Fouad Siniora in Iraq: Progress Between Iraq and Lebanon?

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Prime Minister Fouad Siniora traveled to Baghdad last week, becoming the first Lebanese leader to visit Iraq since the fall of Saddam Hussein. This was a further step toward Iraqi reconciliation with its Arab neigh

bours and a step toward the restoration of commercial relations between two former trading partners.

The announcement came a day after Iraqi government spokesman Ali Al-Dabbagh announced that seven Arab countries are set to reopen their embassies in Baghdad this year.

These countries include Kuwait, the United Arab Emirates, Saudi Arabia and Bahrain, Algeria and Morocco.

Jordan also recently announced that it would reopen its embassy to Iraq after the historic visit of King Abdullah, who became the first Arab head of state to do so since the 2003 invasion that toppled the former regime.

Lebanon is only one of five Arab states to currently have an embassy in Iraq, alongside Syria, Palestine, Yemen, Lebanon and Tunisia, which it opened in 2006. Official relations had been strained for six years between 1994 and 2000 when Lebanon broke its relations with Iraq in 1994 following the murder of an Iraqi dissident in Lebanon.

Sinioria travelled to Baghdad to discuss trade and energy, his spokesman quoted by the AFP as saying: “The discussions with Iraqi leaders will be on bilateral relations and particularly trade and oil.”

Renewed relations with Lebanon would be a positive sign for Maliki’s government, and both countries share a similar recent history. In the late 1960s and early 70s Beirut was considered the ‘Switzerland of the Orient’ and was home to a Riviera as opulent and international as any in Southern France, as well as being an Arab financial and medical centre, with Shia, Sunni and Christian living together in relative harmony.

Iraq was an oil rich state with high rates of education, renown for its industry and culture and pro-Western outlook, seemingly combining the best of East and West, as well as combining a mixed population of Shias, Sunnis and Christians. The ties that bind are the brutal and punishing conflicts both countries have endured since then, reducing these once prosperous nations to sectarian battlegrounds, divided internally and used as pawns in a regional power struggle.

As the war rages in Iraq and simmers in the Levant, commentators have been quick to point out the similarities, and many believe that a solution to either, or both, conflicts may hold the key to lasting peace in the Middle East. The reality is of course different. Regional power Saudi Arabia is an ally of the Lebanese government, but shows indifference and hostility to the power brokers in Baghdad.

Politics aside, Iraq and Lebanon have in the past few decades shared a strong trading relationship. In the 1970s and 80s the Iraqi market accounted for over a quarter of Lebanese total exports, interrupted by the first Gulf War.

In the late 1990s however, many Lebanese companies turned to Iraq in a time of economic downturn and uncertainty, seeing opportunity for manufactured goods and foodstuffs in a country crippled by sanctions but rich with petrodollars. The two countries signed a bilateral free trade agreement in April 2002, abolishing tariffs on goods traded between the two countries.

According to official figures provided the Center for Economic Research at the Chamber of Commerce, Industry, and Agriculture of Beirut, exports to Iraq (including both the public and private sectors) totalled $71,117. However an article in the Washington Report on Middle East Affairs journal in 2002 claimed that “the actual number was close to $400 million. Some even go so far as saying it exceeded $1 billion—a huge figure, considering that Lebanon’s public debt amounts to around $30 billion.”

The article went on to say that “hundreds of other Lebanese companies could suffer as a result of the war on Iraq.” Since 2003 though, Lebanon has played a minor role in the U.S.-controlled Iraqi economy, despite some optimism shown by Lebanese commentators in 2003, who believed that Lebanon was poised to benefit strongly from lucrative U.S. reconstruction contracts.

The past 12 months though have been a different story, and as I wrote recently, Lebanon has been one of the few consistent Arab sources of private capital into Iraq. Although Lebanese investors missed out on the privatisation of Iraq’s mobile phone network in 2003 and 2007, entrepreneurs have been leading the way in a variety of non-energy sectors including construction, tourism, banking and industry.

Lebanon is a major exporter of cement to Iraq, and Make Oil, a prominent Lebanese firm, has expressed its desire to build a cement factory in Dohuk, northern Iraq in addition to a $3 billion oil refinery. Byblos Bank opened an Iraqi branch in Erbil in 2007 and has announced expansion plans. A sponsor of the Iraq Industry summit in Dubai earlier this year, Byblos’ operations in Iraq include financing trade and infrastructure projects. Byblos also acts as an intermediary for Iraqi banks trying to do business overseas.

Tourism and Iraq are not often mentioned in the same sentence, but in the virtually autonomous Iraqi Kurdistan, it has taken off in a big way due to relative security. Lebanese companies over the year have announced plans for a massive mountain resort in Shaqlawa County, Erbil and a $55m 5-star hotel in the city of Erbil, to be managed by a major Gulf hotel group, Rotana Hotels.

Investment into Iraqi Kurdistan is nothing new, however. Earlier this year, UAE property giant DAMAC announced a $15 billion residential project for the region, showing just how much confidence the region has attracted. Undoubtedly this attracts attention to Iraq as a whole but the uncertainty over the oil and gas law and, more significantly, the status of Iraqi Kurdistan does not guarantee that the benefits will spill over into the rest of the country either in the short to medium term.

