What Volcker did not probe

The Volcker Committee's failure to investigate how Iraq was short-changed for its oil exports represents a serious omission.

"A prominent Iraqi businessman claimed in interviews with the Subcommittee to have been a major smuggler of oil out of Iraq through the Persian Gulf. The interviewee asserted his smuggling had been an act of patriotism, since the money Iraq obtained from smuggled oil was used to purchase food, medicine and goods for the Iraqi people."

- U.S. Senate Permanent Subcommittee on Investigations headed by Norm Coleman, May 17, 2005.

PAUL VOLCKER'S Report is controversial because of the perception that it has focussed on wrongdoing defined in a narrow sense. What the panel did not investigate, rather than what it did, indicates serious bias. That would be considered unworthy of a United Nations-appointed panel, which is answerable to the world at large and not just to the sole superpower.

Those sympathetic to the plight of the people of Iraq have argued that the Report does not situate the alleged wrongdoings of the Saddam Hussein regime during the Oil-For-Food Programme (OFFP) in the context of much bigger wrongs perpetrated on Iraq during the last 15 years - first under sanctions and, since 2003, the U.S.-led invasion. In particular, the panel's failure to investigate the manner in which Iraq was short-changed for its oil exports during the OFFP represents a serious omission. Indeed, the scale of Saddam Hussein's wrongdoing appears trivial when seen in relation to how Iraqi oil was systematically underpriced during the OFFP, largely as a result of the control exercised by the U.S. and Britain.

The OFFP, which started operations in December 1996 and largely came about because of the mounting pressure of international public opinion against sanctions, provided a measure of respite to the people of Iraq from the brutality of the sanctions that were imposed on it in August 1990. In order to understand the extent of wrongdoing it is necessary to understand how the programme came into existence and how it functioned. The OFFP came into being as a result of Resolution 986 passed in 1995 by the U.N. Security Council. It allowed Iraq to export $2 billion worth of oil every quarter. Iraq initially refused to accept the stringent conditions that were imposed. More than a year later, on May 20, 1996, Iraq signed a Memorandum of Understanding (MoU) with the U.N., which gave effect to Resolution 986. The first export of oil under the OFFP was made in December 1996. The first shipment of humanitarian supplies, a consignment of wheat, landed in Iraq in April 1997. In 1997 the Office of the Iraq Programme (OIP) was established to administer the Programme.

The OFFP is generally accepted to have been a remarkable success, providing tangible relief to the people of Iraq. The average daily caloric intake of the people of Iraq increased 83 per cent within a few years after the programme started. Malnutrition, particularly among children, dropped significantly by 2002. Another notable result was the reduced child mortality in Iraq after the OFFP started.

The Programme was divided into phases, each of about 180 days. In the first three phases the Security Council set a ceiling of $2 billion on oil exports in these phases. Although international oil prices were high during these phases, the ceiling prevented Iraq from taking advantage of the high price for oil. In phases IV and V the ceiling was raised to $5.2 billion.

However, by then oil prices had collapsed in the international market, and the poor state of the Iraqi oil industry did not enable the country to take advantage of the higher limit. In phase VI, Iraq was permitted to export an additional $3 billion worth of oil. Security Council Resolution 1284 (1999) removed the ceiling on Iraqi oil exports.

Through the "661 Committee", which implemented the sanctions, the Security Council oversaw the OFFP even though the OIP was entrusted with the task of implementing it. The Committee had the final say in determining not only the oil prices but also all humanitarian contracts. In short, a veto by the U.S. or any of the other Permanent Members of the Security Council represented on the "661 Committee" could have halted any oil or humanitarian supply contract under the OFFP.

THE most striking feature of the Volcker Report is its unquestioning acceptance of the fact that a premium existed for oil supplied by Iraq under the OFFP. Common sense would suggest that a premium could arise only if the price of the oil sold under the OFFP was set below prevailing international prices. Who set the price of the oil sold under the OFFP? And, how were prices determined?

The May 17, 2005 report of the Senate Committee chaired by Republican Norm Coleman, which inquired into the OFFP, indicates how this was done. It observed that the "661 Committee" set the Official Selling Price (OSP) for Iraqi oil. Although the Iraqi State Oil Marketing Organisation (SOMO) nominally "proposed" a price for the oil that was to be exported, prices were, in fact, determined by a group of "oil overseers" sitting in Manhattan. The overseers and the "661 Committee" thus had the final word in the matter of setting the price at which oil was exported by Iraq under the OFFP.

The Senate panel observed that "the OSP was generally set as a specified differential to the global benchmarks for oil pricing". It is obvious that the severe abridgment of Iraqi sovereignty curtailed its ability to determine what was a fair price for its valuable resource.

