and the United States more overweening and unilaterally belligerent, Turkey will have to give up its fantasies - bred by the country's post-Ottoman founding father, Kemal Ataturk - of becoming an inalienable part of Western civilization.

Both Turkey and Israel will, in due time, be forced to accept - however reluctantly - that they are barely mid-sized, mostly Asiatic, regional powers and that their future - geopolitical and military, if not economic - lies in the Middle East, not in the Midwest. Turkey could then serve as a goodwill mediator between erstwhile enemies and Israel as a regional engine of growth.

Until they do, both countries are major founts of regional instability, often deliberately and gleefully so.

Israeli engineering firms, for instance, are heavily involved in the design and implementation of the regionally controversial Southeast Anatolian Project (GAP), intended to block Turkish water from reaching Syria and Iraq. Additionally, protestations to the contrary aside, the thrust of Israel's burgeoning military cooperation with Turkey is, plausibly, anti-Arab.

Turkish security officials confirmed to the English-language daily, Turkish Daily News, in March last year, that Turkey worked with Israel to counter the Hezbollah in Lebanon. As early as 1998, Turkey threatened war with Syria - and mobilized troops to back up its warnings - explicitly relying on the always-present Israeli "second front". The Egyptian government's mouthpiece, the daily al-Ahram, called this emerging de-facto alliance "the true axis of evil".

Israel's massive army, its nuclear weapons, its policies in the West Bank and Gaza, its influence on right-wing American decision-makers and legislators - provoke the very same threats they are intended to forestall, including terrorism, the coalescence of hostile axes and alliances and the pursuit of weapons of mass destruction by regional thugs.

Turkey's disdain for everything Arab, its diversion of the Tigris, Asi and Euphrates rivers, its arms race, its suppression of the Kurds and its military-tainted democracy have led it, more than once, to the verge of open warfare. Such a conflict may not be containable. In 1995, Syria granted Greece the right to use its air bases and air space, thus explicitly dragging NATO and the European Union into the fray.

It is, therefore, the interest of the West to disabuse Turkey of its grandiosity and to convince Israel to choose peace. As September 11 and its aftermath have painfully demonstrated, no conflict in the Middle East is merely regional.

Israel - The Next Target

Its leader seems more comfortable in battle fatigues than in civil suits. He has been long pursuing a policy of bloody oppression and annexation. The regime is often castigated due to rampant human rights violations. The country possesses weapons of mass destruction, though it repeatedly denies the allegations. It refuses to honor numerous Security Council resolutions. President Bush senior once subjected it to sanctions. The United States has already trained its sights on this next target: Israel.

The chieftains of the New World Order have made it abundantly clear that Iraq's capitulation will be closely followed by the official release of a much-leaked "road map" for peace in the Middle East propounded by the "Quartet" - the USA, UK, United Nations and Russia.

A series of disclosures in the Israeli media made it equally evident that prime minister Ariel Sharon's crew beg to differ from substantial portions of the foursome's vision.

To demonstrate to skeptic and embittered Muslims everywhere that its motives in waging war on Iraq were more altruistic than ulterior, the Administration will impose an even-handed peace on a reluctant Israel. Should it resist, the Jewish state will find itself subjected to the kind of treatment hitherto reserved for the founding members of the axis of evil - economic sanctions to the fore.

Can it withstand such treatment?

Institutional Investor has just downgraded Israel's 2002 country credit rating to 45th place - seven rungs lower than in early 2000. It is ranked behind Kuwait, Cyprus, Qatar, and Oman. Moody's, Fitch and Standard and Poor's (S&P) has refrained from a further rating action, following a series of demotions in the past two years.

The country's economy - especially its dynamic construction, tourism and agricultural segments - has been weakened by three years of civil strife both within the green line and throughout the occupied territories. This has been reflected in the shekel's and the stock exchange's precipitous declines, by one fifth each. Profits in the banking sector slumped by more than three quarters due to augmented loan loss provisions.

A global recession and the bursting of the hi-tech bubble have not helped. Gross domestic product growth in 2000 was a spectacular 7 percent. In the next two years, however, the economy has contracted. The calling up of reservists to active duty, the dwindling of immigration - from 78,400 in 1999 down to 31,491 three years later - and the disappearance of the Palestinian shopper depressed consumption, services and retail sales.

Uriel Lynn, chairman of the Israeli Chamber of Commerce, told BBC News Online, that the country has lost about $2.5 billion "in terms of business product". Defense spending spiked at 10 percent of the budget, double the American ratio and triple the military outlays of the typical EU member.

