Middle East Economic Survey
VOL. XLVII
No 42
18
Carlyle Group Proposes To Collect Iraqi Debt For Kuwait, Says The Nation
An article published in the latest edition of The Nation examines the conflict of interest confronting former US Secretary of State James Baker III in his government role as Special Presidential Envoy on Iraqi debt and in his private interest as a senior counselor and equity partner in the Carlyle Group. Together with the Albright Group (headed by former US Secretary of State Madelaine Albright) and other international firms, the Carlyle Group has formed a consortium, The Nation alleges, for the purpose of persuading Kuwait to allow the consortium to collect billions of dollars of unpaid Iraqi debt on its behalf. In the process of doing so, the consortium would reap substantial financial benefits for itself.
Citing a copy of a 65-page confidential proposal and relevant correspondence, The Nation says that the Carlyle Group is seeking to “secure an extraordinary $1bn investment from the Kuwaiti Government, with Baker’s influence as debt envoy being used as a crucial lever.” The Nation says that the “secret deal” calls for the transfer of ownership of some $57bn in unpaid Iraqi debts owed to the government of Kuwait to a foundation created and controlled by the consortium. Under the deal Kuwait would give the consortium $2bn up front to invest in a private equity fund devised by the consortium, with half of it going to Carlyle. (For full article see website: http://www.thenation.com/doc.mhtml?i=20041101&s=klein).
Meanwhile, the Carlyle Group denied on 14 October that it was ever a part of any consortium or proposal, but in light of Mr Baker’s connection with President George W Bush and his family, Carlyle’s statement is being viewed as damage control as the US Presidential election enters its final weeks. Other members of the consortium include: Fidelity Investments, BNP Paribas, Gaffney, Cline & Associates, Nexgen Financial Solutions, and Emerging Markets Partnership. The Kuwaiti Government has not issued any formal reply to the story so far. According to The Nation, the “Proposal to Assist the Government of Kuwait in Protecting and Realizing Claims Against Iraq,” was delivered to Kuwait’s Foreign Minister, Shaikh Muhammad al-Sabah, last January by Shahameen Shaikh, chairman and CEO of International Strategy Group, the company created by the consortium to manage the deal, on the same day that James Baker happened to be in Kuwait meeting with Kuwaiti leaders. According to Mr Shaikh, the timing was a coincidence.
In correspondence between the consortium and the Kuwait Foreign Ministry obtained by The Nation, the consortium warns Kuwait that the debts due to it from Iraq “are in imminent jeopardy,” and that world opinion is beginning to favor debt forgiveness, which it says is shown by President Bush’s appointment of Mr Baker as his envoy to negotiate Iraqi debt relief. The consortium has told Kuwait that it stands to lose the $30bn in sovereign debt that Iraq owes it as well as $27bn in war reparations stemming from the 1990 Iraqi invasion. The consortium informs the Kuwaitis that through its roster of high-level US and European politicians, who have “personal rapport with the stakeholders in the anticipated negotiations,” it is able to “reach key decision-makers in the UN and in key capitals.” The consortium has told Kuwait that if it agrees to transfer the debts to the consortium’s foundation, the consortium will use these personal connections to persuade world leaders that Iraq must “maximize” its debt payments to Kuwait, which would be able to collect the money after 10 to 15 years. The more the consortium gets Iraq to pay during that period, the more Kuwait collects, with the consortium taking a 5% commission or more, The Nation says.
“The goal of maximizing Iraq’s debt payments directly contradicts the US foreign policy aim of drastically reducing Iraq’s debt burden,” The Nation points out and then goes on to ask the opinion of law professor Kathleen Clark of Washington University, who states that Mr Baker’s circumstances presents a classic conflict of interest. “Baker is on two sides of this transaction: He is supposed to be representing the interests of the US,” Ms Clark said, “but he is also a senior counselor at Carlyle, and Carlyle wants to get paid to help Kuwait recover its debts from Iraq.” After examining the documents obtained by The Nation, Ms Clark said, “Carlyle and the other companies are exploiting Baker’s current position to try to land a deal with Kuwait that would undermine the interests of the US Government.” Meanwhile, Jerome Levinson, an international lawyer and expert on corruption at American University described the proposed deal as “one of the greatest cons of all time. The consortium is saying to the Kuwait Government: ‘Through us, you have the only chance to realize a substantial part of the debt. Why? Because of who we are and who we know.’ It is influence peddling of the crassest kind.” However, The Nation says that in speaking with the Carlyle Group, the firm claims that neither it nor Mr Baker wrote, edited or authorized the proposal to the Kuwait Government, yet it acknowledged that Carlyle had proposed a deal to the Kuwaitis that would give it a $1bn investment.