No self-respecting patriot would have accepted these rules as sacred. The Saddam Hussein regime's imposition of a surcharge on the oil that found its way into the world market was a logical response to the U.S.-led attempt to cheat Iraq. The Iraqi regime demanded a surcharge for the oil because it realised that the market placed a premium on its oil because of deliberate and systematic under-pricing of Iraqi oil. The regime, by imposing and successfully collecting the surcharge, ensured that at least a portion of the premium would come back into Iraq. Obviously, the only way this could have been done was to take these transactions outside the loop of the escrow account managed by the U.N. Moreover, the surcharge was not as large as made out to be in the Volcker Report; they, in fact, amounted to a mere 7 cents a barrel over the life of the programme. Clearly, the Saddam Hussein regime was smart enough to realise that the surcharge could not be so big as to destabilise its major source of revenue.

There was another reason why Iraq chose to escape the escrow account route. This arose from the fact that only about 72 cents out of every dollar earned from oil sales were available for the purchase of humanitarian supplies. Of the remaining portion, 25 per cent was earmarked for reparations to Kuwait; a smaller portion went towards paying for the U.N. weapons inspection teams that scoured the country for weapons of mass destruction (WMDs), which were never found. It seemed perfectly rational for Iraq to try and divert as much money as possible outside the escrow route so that the entire amount would be available to meet the national emergency that the sanctions had caused.

Volcker refers to the "Phase IX crisis" (December 2000-July 2001) as one that was sparked off by the hike in surcharge rates to 50 cents a barrel from 10-30 cents. However, it appears that Iraqi exports were hit far more severely by other factors, most notably the decision of the "661 Committee" (the U.S. and the U.K. in particular) to impose a "retroactive pricing" formula on Iraq in October 2001 (during Phase X which ended in November 2001).

This novel method of pricing oil forced potential buyers to commit to oil contracts without knowing the price, an outrageous way of buying anything in the real world. This meant that prices would be set after buyers lifted the oil. Scott Ritter, former U.N. weapons inspector in Iraq, termed this scheme "insane". It was obvious that buyers would run away from executing such a contract.

The scheme was effective in lowering the surcharge. But it also effectively killed the OFFP. Prices collapsed and exports never regained the levels of 1999. As can be seen from the accompanying Table, prices never regained the peaks they achieved during Phase VIII. After "retroactive pricing" came into full play in Phase XI, the volume of oil exported fell by 25 per cent when compared with the earlier Phase. Prices also fell substantially, by about 20 per cent.

In 2001 (covering Phases IX and X), the average price in the U.S., the biggest oil consuming market, was more than 25 per cent higher than the price that was paid for Iraqi oil.

In fact, the Senate investigation revealed that Bayoil, a U.S.-based company, which was also investigated by the Volcker panel, was the single most important source of funnelling Iraqi oil to the U.S. market. The Senate panel found that between July 1999 and April 2002 Bayoil consistently lifted at least 15 per cent of the entire oil production in Iraq.

THE "661 Committee" also monitored all humanitarian contracts awarded under the OFFP. John G. Ruggie, who served as Assistant Secretary-General to Kofi Annan, remarked in June 2004 that the Committee "approved" each and every one of the 36,000 contracts that were executed during the lifetime of the OFFP. Although U.S. participation was a permanent feature of the "661 Committee", Ruggie observed that it never held up a single contract on the grounds that the pricing was suspect.

In fact, OIP officials flagged at least 70 contracts in 2000-01 on the suspicion that they were overpriced, but the Sanctions Committee never stalled these contracts. Writing in Harper's Magazine in December 2004, Joy Gordon, Professor of Philosophy at Fairfield University, pointed out: "The OFFP had one of the most rigorous, elaborate systems of monitoring and verification imaginable... . Before Iraq could purchase a single item - including food and medicine - it had to submit detailed proposals for each six-month period." The U.S. had a representative on the "661 Committee", which gave it veto power over all contracts, during the entire duration of the Programme. OIP sources have claimed that no contract was ever challenged on the grounds that it was overpriced.

How large were the "kickbacks" and "illicit" surcharges in relation to the value of the oil that was allowed to be smuggled out of Iraq? In April 2004, the U.S. Government Accountability Office estimated that the Iraqi regime earned $5.7 billion by smuggling oil through Jordan and Turkey. Significantly, the U.S. Navy formed the overwhelming portion of the supposedly Multinational Interception Force, which was entrusted with the task of interdicting such traffic. Gordon observed that Saddam Hussein did not smuggle the oil "with the complicity of the U.N. He did it on the watch of the U.S."

The scale of Saddam Hussein's alleged illegalities pale into insignificance when compared with what happened to the OFFP funds that fell into the hands of the Coalition Provisional Authority (CPA). A few days before Volcker's interim report was released in February 2005, an inspection report into the accounts of the CPA showed that $8.8 billion had virtually disappeared. Significantly, $9.3 billion, representing 13 per cent of all funds that Iraq earned through the export of oil under sanctions, went into the Development Fund for Iraq, established by the occupying regime after the 2003 invasion.