Many Lebanese companies, such as Sfeir Industries which has a contract with the U.S. military to supply food services in Baghdad, operate out of Jordan or Turkey.

Carlos Sfeir, general manager of the company told Oxford Business Group in an interview that “The growth is very interesting and the potential is huge so we take the risk,” but admitted that “We never send company personnel to Baghdad.”

Alongside boosting diplomatic acceptance of the current Iraqi administration, Lebanese firms could in many ways offer far greater support by venturing south in search of commercial opportunities and setting a precedence for Arab companies who are better equipped with cultural ties and physical proximity than international firms. They can also show that there is money to be made outside of the energy sector.

Before 2003 Lebanon exported to Iraq over 97 articles, including food products, leather, wood, cement, iron, books and newspapers, clothes, and machinery: products desperately needed in 2008.

Corrupt and unmanned border crossings have made the Iraqi market an easy target for Turkish and Iranian manufacturers and merchants, peddling everything from tinned food, radios and other consumer items to the detriment of Iraqi industry and consumers alike. A colleague in Baghdad often complains of shoddy imports, and wishes that the government would

take action. He was delighted recently with the purchase of a Lebanese made petrol-powered generator for his basement, and wants better quality goods to return to the general market, without premiums demanded by blackmarketeers.

As much as Iraqi consumers or Lebanese exporters would wish to focus on trade and commerce, and for agreements to be made, yet oil and gas dominate the headlines.

Iraq was a major exporter of oil to Lebanon in the 1970s and 80s but output was cut after the first Gulf War. In 2000 Iraq and Syria agreed to build a pipeline to Syria’s Mediterranean port of Banias, including Lebanon in the process, and it courted controversy for flouting UN imposed sanctions with the volumes exported. It was shut by the U.S. soon after the 2003 invasion.

The 200,000 – 300,000 bpd Iraq-Syria-Lebanon Pipeline (ISLP) has been closed and the Iraqi portion reported unusable since 2003. The initial capacity of the pipeline was approximately 700,000 bpd, with potential to expand to 1.4 million bpd, according to data obtained from the U.S. government’s Energy Information Administration.

Government statistics put Iraq oil production at 2.46 million bpd in July 2008, with exports at 1.89 million bpd.

On August 11th 2008 the Iraqi Ministry of Trade released a statement saying that Iraq and Syria have agreed on terms to revitalize an idle pipeline that used to carry Iraqi crude to Syrian terminals on the Mediterranean. Discussions have been ongoing since the beginning of the year to re-open the pipeline and a Russian company has been widely tipped to win the contract for renovation works after carrying out a survey of the remaining pipeline and facilities. There have also been talks to add a second line parallel to the existing one.

Whilst Lebanese investment in Iraq is on the up, what of Iraqi interests in Lebanon? After all a healthy trade relationship is a balanced one.

There are no exact figures to measure trade between the two countries, but it is reported that millions of dollars flow between the two on a monthly basis: the more exports from Lebanon the better for it; Lebanon’s exports surpassed $5.96 billion in the first four months of 2008, but the trade deficit widened to $3.65 billion in the same period.

During the Israel-Lebanon conflict in the summer of 2006 the UN Office for the Coordination of Humanitarian Affairs released a statement saying that the current conflict in Lebanon was having a negative impact on the Iraqi economy as most of its trade with Lebanon has been frozen and business with Syria has decreased.

It quoted Muhammad Rushi, an economic analyst and professor at Baghdad University, as saying: “Lebanon and Syria were Iraqi’s most important trading partners…Hundreds of contracts had to be cancelled or postponed due to the current violence in Lebanon.”

Iraqi refugees in Lebanon number only 20,000 – 50,000, U.N. data shows. Such small numbers are unlikely to make a significant economic impact on the local economy compared to their counterparts in Jordan and Syria. Iraqi capital has flowed steadily into Jordan and the influx of refugees into Syria has sent house prices soaring. To compare, only 20% – predominantly Christian – of Iraqi refugees in Lebanon said they want to integrate into the country.

Last Monday, the influential Lebanese newspaper The Daily Star published an article on the progress of the Iraqi investment law that was designed to encourage the development of Iraq’s private sector and to reassure foreign investors. Passed in 2006, it has still not been implemented, and this failure is almost a big a barrier to foreign investment as the conflict itself. It has also not helped that private sector growth in Iraq has been low key at best.

“It is the nature of capital to favour markets in which a single, clear, comprehensive law is applied regarding investment, and where a single authority is responsible for this law,” the article states, “Therefore, stability, clear principles and rules that govern investment operations, and modernizing laws to simplify regulations are considered the main means for providing a suitable investment climate.” Where there is no comprehensive law, it sums up, “there is chaos.”

The solutions it offers are simple: Reduced bureaucracy, investment timeframes to prevent foreign monopolies, increased tax exemption and investor protection from exploitation and corruption.

It may be wishful thinking but if regional investors, led by companies from Lebanon with a long history of trading with Iraq, make a real effort to enter the Iraqi market and nurture private sector growth, it would surely be in the interest of the government of Iraq to legislate for a better trade and investment climate.

Oliver Pearce is an editor at a leading Middle East focused business information service. You can contact him at: olivercpearce [at] gmail [dot] com.

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