Social solidarity is fraying. The Histadrut (General Federation of Labor in Israel) - run by members of the shriveled opposition Labor party - declared a labor dispute on Sunday, heralding a general strike. This in response to reforms promulgated by the Ministry of Finance, now headed by a hardliner, the former prime minister Benjamin Netanyahu.

The private sector accounts for 70 percent of GDP in Israel and is already stretched to the limit. Instead, the hard-pressed ministry wants to sack thousands in the bloated public services and cut the salaries and pension rights of the remaining civil servants by 8 percent. Government consumption amounts to one third of GDP and public debt exceeds it.

In a reversal of decades of tradition, collective wage agreements will be abolished. The finance ministry is trying to reduce the spiraling budget deficit - now pegged at more than 6 percent of GDP - by $2 billion to c. 3.5-4.5 percent of GDP, depending on one's propensity for optimism.

Netanyahu also pledged to trim down the top marginal tax rate from a whopping 60 to 49 percent and to aggressively privatize state holdings in companies such as El Al, Bezeq Telecommunications, Oil Refineries and Israel Electric Company. He told the Israeli daily Ha'aretz that the fate of an American package comprising $1 billion in extra military aid and $9 billion in loan guarantees depends on such "proper economics".

Trying to balance fiscal profligacy, David Klein, the governor of the Bank of Israel, kept real interest rates high, cutting them by a mere 0.2 percent yesterday to 8.7 percent. Inflation last year, at 5.7 percent, was way above the 1998-2002 average of 3.7 percent.

Partly due to this contractionary bias, more than 50,000 small businesses closed their doors in 2002. According to the CNN, another 60,000 will follow suit by yearend. The number of tourists plunged by a staggering three fifths. Foreign investment crumbled from $11 billion in 2000 to $4 billion last year. 

Unemployment is stubbornly stuck above 10 percent - and double this figure in the Arab street. The State of the Economy Index, published by the central bank, fell for the 30th consecutive month in February. Of 1.6 million employees in the business sector, 61,000 were fired since January 2001.

It is the third year of recession: the economy contracted by 1 percent last year and by 0.9 percent in 2001. Nor is it over yet. Business Data Israel (BDI), a forecasting consultancy, reckons that the damage to Israel's economy of a short war in Iraq would amount to $1 billion, or 1 percent of GDP.

One fifth of the population survives under the poverty line. Strains between well to do newcomers, mainly from the former Soviet republics, and impoverished veterans are growing - as do tensions between destitute immigrants and their adopted homeland. Many emigrate from Israel back to the Commonwealth of Independent States, to Germany, Australia and New Zealand.

American aid - some $2.7 billion a year - largely goes to repay past debts. U.S. Secretary of State Colin Powell has announced in January the U.S.-Middle East Partnership Initiative. Local groups will be encouraged to invest in the private sectors of their countries. But the Partnership is geared to tackle the needy Arab polities rather than the far-advanced and sated Israel.

Consider next door Palestine, now severed from its main market employer next door.

A World Bank report released in early March stated that half the 3.5 million denizens of the Palestinian Authority live under an impossibly depleted $2 a day poverty line. One in two employees in the private sector lost their jobs and GDP declined by two fifths in the first two years of the intifada.

The UN Conference on Trade and Development (UNCTAD) warned last September that the economy of the West Bank and the Gaza Strip was drained of up to $2.4bn due to closures, mass unemployment, and damages to infrastructure. "The profound changes that have taken place in the functioning of the economy ... are unlikely to be easily reversed even if stability is attained," the report concluded gloomily.

Israel withholds more than $400 million in back taxes it had collected on behalf of the Palestinian Authority. Business Week predicts that donor aid - more than $1 billion annually at current levels - will dry up in the wake of the Iraq conflict with resources diverted to reconstruct a nascent and oil-rich democracy on the Euphrates.

Hence Blair's sense of urgency. Come victory in Iraq, Israel will face a united "land-for-peace" front, encompassing ostensible adversaries such as France and the United States. Unity on the Palestinian question will salve the wounds self-inflicted on the Euro-Atlantic coalition on the road to Baghdad.

Few place bets on Israel's ability to resist such concerted action, led by the sole superpower. The Economist Intelligence Unit foresee the imminent collapse of Sharon's narrow right-wing government - this despite a modest economic revival.

The current account deficit, prognosticates the EIU, should fall to 1.7 percent of a GDP growing, in real terms, by 3.1 percent in 2004 (compared to a rosy scenario of 0.3 percent this year). This may be unrealistic. Exports have sharply plunged to less than $28 billion in 2002, two fifths of it to the USA and a similar proportion to the European Union.

