Doing Business in Iraq

Stephen DeAngelis

June 18, 2008

The news yesterday that over 50 innocent people were killed in a suicide attack in Baghdad reminds us all how dangerous a place Iraq remains. Yet there is also good news. The Economist reports that Iraqis “are still suffering monstrously, but Iraq is doing far than it was only a few months ago.” [“Iraq starts to fix itself,” 14 June 2008 print edition]. To back its claim, the magazine reports:

“Only a few months ago, Iraq was in the grip not only of a fierce anti-American insurgency but also of a dense tangle of sectarian wars, which America seemed powerless to stop. Those who thought it was just making matters worse by staying on could point to the bloody facts on the ground as evidence. But now it is time to look again. Each of those overlapping conflicts has lately begun to peter out. … The conflict between Shias and Shias has died down too.”

Considering yesterday’s attacks, the magazine also prophetically noted, “Needless to say, these conflicts could resume.” In a companion article in the same issue, The Economist reports, “By all the main measures—military, political and economic—Iraq is now improving, from a dire base. But that does not yet mean it is headed for peace and prosperity.” [“Is it turning the corner“] It reports:

“The violence, albeit still ferocious in parts of the country, has subsided dramatically. … Politics is also beginning to stutter towards something approaching normality, with signs of an accommodation between the three main communities—Shia Arabs, Sunni Arabs and Kurds—and the prospect of a series of vital laws, on such matters as sharing the revenue from oil, being passed, though they are still subject to endless last-minute hiccups. … The economy has begun to grow fast too, though its ripples have yet to be felt across the country. The soaring price of oil, along with a mild improvement in production to just above its pre-war peak, mean that the government has more cash to spend than it is has had since the first Gulf war of 1991.”

Although Shia cleric Muqtada al-Sadr remains a wild card on the political front and the Iraqi central government is balking at some of the terms the Bush administration would like included in a security agreement, things appear generally to be moving in the right direction. This improved climate has encouraged some foreign companies to make some tentative investments in Iraq’s emerging economy. Surprisingly, U.S. companies are lagging other international companies in these investments [“Foreign Firms Investing in Iraq,” by Jim Michaels, USA Today, 17 June 2008]. Michaels reports:

“European and Asian companies are beating their American rivals into Iraq now that security has improved the investment climate, Iraq and U.S. officials say. ‘It’s starting to turn … and the people who are getting in on the ground floor are not American,’ said Paul Brinkley, the Pentagon official who is leading U.S. efforts to help Iraq rebuild its economy. ‘It’s ironic.’ Foreign companies, including U.S. investors, have committed to deals worth about $500 million so far this year and Brinkley expects at least $1 billion in foreign investment by the end of the year. So far, Romanian consortium and a Lebanese company have signed revenue-sharing deals with Iraqi state-owned cement factories. Each group will invest about $150 million. China has also aggressively pursued the Iraqi market, selling machinery to the government and electronic products to consumers.”

As frequent readers of this blog know, my company Enterra Solutions is one of the U.S. companies that is trying to help rebuild the Iraqi economy. Some of the most active companies in Iraq are Turkish. Of course they enjoy the advantage of being Iraqi neighbors, but they are also risk takers with a belief that Iraq’s future remains hopeful. Michaels report agrees:

“Iraqi Foreign Minister Hoshiyar Zebari, in Washington on an official visit, said … that larger U.S. firms were waiting for more security before entering the market. Zebari noted that Turkish and Russian companies were already active in Iraq. ‘They take risks,’ he told USA TODAY in an interview. ‘No pain, no gain.'”

I’m working with the U.S. Chamber of Commerce to help attract other U.S. businesses to Iraq, but the going has been slow so far.

“Many of the companies active in Iraq now are from countries, including France, Russia and Turkey, that did not send combat troops to back the U.S.-led invasion. Some U.S. and Iraqi officials say American companies risk losing an early opportunity to establish long-term strategic ties with Iraq.”

