State Department Ignored Warnings of Military Buildup

According to the US Export-Import Bank, Iraq used foreign credit to purchase arms from US firms

CONGRESS, scrutinizing the US Export-Import Bank's past policy toward Iraq this week, has exposed the State Department's refusal to listen to repeated warnings from Exim about Baghdad's military buildup. Key Exim officials testified before the House Committee on Banking, Finance, and Urban Affairs Wednesday on the bank's strident posture toward Iraq despite constant US government and private sector pressures for a softer stand.

The Bush administration issued a National Security Council directive in 1989 calling for improved relations with Iraq; it endorsed business activity in Iraq to help satisfy Baghdad's demand for US financing and exports. Baghdad had constantly reminded Washington in recent years that improved commercial links were essential to warmer political relations.

Committee chairman Henry Gonzalez (D) of Texas said it was "shocking" that US policy awarded billions of dollars in US export credits to Iraq, while Exim warned of Iraq's military buildup through foreign credits.

Exim chairman John Macomber said his agency offered "strong, straightforward analysis" permitting "short-term credit that doesn't amount to very much. We refused medium and long term."

The bank "has a deliberate policy of staying open in high-risk countries," said Daniel Bond, Exim's vice president for Country Risk Analysis. As the highest risk, Iraq was charged the highest fee "with a surcharge on top of that," he added.

Exim disappointed US business because it refused to exceed a $200 million short-term credit limit.

The USDA's Commodity Credit Corporation, which supported US farm exports to Iraq, did $1 billion a year in business with Baghdad in the past four years. The CCC failed to notice that Iraq was abusing its program for military purchases, many from US-based firms. CCC's rate for Iraq was significantly lower than Exim's, despite its much higher risk. Iraq was often in arrears to CCC, with no prospect of repayment.

House Banking Committee members were incredulous of Washington's "policy of engagement" with Iraq as they pored over Exim's country risk analysis. Seven Exim reports from 1986 to1989 detail Iraq's inability and unwillingness to repay debts. They point to Baghdad's manipulation of foreign credits to meet priority spending for a variety of "advanced military technologies," including chemical and biological warfare plants and a budding nuclear program.

Mary Rose Oakar (D) of Ohio and Joseph Kennedy (D) of Massachusetts asked several times, "Did the red flag go up?," when State, Commerce, and Agriculture Department officials regularly attended Exim Board meetings and heard Exim's dismal assessments of Iraq.

Despite Exim's broad analyses - a composite of State Department cables from Iraq, CIA classified and unclassified documents, exchanges with other US departments, and sophisticated analyses from other international export agencies - Exim was ignored.

US Embassy cables from Baghdad in 1989 - when Iraq was cash-strapped and desperately seeking assistance for defense projects - eagerly informed Washington of Iraq's enormous import needs and desire for US technology. US industry and agricultural producers, supported by the State Department, pressured Exim with repeated letters and visits.

While the Exim officials deftly avoided criticizing other departments at the hearing, committee members constantly queried them about the State Department's pressure on the bank to give Iraq a better rating. The committee folders included a sampling of Exim's file of letters from the US business community.

One 1988 letter from Bechtel Financing Services Inc. states plans to build an ethylene oxide plant. Ethylene oxide is a precursor to mustard gas which the Iraqis hoped to produce. Exim turned down the loan application and Bechtel later secured financing with BNL, the state-owned Italian bank that manipulated CCC credits to help finance billions of dollars in defense exports to Iraq.

In an effort to slow Capitol Hill's investigation of US policy, the administration is once again invoking national security concerns, says a congressional aide.

"Ever since we announced our intention to hold hearings, Justice, backed by State, tried to hold up data we requested from Eximbank," she says. A senior US Treasury official says Exim checked with Justice Department officials before sending over the requested documents.

A senior US Agriculture economist says the department curtailed discussion on Iraq. "They've told us we can't talk about Iraq's CCC program with anyone outside the USDA and we're even monitored on what we say inside the department itself. If we violate this, we'll find ourselves on some list, somewhere."

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