Still, with a GDP per head of about $16,000 (or $20,000 in purchasing power parity terms), Israel is one of the richest countries in the world - particularly if its thriving informal economy is considered and if the global hi-tech sector recovers which is widely tipped to happen. According to Jane's Defense Weekly, Israel is the third largest exporter of armaments, materiel and military services, ahead of Russia.

The country's foreign exchange reserves per capita, at $3500, are higher than Japan's. Its external debt - c. $27 billion - is puny and almost entirely guaranteed by the United States. Only one tenth of it is held by ordinary foreign investors. Israel can withstand years of economic sanctions unaffected - as it has done well into the 1970s. The Jewish state also enjoys the support of a virulently nationalistic diaspora, willing to dip into bulging pocketbook in times of need.

Another scenario, however unlikely, would see the European Union siding with Israel against a bullying United States and its sidekick, the United Kingdom. Last week, Italy's outspoken prime minister, Silvio Berlusconi, normally a staunch supporter of president George Bush, floated the idea of further enlarging the EU to incorporate Russia, Turkey and Israel.

But visionaries like Stef Wertheimer, an Israeli industrial tycoon, talk wistfully of a regional "mini" Marshall Plan. It calls for massive infusions of aid and credit, overseen by the International Monetary Fund (IMF) and the World Bank, into the eastern Mediterranean - Jordan, Turkey, the Palestinian Authority and Israel's minorities - at least until GDP per capita throughout the region surges fivefold, to $6,000 per year.

Such misguided development nostrums are alluring. They cater to the Western misconception that terrorism is born of poverty and ignorance. Removing these alleged causes of violence, goes the refrain, will end all aggression. Throwing money at problems is an inveterate American and European reflex. Prosperity and democracy are keys to stability and moderation, they preach.

But the unpalatable truth is that Israel is the haughty outpost of Western civilization in an area distinctly un-Western and anti-Western. Terrorism is about clashing values and opposing worldviews, not about the allocation of scarce jobs and the benefits of technology parks.

People like Osama bin-Laden are rich and well-educated. Muslim fundamentalists - in between atrocities - provide health, welfare benefits and schooling to millions of the poor and the deprived. They don't seem to think, like Wertheimer and his patronizing ilk,  that higher standards of living negate their mission to oppose American culture, ethos and hegemony by all means, fair or foul.

Oil for Food Revisited

It is payback time. The United States has every intention of sidelining France, Germany and Russia in the lucrative reconstruction of a war-ravaged Iraq.  U.S. Ambassador to the United Nations, John Negroponte, said, last Wednesday, that  Washington is bent on "streamlining" the 8 years old U.N. oil-for-food program, now on hold since last Monday.

Money from Iraqi oil sales currently flows to an escrow account, co-managed by the Security Council's Office of the Iraq Program (OIP) and the Iraqi government. More than $42 billion worth of contracts for humanitarian supplies and equipment have been signed since December 1996.

The U.N. states that "supplies and equipment worth almost $26 billion have been delivered to Iraq, while another $11.2 billion worth of humanitarian supplies and equipment are in the production and delivery pipeline." Of these, reports the Washington Post, $8.9 billion in humanitarian goods, including $2.4 billion worth of food, are "ready to be imported into Iraq". The program's budget is c. $10 billion a year.

America and Britain wish to make Kofi Annan, the Secretary General of the United Nations, the sole custodian of the program, exclusively empowered to approve applications and disburse funds - as he has hitherto been doing in north Iraq. According to their proposals and the Secretary General's 8-page letter, the program's remit will be extended to cover war refugees as well.

Other novelties: Annan would be authorized to renegotiate contracts - for instance, with Russian, French and Chinese energy behemoths - and prioritize purchases. Additional routes and sites - both inside and outside the besieged country - would be approved for Iraq's energy exports and for the delivery and inspection of humanitarian supplies.

Stratfor, the strategic forecasting consultancy, explains why this stratagem is anti-Russian and, more so, anti-French:

"The process would greatly speed up the aid disbursement process and cut out the middlemen who profit from the contractual go-betweens ... (which) have been almost exclusively French and Russian companies ... French and Russian banks usually have channeled the funds to the appropriate places ... The contracts were bribes to Paris and Moscow to secure French and Russian support for Iraq within the United Nations."

The non-disbursed portion of the fund has now ballooned to equal 2-3 years of Iraqi oil revenues, or more than $40 billion. Iraqi Vice President, Taha Yassin Ramadan, scathingly criticized Annan yesterday for seeking to expand the exclusive role of the U.N. in administering the oil-for-food program. He said the proposal was "based on a colonialist, racist and despicable illusion that pushes the despot oppressors in Washington and London towards eliminating the state of Iraq from existence."

