IRAQ ENTERING A NEW ERA   But what with the old debts?

The war on Iraq can grosso modo be considered to be over. Saddam's regime is ousted and a new governing council put in place. With its resolution no. 1483, the United Nations Security Council also discontinued on May 22 the embargo which had been imposed on Iraq after the war over Kuwait. The restrictions were truly unique, as the ban on doing business with Iraq was long-lasting and world-wide, prohibiting any trade or financial dealings with the Middle Eastern republic without the express consent and monitoring of the United Nations.
The investor community welcomed the lifting of this embargo. Although the country's society must be considered one of the poorest in the region, the wealth buried in the soil of Iraq provides enormous possibilities for new investments and--with the reconstruction of the country already being discussed--companies keep a close eye on the developments.
Experience so far shows that the fear that new investment opportunities would be reserved for corporations and investors from coalition-friendly nations appears to be false. Negotiations over new contracts for Iraq engage companies from all over the globe.

But one doubt remains: What are the consequences for the old debts of the Republic of Iraq and its agencies?
A question which is not trivial, as the total debt of Iraq is considered to amount to not less than $300bn and the private sector's share amounts to 10 percent of that massive figure being a result of previous wars with Iran and Kuwait. Some of it also stems from Saddam's desire to transform Baghdad from an authentic Arab city into a tribute to himself, with no better description for the metropolis than a Stalinist construction site, comprising some kitsch squares and lanes combined with slums surrounded by extremely poor neighbourhoods.
For many companies the end of Saddam's reign means a bitter pill--they are convinced that they need to accept their Iraqi claim as worthless. Some might think that the situation from before, during and after the situation does not change a lot anyway, but in fact things have changed!
Few managers realised during the embargo that there were still possibilities to recover their Iraqi claim. As a key player on this market, East-West Debt was and continues to be able to assist many companies in recovering the amounts owed by Iraqi businesses and agencies.

This article is an attempt to provide an oversight of the different kind of Iraqi private sector debts, their previous possibilities for recovery and an indication for the remaining debt.

1. The various Iraqi debts
Already in the 1980s, the Republic of Iraq under the Hussein regime was centralised, which, as is usually the case, greatly influenced the way trade was done. Only state enterprises or establishments, forming an integral part of the Hussein administration, were allowed to import goods into the country. Under such circumstances, nearly all western exporters potentially had a claim against the republic, not just a state company, as the debtor. Few companies were aware of this, however.
But just as in practically all countries with centrally managed economies, no importer was authorised to deal in foreign currencies. Thus western exporters acting through open accounts were paid at their local representation in Iraq in Iraqi dinars, which they could change locally at the Central Bank of Iraq against a rather unfavourable rate.
To avoid this, most exporters chose to work through documentary credits or bank guarantees. These credits and guarantees were issued by the Central Bank of Iraq or the Rafidain Bank. The latter was a state-owned commercial bank, the explicit purpose of which was financing trade between Iraq and foreign investors.

As explained above, the significant construction works carried out by the Hussein regime, and the war with Iran, already generated heavy debts for Iraq, despite the inflow of oil revenues during the late 1980s. As a result, Iraq focussed on making payments for "high priority goods."
By mid-1988, the Rafidain Bank went practically bankrupt and defaulted on a large scale its payment obligations due to the lack of assets generated by exports of oil.

When the Iraqi government became aware of the situation, a clever solution was invented. In September of 1988, the Iraqi Ministry of Finance issued a ministerial decree deciding that all remaining assets of the Rafidain Bank would be shifted to a newly created Rasheed Bank. The Rafidain Bank continued to exist though as a separate legal personality, while the outstanding debts remained due by the Rafidain Bank which served as protection for the Rasheed Bank against any prosecution for old Rafidain Bank claims. Moreover, as an "empty shell," the Rafidain Bank continued to issue letters of credit in favour of unaware western exporters.
Immediately after its establishment, the Rasheed Bank started issuing documentary credits as well, bringing the total of Iraqi debtors to four--the republic (for all of its state enterprises and establishments), the Central Bank of Iraq, the Rafidain Bank, and the Rasheed Bank.
From the imposing of the embargo on August 2, 1990, no single Iraqi debtor was willing to pay any debt anymore, claiming the embargo was force majeur.

