US embassy cable - 05BAGHDAD2453

S E C R E T SECTION 01 OF 03 BAGHDAD 002453 
 
SIPDIS 
 
E.O. 12958: DECL: 06/08/2025 
TAGS: EFIN, ECON, EAID, PGOV, PREL, IZ, SY, LE, ECON Development, Parliament, Reconstruction 
SUBJECT: IRAQ: MINISTER OF FINANCE ON POLITICAL DYNAMICS, 
BRUSSELS CONFERENCE, JEC, AND SYRIA/LEBANON ASSET RECOVERY 
 
REF: STATE 106124 
 
Classified By: Deputy Chief of Mission David M. Satterfield for 
reasons 1.4 (b) and (d) 
 
1. (S) SUMMARY: Describing his take on current maneuvering 
within the Iraqi Transitional Government (ITG), Finance 
Minister Allawi told the DCM June 8 he does not think Prime 
Minister Ja'afari has done a good job in articulating a clear 
political position and is having difficulty managing the 
government.  Allawi, who referred to himself and Planning 
Minister Saleh as "cat's paws" in a larger political game 
between Shia and Kurdish political figures, said he hopes a 
final decision on where responsibility for donor coordination 
will fall will be made within a few days.  In any event, 
Allawi stressed he and Saleh will work closely together to 
make a successful Iraqi showing at the Brussels Conference. 
In reply to the DCM's delivery of reftel talking points on 
the importance of substantive reform deliverables for 
Brussels and the JEC, Allawi noted he has already pitched a 
strategy for reductions in food and fuel subsidies to the 
Council of Ministers.  MoF will try to re-engage with Syria 
on return of frozen assets and provide Embassy with a 
detailed read out of the problems it is encountering in 
recovering the $140 million in assets that remain frozen in 
Lebanese commercial banks.  END SUMMARY. 
 
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BOSNIAN SOLUTION 
---------------- 
 
2. (S) During a frank and open discussion with the DCM on 
June 8, also attended by Treasury Attache and econoff, 
Minister of Finance Allawi shared his thoughts on the current 
state of debate within the ITG as to Iraq's political future. 
 While stressing it is too early to make definitive judgments 
as to what can be constituted a trend, Allawi observed, it is 
possible that Iraq may be headed, whether by design or not, 
towards some kind of "Bosnian solution."  Sunni Arabs are not 
yet fully adjusted to their loss of status, but appear 
resigned to the existence of a Kurdish Federation.  Few Kurds 
view Iraq as a natural, long-term entity, but are prepared to 
give short-term support to the political process as long as 
their principal interests and conditions are met.  The Shias, 
for their part, are prepared to concede much to get a 
resolution to political stalemate, but will not go so far as 
to accept an inequitable "Muslim-Croat" form of power 
division. 
 
3. (S) Allawi said he would only give the performance of the 
ITG a C minus rating.  Noting in the Prime Minister's defense 
that he has only been in power for a few weeks, Allawi 
stressed that Ja'afari has nevertheless failed thus far to 
articulate a clear political position and vision.  He 
commented that Ja'afari is overloaded with trying to achieve 
too many goals, rather than focus on a few that are doable, a 
similar trap that the Iraqi Interim Government (IIG) fell 
victim to.  The ITG also suffers from over-centralization of 
decision-making authority within the Prime Minister's office 
and micro-management of even relatively minor administrative 
issues. 
 
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POLITICAL CAT'S PAWS 
-------------------- 
 
4. (S) Noting that Ja'afari still has many issues to work out 
with the Kurds, Allawi said Shias are divided in terms of how 
they see relations with the Kurds developing.  One view, 
represented by Supreme Council of the Islamic Revolution in 
Iraq (SCIRI) leader Abdul Aziz Hakim, is that the Kurds 
should be developed as long-term allies.  Others, however, do 
not want to see the ITG made hostage to Kurdish demands. 
Vice President and SCIRI member Adel Mahdi is very close to 
the Kurds.  Mahdi's candidacy to head the ITG was withdrawn, 
Allawi continued, when SCIRI decided it would be best not to 
have to take responsibility for a short-term government. 
Dawa leader Ja'afari, on the other hand, was persistent in 
his pursuit of the position ad it became clear that there 
would be no viable alternative to Ja'afari. 
 