The increasingly cantankerous Mohammed Al-Douri, Iraq's disheveled Ambassador to the U.N., invoked the inevitable conspiracy theory. Iraq, he seethed, is to be eliminated and transformed "into colonies under the control of the world American and Zionist oil mafia". It is "a great insult to the United Nations." Annan's scheme "calls for the forfeiting of the oil of the Iraqi state and implementing the colonial illusion of the removal of the State of Iraq." - he thundered.

The Washington Post quotes a "confidential U.N. paper" as saying that "the U.N. image is already tarnished among the Iraqi people. It will be further damaged if the question of Iraq's oil resources is not managed in a transparent manner that clearly brings benefit to the Iraqi people."

The stalemate costs the under-nourished and disease-plagued people of Iraq dearly. More than three fifths of them - some 14 million souls - rely on the program for daily necessities. Over the weekend, experts from the 15 members of the Council, presided over by Germany, met to iron out the details. They were aided by Deputy Secretary-General Louise Fréchette, Benon Sevan, Executive Director of the OIP, UN Legal Counsel Hans Corell and Under-Secretary-General for Humanitarian Affairs Kenzo Oshima.

Negroponte reiterated Washington's mantra that the United States "will ensure that Iraq's natural resources, including its oil, are used entirely for the benefit of the Iraqi people". But Annan did not sound convinced when he exhorted the USA and the United Kingdom in the letter he delivered last week to the Security Council:

"The primary responsibility for ensuring that the Iraqi population is provided with adequate medicine, health supplies, foodstuffs and materials and supplies for essential civilian needs will rest with the authority exercising effective control in the country ... (But) without in any way assuming or diminishing that ultimate responsibility, we, in the United Nations, will do whatever we can to help."

Thus, continues Annan's missive, money in the U.N. account, originally earmarked for equipment and infrastructure, would be diverted to purchase food and medicine "on a reimbursable basis". Who would reimburse the fund he left unsaid. Nor did he limit the newfangled "interim" oil-for-food regime in time.

Whatever the outcome of the recent tussle, the U.N. would still have to rely on the Iraqi government to distribute goods and provide services in the southern and central parts of this California-sized polity. The United Nations' own staff has been withdrawn upon the commencement of hostilities. Annan already conceded that "the Iraqi State Oil Marketing Organization should be allowed to continue to retain ... the authority to conclude oil contracts with national purchasers."

But Saddam Hussein's regime fails to see the urgency. Baghdad said last Monday that it had distributed food to the populace to last them through August. Even non-governmental organizations in the field claim that no shortages are to be expected until May. So, what's the hurry? - wonder the authorities aloud, as they cower in their offices, awaiting the next, inevitable, blast.

Iraq's Middle Class

Iraq had no middle class to speak of until the oil boom of the 1960s-1970s. At the turn of the previous century, Baghdad sprawled across a mere tenth of its current area. However, since then and as late as 1987, the Iraqi capital was renowned throughout the Arab realm for its superior infrastructure, functioning services, splendor, conspicuous consumption and educated populace. "Baghdadi" in many Arab dialects meant "big spender".

Two thirds of all Iraqi children attended secondary school, thousands studied abroad, women actively participated in the workforce. The oil wealth attracted hundreds of thousands of menial laborers from Africa and Asia. It was Saddam Hussein, the country's tyrant, who rattled the moribund and tradition-bound entrenched interests and ratcheted up living standards by imposing land reform, increasing the minimum wage and expanding healthcare.

Even the Iran-Iraq war which decimated tens of thousands of intellectuals and professionals barely dented this existence. Rather, the - mostly Sunni - middle class was done in by the sanctions imposed on Iraq, the aggressor in the first Gulf War, after 1991.

Iraq's relatively affluent and well-traveled urban denizens had access to all the amenities and consumer goods - now proffered by the impoverished owners in improvised curb markets. As wages and the dinar plummeted, once-proud Iraqis were reduced to agonizing, humiliating and sometimes life-threatening penury.

Prostitution, street kids and homelessness have flourished. Divorce and crime rates are sharply up. Young couples cannot afford to marry, so promiscuity and abortions are in vogue. On the other extreme, Islam - both moderate and fundamentalist - is making headway into a hitherto devoutly secular society. Headscarved women are not a rarity anymore.

Official unemployment is c. 20 percent but, in reality, it is at least double that. Polyglot professionals with impressive resumes drive taxis, moonlight as waiters, or sell vegetables from rickety stalls.