2. Applied solutions for Iraqi debts during the embargo

• 2.1. Establishing the claim
  Before one can start thinking of the recovery of his claim, the claim itself has to be well established. The most secure way of doing so is by having it confirmed in court by a judge. This has a double advantage as, firstly, the claim's time limitation period is renewed (in some countries for up to 30 years) and, secondly, once the judgement is final it is difficult for the debtor to deny the claim.
  It depends on the provisions of the contract (both open-account or guaranteed) whether the claim stood a legal chance or not. If the place of jurisdiction was stipulated to be Baghdad and with Iraqi law as governing law, it goes without saying that it was nearly impossible to establish the claim in a legal way. Few of the exporters with these contracts were able to see a penny back from what they were due. A lot of western-Iraqi contracts therefore specifically foresaw in a clause that any dispute would be resolved by an internationally reputed instance, such as an international chamber of commerce.
  For those contracts in which no jurisdiction and no applicable law was foreseen, the unpaid exporter had to be inventive to find a way of seeking an appropriate forum where he might be issued a court order. It was one of the areas in which East-West Debt clearly provided a fundamental advantage to its clients.
  Primordial in seeking a judgement confirming the claim is to start in time. Establishing whether or not the start was timely depends on the law applicable to the claim. Here we have to make a distinction between acting in a code-law country and a common-law country.
  If we take, for instance, a claim dating back to the year 1986, it would be governed by the Iraqi law according to most code-law tribunals, while the law of the place of payment (if this was London, the English law) would apply in common-law tribunals. Knowing that the Iraqi law foresees a prescription period of 15 years, while under the English law it is six years, it means that the same claim would have remained valid until 2001 in the code-law tribunal whereas it was time-barred already in 1992 in a common-law tribunal.
• 2.2. Collecting Iraqi assets
  Many business people are not inclined to take legal actions and right they are. As such, a decision of a judge is nothing more than a nice piece of paper without any further guarantee to be paid by your debtor. "The only ones pleased with a judgement are lawyers" is a popular joke.
  Only if you can find out where your debtor keeps his assets will your judgement produce the right effect. Above all, this is where a company such as East-West Debt offers clearly added value. Over the course of the years, we were able to locate several Iraqi bank accounts worldwide. For every single bank account, it had to be checked whether no additional protections, such as the rules of state immunity, were covering the account.
  Five Iraqi entities could be identified to be the owners of accounts outside Iraq, namely the republic, the State Organisation for the Marketing of Oil products (SOMO), the Central Bank of Iraq, the Rafidain Bank, and the Rasheed Bank.
  We mentioned above already the indebtedness of the Rafidain Bank, which made solutions on that specific debtor dry up very quickly. With the Republic of Iraq and some of the Central Bank of Iraq bank accounts very often protected with the state immunity, and with the SOMO not dealing with western exporters outside the oil industry, it is not simple to bring every operation to a good end and it takes a lot of persistency and courage.

3. The failure of the United Nations Compensations Committee
In 1992, the United Nations established a United Nations Compensations Committee (UNCC) charged with the mission to repair damages to individuals, states and companies which suffered from Iraq's invasion in Kuwait, while imposing the embargo on Iraq of August 2, 1990. It was decided that a fund would be established, fuelled with the revenues from oil trade, resumed under the auspices of the United Nations during the embargo.
Many companies thought this was the insurance for their Iraqi claim and sat still until now, apart from filing an application to the UNCC to get paid. But Iraq was so heavily indebted that the oil revenues were not enough to pay all debtors and the UNCC started to apply severe rules to be taken into consideration for the payment of the claim.
For instance, an exporter which delivered goods to Iraq in 1988 and issued a payment deadline for March 1990, was not reimbursed by the UNCC because the lack of payment was not a direct consequence of the Iraqi invasion in Kuwait, according to the Committee. In reality, however, it was.
Taking into account that an application filed to the UNCC did not stop the time limitation from running, a creditor which laid his claim down at the UNCC in 1997 for unpaid deliveries of 1987 to an Iraqi debtor and received a negative decision yesterday, ends up with a "worthless" time-barred claim.

4. Possibilities left
The possibilities left for creditors of Iraqi entities under the old regime have become very limited. The chief "villain" here is Resolution 1483 of the Security Council itself. In article 23, this resolution foresees that all remaining Iraqi assets abroad will be transferred to a newly created Development Fund for Iraq. Creditors that have not taken any legal action yet to preserve their rights cannot impose them on these assets anymore.
Moreover, it is hardly imaginable that the new government of Iraq, pro-western or not, will ever take into account the debts produced by the former regime and pay back the creditors voluntarily. Furthermore, it is highly likely that the Rafidain Bank will disappear completely and that the Central Bank of Iraq in the future will limit itself to what a central bank is destined to--regulating the interior monetary flows and governing the country's reserves. An open question remains whether there will be a place in the new Iraq for an all- Iraqi commercial bank and whether that role will be played by the Rasheed Bank. It is highly likely though that Iraq's two commercial banks, Rafidain and Rasheed, will disappear to break all ties with the former regime.
A long term possibility might be to try to obtain a debt-for-investment swap. Although plausible in normal circumstances, a lot will depend on how the Iraqi state is structured in the future. If, for instance, the textile market is freed up and run by the private sector, it will be of no use for a western textile exporter to try to swap its old "State Establishment for Textiles" debt for new exports or to obtain overpriced contracts with a private Iraqi textile company.
A more short term opportunity is the fact that Iraqi debt gets traded. Although still on a low-percentage basis, the rate for Iraqi debts is going up. As East-West Debt foresaw the fact that legal recovery of Iraqi claims would become virtually impossible, the company started focusing on buying claims on the Rafidain, Rasheed and Central Banks. Given the fact that East-West Debt has a wealth of expertise on Iraq and remains one of the few traders in this new market for companies and banks, we are in the best position to negotiate the maximum price for these debts.
It is absolutely obvious that trading Iraqi debts requires well-documented claims, preferably not time-barred, and starting with a minimum amount of $3m.

5. Conclusion
Any creditor getting back a single dime from his old debt in the future may call themselves very lucky. It appears that in the new Iraq, the old creditor's rights have been overlooked completely by the international community.
The lesson to be learned for creditors, on the other hand, is quite clear. It is of no use to sit and wait until your debt becomes worthless. Those creditors who took action in time were quite often rewarded and nobody in Iraq will blame them for it. They will have as much possibilities as other companies to resume trade with the country. As for the involvement of a company like East-West Debt, the example of Iraq is the clear proof that any exporter can only benefit from cooperation with us.
Working on a no-cure/no-pay basis, East-West Debt often guides its clients directly to success without any cost involved for the customer. In the end, the creditor can get back as good as the principal amount of the outstanding debt. Compared to their competitors, that is more than a decent result. [Didier De Baere, Head Legal Department - East-West Debt ]