5. (S) Referring to himself and Planning Minister Saleh as 
"cat's paws" in a larger political game, of which the 
struggle over which ministry is to control the donor 
assistance portfolio is just a small reflection, Allawi said 
he thinks there is a better than even chance (60/40) the 
issue will be resolved within two days.  According to Allawi, 
Ja'afari is likely to "capitulate" to the Kurds and allow the 
function to remain with Saleh as he will be unwilling to risk 
the success of his government over the issue.  Allawi 
characterized Ja'afari's political style as one that always 
leaves room for maneuvering, something that is sometimes 
misinterpreted as being indecisive.  In fact, Ja'afari enjoys 
and is good at high stakes political poker.  With regard to 
PM spokesmen Laith Kubba, who has been less than careful in a 
number of public statements (e.g., charges against Saddam and 
Iraqi debt write-off), Allawi speculated that Ja'afari may 
have had some unknown, byzantine reason for giving Kubba the 
position.  He added that Kubba is not trusted at all by the 
Kurds. 
 
6. (C) As he has "no ego involved" in the outcome, Allawi 
stressed that, if a political resolution of the donor 
coordination debate within the ITG is not achieved soon, he 
will work out a mutually agreeable arrangement directly with 
Saleh with whom he personally gets along very well.  The DCM 
interjected it is critical that Allawi and Saleh be united 
and be prepared to present a strong message of the ITG's 
commitment to economic reforms.  To lose the opportunity 
Brussels represents to line up international support would be 
a major setback for the ITG.  The United States will do 
everything possible to make the conference a major success, 
but in the end it will be up to Iraq.  The DCM added that the 
ITG Ministers of Defense and Interior have committed to work 
together closely.  Acknowledging the DCM's comments, Allawi 
remarked an agreement to coordinate efforts for the Brussels 
Conference had been reached by the relevant ministers during 
a meeting earlier in the day at the Ministry of Foreign 
Affairs. 
 
7. (C) With regard to division of responsibility on donor 
coordination issues, Allawi said a "technical solution" would 
be to spin off to MoF the capital budget function of the 
Ministry of Planning and Donor Coordination (MoPDC) and 
establish donor coordination as a new unit under the Prime 
Minister's office to be headed by Saleh.  Such a solution 
would help Ja'afari to save face since he has already 
announced publicly that donor coordination would go to MoF. 
The new unit would be responsible for accelerating the flow 
of aid and project implementation.  Allawi said that Saleh 
himself favors dismantling the MoPDC.  Its remaining 
functions could serve to perform data collection and 
statistical analysis. 
 
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PREPARING FOR THE JEC 
--------------------- 
 
8. (C) Transitioning to the topic of the upcoming Joint 
Economic Commission to be held in Amman in July, the DCM 
delivered reftel talking points (a copy of which was left 
with Allawi as a non-paper).  He stressed the high-level 
composition of the US delegation and noted the success of 
Iraqi participation will be judged by how much progress on 
economic reform can be announced.  Allawi, the DCM 
reiterated, should come prepared to announce subsidy cuts in 
Brussels, in preparation for the JEC.  At a minimum, it is 
imperative Iraq's intent to proceed with specific cuts be 
declared. 
 
9. (C) In response, Allawi noted he has already been doing 
the groundwork for cuts in food and fuel subsidies and 
discussed his thinking at a recent meeting of the Council of 
Ministers.  While there is consensus within the ITG that 
reform of Iraq's system of subsidies is critical, some in the 
government are wary about the lack of a sufficient social 
safety net and any raise in fuel prices at a time of 
political stress.  Many Iraqis already pay higher prices for 
gasoline on the black market, but many others still wait in 
line to get it for free.  Allawi believes he will be able to 
achieve political agreement to proceed with phased-in 
increases in the price of gasoline, leading to a 20 percent 
cut in expenditures in fuel subsidies, a measure that should 
satisfy the IMF Iraq is being faithful to its Emergency Post 
Conflict Arrangement (EPCA) commitments. 
 