According to Humam Al Shamaa, professor of economy and finance at Baghdad University, quoted by the Asia Times, one in every two Iraqis are currently employed in agriculture - most of it subsistence farming, raising cattle and poultry. Many an urbane urbanite now tend to tiny plots, trying to eke a living out of the fertile banks of the Two Rivers - the Euphrates and the Tigris. Industry - cement, petrochemicals - is at a standstill due to the dearth of raw materials oft-proscribed by the ponderous sanctions committee.

The Boston Globe recounts the tale of an Iraqi Airlines pilot whose monthly earnings plunged from $1500 to $2.50. Malnutrition and disease prey on the traumatized and destitute remnants of the bourgeoisie, the erstwhile nobility of the Arab world. The virtual elimination of the purchasing power of one of the richest Middle Eastern countries has had a profound impact on neighbors and trade partners across the region.

The UN Human Development Index has chronicled the precipitous decline of Iraq's ranking to its 127th rung. The New York-based Centre for Economic and Social Rights says that "Iraqis have been extremely isolated from the outside world for 12 years. The mental, physical and educational development of an entire generation has been affected adversely by the extraordinary trauma of war and sanctions."

Public services - from primary healthcare through electricity generation to drinking water - were roughly halved in the past 12 years. Quality has also suffered. Iraq's gross domestic product plunged by four fifths. With infectious diseases on the rampage and a debilitating stress load, life expectancy dropped - men now survive to the ripe old age of 57.

Infant mortality, at 93 in 1000 live births, soared. Three fifths of the population depend on an efficient system of government handouts. An exit tax of more than $350 virtually fenced in all but the most well-heeled Iraqis.

The American administration, in the throes of preparations for the reconstruction of a postbellum Iraq, acknowledges that the rehabilitation of the war-torn country's middle class is the cornerstone of any hoped-for economic revival.

But income inequality and a criminalized regime led to huge wealth disparities. The tiny, fabulously rich elite beholden to Saddam (the "war rats") are removed from the indigent masses. They make the bulk of their ill-gotten gains by maintaining Saddam-blessed import monopolies on every manner of contraband from building materials and machine spare parts to cars, televisions and beauty products. The United States estimates that the dictator and his close, clannish circle have secreted away more than $6 billion in illicit commissions on oil sales alone.

But the proceeds of smuggling and intellectual property piracy have trickled down to a growing circle of traders and merchants. So has the $30 billion influx from the oil-for-food scheme, now in its eighth year - though, as Hans von Sponeck, head of the program between 1998-2000, observed in the Toronto Globe and Mail:

"Until May of 2002, the total value of all food, medicines, education, sanitation, agricultural and infrastructure supplies that have arrived in Iraq has amounted to $175 per person a year, or less than 49 cents a day ... This has made postwar reconstruction impossible, and ensured mass unemployment and continuing deterioration of schools, health centers and transportation. 'Smuggled' oil revenues represent only a small fraction of oil-for-food funds. Even here, an estimated three-quarters of these funds have been directed to social services."

Still, Iraq's economy has been partly remonetized and is less insulated than it was in 1996. Even the stock exchange has revived.

Whatever the length of the war, its outcome is said to be guaranteed - the ignominious demise of the hideous terror regime of Saddam Hussein. Then, the scenario goes, the American and British "liberators" will switch from regime-change mode to the nation-building phase. Iraq will once again become the economic locomotive of the entire region, prosperous and secure.

But the bombed and starved denizens of Iraq may be holding a different viewpoint. Quoted in The Californian, Terry Burke and Alan Richards, professors at the University of California, Santa Cruz, noted that "the invasion and air attacks are forging intense hatred against the United States that will undermine any hope of gracefully replacing Saddam Hussein's dictatorship."

It would be instructive to remember that the 1958 overthrow of the monarchy by the Free Officers, followed by the Ba'ath party in 1968 and, later on, by Saddam Hussein, represented the interests of the lower middle class and the petty bourgeoisie: shopkeepers, low and mid-ranking officials and graduates of training schools, law schools, and military academies.

The most important economic policies in the past four decades - the agrarian reform and the nationalization of oil - catered to the needs and aspirations of these socio-economic strata. The backbone of Saddam Hussein's regime is comprised of bureaucrats and technocrats - not of raving rapists and torture-hungry sadists, as Western propaganda has it.

Saddam's days may well be numbered. But the levers of power, based on tribal affiliation, regional location, religious denomination and sectarian interests - will survive intact. If the West really aspires to resuscitate a stable Iraq - it has no choice but to collaborate with the social structures spawned by the country's long and erratic history. The Ottomans did, the British did - the Americans will do to.