Special Envoy Role
In his role as special envoy Mr Baker has distinguished between sovereign debt and war reparations saying that while sovereign debt may be forgiven, reparations may not because that is under the jurisdiction of the UN. As it now stands, Iraq owes up to $200bn in sovereign debt and war reparations, a figure that severely curtails the country’s ability to rebuild itself or meet pressing humanitarian needs. The Nation says that over the last 18 months Iraq has made reparations payments of $1.8bn, more than Iraq’s education and health care combined and more than the US has spent on reconstruction. “Most of the [reparations] payments have gone to Kuwait, a country that is about to post its sixth consecutive budget surplus, where citizens have an average purchasing power of $19,000 a year,” The Nation says, adding: “Iraqis, by contrast, are living on an average of just over $2 a day, with most of the population dependent on food rations for basic nutrition.” Reparation claims amounting to nearly $50bn have been awarded by the UN and many claims still remain to be assessed. These have an estimated value ranging from $50bn to $130bn. The UN Compensation Commission puts the figure for unresolved claims at $82.6bn, only a portion of which is likely to be awarded.
But the fate of reparations is also in question as many are beginning to consider the damage done during the wars resting solely with Saddam Husain and not the Iraqi people. The Carlyle/Albright consortium sees this change in attitude as a political and public relations problem and has informed the Kuwaitis that if it is going to receive its reparations awards it will need to cast them in a light that shows them not to be a burden on Iraq but “as a key element in working toward regional stability and reconciliation.” In order to ensure that Kuwait does not lose its sovereign debt and reparations payments, the consortium proposes a “three-pronged strategy of aggressive backroom lobbying, clever public relations and creative investing and financing,” The Nation says, and quotes the proposal as saying: “Any solution for payment of the Unpaid Awards…must be politically sellable as reinforcing stability and growth in the Gulf and in Iraq. This proposal provides the strategy, the architecture and the talent to achieve this goal.”
The proposal suggests a full-time lobbying offensive directed at Security Council members, using Albright’s connections, but also other “eminent” people associated with the consortium like former US Senator Gary Hart and former US Ambassador to the UN Jeane Kirkpatrick. “We will first seek to preserve the 5% of the revenues from Iraqi oil allocated as funding for payment of the UNCC awards,” the proposal says, adding that it will do this by making “discreet contacts at top levels in key capitals of Security Council members states and with influential representatives,” and “interventions with UN senior staff to shape presentations to the Security Council.”
Public Relations Front
On the public relations front, the proposal will attempt to dispel the notion that reparations are “diverting resources from rebuilding Iraq to a more wealthy neighbor.” It suggests that Kuwait must first assign its unpaid debts from Iraq to a private foundation controlled by the consortium that will manage an investment fund that will invest a portion of reparations payments from Iraq to Kuwait back into Iraq, such as buying Iraqi state-owned companies. By doing this, the consortium concludes, the foundation “establishes a humanitarian rationale for the US and other countries to continue their support” for reparations. It also suggests that $1bn of reparations money be paid into a ‘Kuwait Environmental Restoration Fund’ that would remind the world of “the gravity of the environmental legacy facing Kuwait,” and to “position Kuwait as the region’s environmental leader.” The fund would be headed by Carol Browner, former head of the US Environmental Protection Agency (EPA) and a principal in the Albright Group.
On investment and financing, the proposal says that in order for Kuwait to maximize the value of its compensation it would need to place another $2bn in a Middle East Private Equity Fund. Of that $2bn, “$1bn would be invested, by way of special agreement, in the Carlyle Group equity funds,” for a period of at least 12 to 15 years, after which time the return on these investments, plus whatever the consortium could secure in reparations payments would be delivered to the Kuwaitis. According to The Nation, it is an excellent deal for the consortium. “Its members get to manage a $2bn investment portfolio, collecting healthy management fees as well as a percentage of interest. They also will be paid a ‘retainer’ and 5% of any debts the consortium gets repaid, and ‘a negotiated percentage of the value of the returned to Kuwait exceeding’ the pre-arranged amount.”
The article goes on to point out that ultimately, because Iraq’s financial resources will be diverted to Kuwait, the US taxpayer will be paying the bill for Iraq’s reconstruction. Commenting on the scenario proposed by the Carlyle/Albright consortium, The Nation quoted Mr Levinson as saying: “Here you have two former Secretaries of State seemingly proposing to use their contacts and inside information to undercut the official US Government policy,” while Ms Clark said the proposal “lays bare how former high-level government employees use their access in order to reap financial benefits that appear to be enormous.”