Awash in oil revenue, Iraq stays on U.S. dole for reconstruction

Nearly two years after ending military engagement in the Iraq War, the U.S. and its allies are still paying millions of dollars for reconstruction, even though Baghdad is reaping revenue from its oil industry as instability rises and the government has grown closer to Iran.

Through an international trust fund established in 2004, the U.S. and 16 other donor nations have raised almost $2 billion for reconstruction projects in Iraq. Scheduled to expire Dec. 31, the trust fund received a one-year extension requested by Baghdad.

But donations for Iraq are becoming harder to justify, given its sizable oil-based revenue.

“These high levels of production, coupled with international oil prices buoyed by geopolitical worries, delivered to Iraq’s coffers close to $100 billion for the year,” the United Nations said in its most recent report on the trust fund. “Iraq’s status as a middle-income country has led to declining donor interest and a reduction in international funding.”

Two donor nations are pulling out of the trust fund and will have their unspent contributions returned to them next year, a World Bank official said, adding that the U.S. is not one of the two.

The trust fund’s largest donors are the European Commission, Japan and Spain. Although the U.S. contributed $10 million, it spent about $60 billion in reconstruction during the war.

Most of the donations have gone to more than 200 development projects, half of which were not completed by the end of 2012, when at least $54 million was unused.

The U.S. is supporting Iraq in other ways. This year, Washington gave Baghdad $470 million in foreign aid, and has requested $500 million in aid for 2014. In addition, the U.S. plans to loan Iraq $573 million to buy U.S. military equipment, a common practice known as foreign military financing.

A State Department official defended U.S. assistance to Iraq despite Baghdad’s increasing oil revenues, saying the aid is aimed at maintaining a strategic partnership with Iraq — and it is working.

For instance, Iraq agreed to increase its oil production in part to fill gaps that resulted from crushing international sanctions on Iran and its petroleum industry, the official said.

“Did the Iraqis have to do that? Of course not,” said the official, who spoke on background. “Iran clearly has an influence in Iraq, but so do we. The Iraqis have publicly stated that we are their partner of choice.”

Growing instability

Since U.S. troops left Iraq in December 2011, violence there has been approaching levels not seen since 2008.

Last month, 743 Iraqis were killed and 1,625 were wounded in bombings and gunbattles across the nation. In October 2012, 136 were killed and 376 wounded in various attacks, according to statistics from Agence France-Presse.

Tensions have worsened between the country’s Shiite Muslim majority, which leads the government, and its Sunni Muslim minority, which ruled Iraq under strongman Saddam Hussein and now feels persecuted.

A government raid of a camp of Sunni protesters in April killed at least 23 Iraqis and sparked a cycle of Sunni-Shiite attacks and counterattacks across the country.

Analysts say Iraqi Prime Minister Nouri al-Maliki, who took office in 2006, could do more to tamp down the tensions but instead has continued to marginalize Sunnis, driving some groups to armed resistance.

“He could negotiate local cease-fires with the Sunni community or appoint a high-level Sunni figure in his government and give him some power,” said Jacob Stokes, an analyst at the Center for a New American Security. “There are things that he could do that could take sectarian element down several levels, but that hasn’t been his approach so far.”

Since the U.S. military’s departure, Iraq has grown closer to the Shiite-dominated Iran and has allowed Iran, despite protest from Washington, to fly weapons to Syrian dictator Bashar Assad through its airspace.

Al Qaeda fighters, who are mostly Sunnis, are attempting to take over Iraq and Syria in order to join the two countries into an Islamic state. Al Qaeda is now at its strongest levels in Iraq since 2006, National Counterterrorism Center Director Matthew G. Olsen told a Senate panel Thursday.

Analysts note some irony in Mr. al-Maliki’s recent visit to the U.S., during which he requested more military equipment.

“If you’re coming to the U.S. for more, you can’t also be helping Iran ship weapons to Syria,” Mr. Stokes said. “I think Congress would be giving more help if it weren’t for the overflights.”

The State Department official said there has been a decrease in Iranian flights to Syria through Iraqi airspace, but there is “room for further improvement.”

Meanwhile, Iraq’s oil sector is booming. The country now exports more than 3 million barrels of oil a day, which accounted for almost all of its 9.38 percent gross domestic product growth in 2012.

Oil revenue is expected to grow. The International Energy Agency predicts Iraq will be responsible for half of the increase in global oil production through 2035.

Although more needs to be done on the political front in Baghdad, U.S. officials say they are seeing some progress in reaching out to Iraq’s minority Sunni and Kurdish communities.

“There is paralysis on the political situation. It’s hard for them to address the little issues when they can’t agree on the bigger issues,” the State Department official said. “It’s far from perfect, but you now have Maliki reaching out to tribal leaders in Anbar, to the Sunni speaker of the parliament. They had a unity meeting last month to establish a code of ethics and code of honor.”

“It’s a slog. It’s hard work but to say that we don’t have any leverage there, if you look at the last eight months of where they were then and where we are now, that hasn’t happened by magic dust,” the official said.

The official noted that U.S. aid to Iraq has been reduced sharply — nearly half of the $850 million that was given in 2012, and that foreign military financing is about 50 percent of what was given that year.

Despite its oil revenue, Iraq has tremendous development needs because of three decades of depravation under Saddam and the war with Iran in the 1980s, the official said.

A key focus of cooperation is on al Qaeda’s re-emergence in Iraq and its spread to Syria.

“Iraq’s biggest concern is if Sunni extremists were to take power in Syria,” the State Department official said. “It would be a major complication on their western border.”

The U.S. plans to send military equipment and intelligence support to Iraq to deal with the threat, which will give the U.S. greater influence in the country, analysts say.

“At the end of the day, we couldn’t control Maliki when we had tens of thousands of U.S. forces on the ground,” Mr. Stokes said. “But we can convince Maliki that he doesn’t want to see his country falling back into chaos. You don’t want to be the person who caused that.”