10. (C) As to cutting the cost of the Public Distribution 
System, Allawi said he favors eliminating some of the items 
currently handed out and focusing the system on key 
commodities only, thereby saving up to $500 million.  Allawi 
agreed with the DCM that from a budgetary standpoint, there 
is little wriggle room for Iraq to meet large security 
expenditure needs except through subsidy cuts.  Allawi also 
concurred on the importance of close budget coordination with 
the Ministries of Defense and Interior and the need to 
protect pipeline infrastructure so that oil revenues are not 
lost. 
 
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ASSET RECOVERY: SYRIA 
--------------------- 
 
11. (C) Reviewing with the DCM the status of Iraq's asset 
recovery discussions with Syria and Lebanon, Allawi confirmed 
nothing substantive has taken place since the return of an 
Iraqi technical team in mid-April.  Out of an almost $2 
billion in total Iraqi frozen assets abroad, Syria holds the 
largest single share at $262 million. (Note: although a 
specific amount was not given, Allawi also noted Bahrain for 
its holdings of Irqi assets.  End note).  Despite requests 
in writing from Iraq to do so, Syria has refused to transfer 
any of the funds from the Commercial Bank of Syria or the $71 
million sitting in its Lebanese subsidiary, the 
Syrian-Lebanese Commercial Bank. 
 
12. (C) Allawi said he was thinking of advising Prime 
Minister Ja'afari to try to solve the issue personally in 
Syria, but concurred with the DCM's recommendation that it 
would make more sense for Iraq to send a technical team.  The 
Syrians are extremely isolated diplomatically and would 
likely try to turn a Ja'afari visit to their political 
advantage.  Iraq should hold Syria's feet to the fire and 
insist upon agreement of asset transfer and an actual 
significant flow of funds before any high-level visits to 
Damascus are considered.  Especially in light of Syria's 
looming June 15 deadline to achieve progress on this and 
other issues or face potential Section 311 sanctions, the DCM 
continued, now is a perfect time for Iraq to press for 
resolution of the issue.  Allawi agreed and noted the DCM's 
comments came at a timely moment. 
 
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ASSET RECOVERY: LEBANON 
----------------------- 
 
13. (C) Allawi said Lebanese banks still hold approximately 
$140 million out of what had once been $300 million in Iraqi 
frozen assets.  He asserted it is not true that Iraq has not 
contacted the Lebanese Central Bank Governor about the 
assets.  The difficulty in getting the assets back appears to 
be that the Lebanese banks (e.g., Mourad and First Bank of 
Lebanon) that hold the Iraqi ministerial accounts do not 
operate according to strictly international standards and 
appear to be trying to bargain over transfer terms.  The DCM 
volunteered the USG is willing to assist, but it would be 
necessary to have specific information on a bank-by-bank 
basis as to the problems Iraq is running into in Lebanon. 
The USG has been receiving very conflicting information over 
whether the ITG had or had not requested transfer of funds in 
Lebanese commercial banks.  Allawi agreed that there was 
internal ITG confusion on the issue which needs to be 
resolved and indicated he would try to work with the Central 
Bank and get us visibility on DFI account information to 
analyze possible transfers into it of frozen assets. 
 
14. (C) COMMENT: Embassy will follow up soonest with the head 
of MoF's asset recovery team to determine what specific steps 
the Ministry intends to take next week on recovery of Iraqi 
assets from Syria.  Embassy will also engage the Central Bank 
directly.  END COMMENT. 
 
15. (U) REO Hillah, REO Basra, REO Kirkuk, and REO Mosul 
minimize considered. 
Jeffrey