Although it is natural for Iraq to establish economic relationships with countries nearer to its borders than the U.S., in the information age distance isn’t the challenge that it used to be. There are lots of “first mover” opportunities in Iraq at the moment, but they won’t last long.

“American companies may also be reluctant to invest in Iraq because the war has generated so much controversy at home, Brinkley said. The private investments that come from the USA are generally individual or institutional investors — not American corporations, Brinkley said. U.S. investors, for example, are part of a $120 million deal to build a hotel in the heavily fortified Green Zone, where U.S. and Iraqi government offices are located. Americans lead other nations in the number of exports to Iraq, but other nations have ramped up trade. China doubled the number of exports to Iraq this year. China is now Iraq’s third-largest trade partner behind the USA and Turkey, according to Global Trade Information Services, a firm that tracks trade statistics.”

Most of the work in which I have been involved has been in northern Iraq, where security and economics conditions are much better than in the south. But as The Economist reports, sky-high oil prices could help Iraq’s economy turn the corner.

“If, with the government’s growing political and military authority, Mr Maliki could get the economy moving, then the much-uttered phrase ‘turning the corner’ may be apt. Iraq’s windfall from higher oil prices is grand. America’s State Department reckons that, if prices stay put, Iraq this year should earn more than $70 billion, though this year’s budget projected $35.5 billion based on $57 a barrel at a production rate of 1.7m barrels a day. The latest production figure is 2.53m, a shade higher than its pre-war peak. So far the cash has yet to be turned into decent public services. People in Baghdad say that they have only a few hours of state-provided electricity a day; the Americans admit that the Baghdad average is seven hours. A vaunted advance is in telephony: there are now 12m cellular phones, against a handful before the war, and 261,000 Iraqis subscribe to the internet, against almost none before the war. Yet the biggest obstacle to economic progress is the lack of qualified people and civil servants to make use of the cash pouring in. The ministries spent barely half of their capital budgets last year, while provincial governments used up less than a third, according to an American government watchdog. Thanks partly to the ‘de-Baathification’ decree of the early American administration which chased out the senior ranks of Saddam’s old bureaucracy, the state virtually ceased to function. But what is left of the old civil service may be starting to operate better again. Professor Toby Dodge, a British expert who has been sceptical of many of the American administration’s past policies in Iraq, says that ‘the state is beginning to re-cohere’.”

One of the underlying drivers of Enterra Solutions’ Development-in-a-Box™ approach is building the indigenous capacity of local institutions and people. Most post-conflict or failed states have little or no capacity for governance, international commerce, communications, transportation, healthcare, sanitation, power generation, and so on and so on. Therefore, hearing that “the state is beginning to re-cohere” is good news. As The Economist notes, however, good news doesn’t mean that all is well.

“There is a long way to go. Much of the middle class has fled; many of its members have been killed. According to the UN‘s High Commissioner for Refugees, some 2.8m Iraqis are still displaced within the country; another 2.2m-plus have gone abroad, out of an original population of 27m or so. The official unemployment rate is 25-40%; in reality, it may be a lot higher. Businessmen and investors have yet to come back. … Meanwhile, the Kurds in the north are quietly consolidating their autonomy and peacefully making progress on all fronts, hoping that Iraq’s Arabs will fully accept that federalism is the way to go. But they are angry that a promised referendum to determine whether the oil-rich province of Kirkuk should become part of their region is again sure to be delayed. In their hearts, most Kurds still hanker after full independence, even if many know in their heads that it is not practicable. Iraq’s future is still full of pitfalls. The sectarian chasms remain deep, the wounds of strife raw. But for the first time since the insurgency against the Americans took off, the tide, which may quickly ebb, is flowing in the direction of the new order.”

There is no doubt that Iraq remains a frontier economy country. Frontiers, however, hold opportunities as well as risks. Clearly, I believe the opportunities in Iraq outweigh the risks.