Report by Chris Blackhurst and Paul Vallely
I am concerned about the course of our relations with Iraq. On the one hand we need to minimise our involvement in the Iraqi military procurement programme. But we also need to bear in mind the implication of export controls on our experts to Iraq and on ECGD's large exposure to that market.
The immediate issue is the prospect of further Customs and Excise investigations which could strengthen Iraqi accusations that we are interfering with civil trade.
Customs and Excise have received information [from the West German Customs] suggesting that Matrix Churchill (part Iraqi-owned) exported machine tools to Chile which were onsold to Iraq and used for munitions manufacture, and that they and other companies exported machine tools to Iraq direct for that purpose, despite furnishing statements that the equipment was required for general industrial purposes.
I understand that Customs are today making an ostensibly routine visit to that company and will report on what, if anything, they uncover. But any action following that visit is likely to worsen relations with Iraq.
Relations are of course already strained. Following our action to intercept shipments of parts of the big gun and the nuclear triggers, the Iraqi Ministry of Industry and Military Manufacture, which accounts for around 60 per cent of Iraqi industrial procurement, announced that trade with the UK was under review. The Machine Tool Trades Association and other UK exporters have made representations to DTI that the Iraqi review amounts to an embargo on new business with the UK which will have serious consequences for some.
I wrote to the Iraqi minister to assure him of our wish for normal commercial relations with Iraq and that while our policy on supply of defence equipment remains in force, we have no intention of interfering with normal civil trade.
Our Ambassador delivered my letter at a call on the Iraqi minister last week. The Iraqi minister's response was not reassuring. He insisted that the UK was interfering with civil trade and encouraging other countries to do likewise. The minister is the President's son-in-law and a member of the inner circle of the regime.
I can see no prospect of any improvement in the position while investigations into possible breaches of export controls continue. On the contrary, I see a considerable risk of further deterioration from which only our competitors can benefit since we have no evidence that they take as restrictive a view as we do on trade with Iraq.
A Customs and Excise investigation involving Matrix Churchill is likely to be reported to Baghdad and to confirm the regime's impression that we are applying an embargo going well beyond defence supplies. This could provoke further reprisals against our exports and also perhaps a general default on repayments of credit.
ECGD's exposure in Iraq is pounds 1bn ... ECGD have meanwhile suspended the approval of new contracts under existing lines of credit until the Iraqis reduce their ECGD guaranteed arrears, which currently stand at pounds 140 million. While Iraq has hitherto treated the UK as a preferred creditor, the present high level of arrears reflects the cessation of payments during the last two months or so which was evidently linked with the current political coolness.
The Iraqis have promised to remit pounds 30m over the next few days, which may be a sign that, barring future upsets, commercial relations are gradually improving. We must hope so. Consequences of a systematic Iraqi default would clearly be extremely serious for ECGD and would have implications for the PSBR.
More generally, certain applications for a renewal of licences for export of machine tools to Iraq are outstanding. I understand that the Foreign Office are not willing to agree to renewal of the licences on the grounds that the goods might be used for munitions manufacture, notwithstanding that the companies concerned have valid contracts and that comparable equipment is widely available internationally.
The intention to apply a unilateral embargo to such exports to Iraq (and to Libya, Syria and Iran), is arguably consistent with the guidelines agreed in 1985, but may be difficult to justify to industry given the imminent removal of controls, agreed with COCOM partners on exports of such goods to Eastern Europe and the USSR.
I see a strong case for a more thorough review of our policy in this area which would take into account the policy and political arguments in favour of export controls, the commercial consequences for British industry and the financial risks for ECGD of continuing friction in our relations with Iraq.
We need to reconsider the rationale of the guidelines for defence sales to Iraq (and Iran) in the light of evidence of moves on each side towards peace negotiations and in the light of impending liberalisation of export controls agreed with COCOM partners, and the trading practices of our competitors. I would welcome your agreement to an urgent meeting to consider these issues.
Timetable of events
December 1984 - The Government draws up guidelines restricting arms exports to Iraq.
August 1988 - Iran and Iraq declare a ceasefire.
December 1988 - The Government secretly relaxes export guidelines.
March 1990 - Farzad Bazoft, an Observer journalist, is executed in Iraq.
April 1990 - Customs seizes pipes destined for "supergun".
June 1990 - Matrix Churchill visited by Customs; Nicholas Ridley proposes the relaxing embargo.
July 1990 - Ministers discuss Mr Ridley's proposal.
August 1990 - Iraq invades Kuwait.
February 1991 - Matrix Churchill executives arrested.
November 1992 - Matrix Churchill trial collapses, Scott inquiry launched.Reuse content