Japan in Iraq: Goodbye troops, hello aid

Posted in Japan | 25-Jul-06 | Author: Hisane Masaki| Source: Asia Times

Port Umm-Qasr

TOKYO - A huge amount of Japanese aid money is in the pipeline for Iraq, especially for the war-torn country's oil and gas sectors, the country's main, almost only, sources of income.

Out of political consideration to its closest ally, the United States, Japan is eager to show its firm resolve to play a leading role in Iraqi reconstruction despite its recent troop withdrawal. But this is not the only reason for Tokyo's generosity toward Iraq. Energy-poor Japan also expects rewards in the form of a fair slice of Iraq's vast future oil exports.

Japan has completed the withdrawal of its troops from Iraq, ending the country's most dangerous overseas mission since the end of World War II. The final batch of about 280 soldiers stepped on Japanese soil again on Tuesday after arriving at Tokyo's Haneda airport from Kuwait

The troop pullout will allow the world's second-largest economy to do what it does best, cooperate in economic reconstruction.

Japan has earmarked US$3.5 billion in soft loans for Iraq, the bulk of which will be disbursed over the next one and a half years. It remains to be seen, of course, how smoothly Japanese-financed projects will proceed, as violence is still raging in Baghdad and other areas of Iraq.

Prime Minister Junichiro Koizumi has been one of the most consistent supporters of US President George W Bush's "war on terror" and the Iraq war. Although Japan's post-World War II pacifist constitution imposes strict restrictions on military activities abroad, the Koizumi government has enacted two controversial laws to enable the country to assist US-led military operations in Afghanistan and Iraq.

Japan's decision to pull out some 600 non-combat ground troops, deployed in the southern Iraqi city of Samawah since early 2004 on a humanitarian and reconstruction mission, was made a day after Iraqi Prime Minister Nuri al-Maliki announced the handover of security responsibility in the southern province of Muthanna, of which Samawah is the capital, from British forces to Iraqi ones. The transfer of security authority was the major factor behind Tokyo's decision to pull out.

During his recent talks with Bush in the United States, Koizumi expressed Japan's firm determination to play a leading role in Iraqi reconstruction. Earlier, Foreign Minister Taro Aso also said, "Japan needs to continue its commitment to assist efforts of the Iraqi government and its people toward nation-building while cooperating with the international community."

Japan has pledged $5 billion in total aid - $1.5 billion in grants-in-aid, with the rest being soft loans - for postwar Iraq, the largest amount committed by any single nation, bar the US. The $1.5 billion portion has already been disbursed, and the $3.5 billion soft loan is to be fully allocated by the end of 2007. Japan, the world's second-largest donor of official development assistance (ODA) after the US, is also considering becoming actively involved in an international project to create a new framework for Iraq's reconstruction.

However, Japan's eagerness to pour money into Iraq, the oil-and-gas sector in particular, has not been matched by other donors, much to Washington's annoyance. According to the US State Department, as of the end of March, of the $13.5 billion total pledged by nations other than the United States at an aid conference for Iraq in 2003, only $3.5 billion had been actually disbursed.

Japan, for its part, had initially hoped to begin loan disbursements in 2005, but could not do so because of the delay in settling the issue of Iraqi debts. Late last year, Tokyo agreed to write off 80% of debts owed to it by Iraq, paving the way for the resumption of Japanese loans. The writeoff covered 690 billion yen ($5.89 billion), about 80% of the $7.3 billion Iraq owed Japan. The deal followed an agreement a year earlier by the Paris Club - in which Japan is the largest creditor - to write off Iraq's foreign debts.

In late March, Japan lifted a freeze on soft loans imposed since 1985 and decided to provide about 76.5 billion yen (about $670 million) to Iraq at favorable rates. Significantly, 30.2 billion yen of this will be used for the rehabilitation of the port of Umm-Qasr, the most crucial oil outlet in Iraq, offering the country the chance to export more of its resources. In a further bid to demonstrate its firm resolve to assist reconstruction, Japan announced at the same time that it was pulling its troops out that it would extend an additional soft loan worth about 3.3 billion yen ($30 million), as part of the $5 billion aid package pledged in 2003.

All these loans offered as ODA are extended under much more favorable terms than loans by private commercial banks. The interest rate on the money Japan has lent to Iraq is 0.75%, and the repayment period is 40 years, including a 10-year grace period. Of course, Tokyo is not extending these loans out of generosity. It hopes its generous economic cooperation will be rewarded with access to Iraq's extensive oil reserves.

The Japanese government has yet to decide specifically how to use the remaining $2.8 billion of its $3.5 billion soft loan. However, the main focus will be on the energy sector. Japan intends to use ODA to restore facilities related to oil and liquefied petroleum gas (LPG) that have been damaged by guerrilla attacks or have fallen into disrepair, including the rehabilitation of oil refineries in the southern city of Basra. A Japanese government official said, "The development of oil and natural gas in energy-rich Iraq is directly linked to its foreign-currency earnings, which in turn will drive reconstruction."

In late March, the Japan Petroleum Exploration Co (JAPEX) extended by one year technical assistance to the Iraqi government for oil exploration. Under the assistance contract signed with the Iraqi Oil Ministry in March 2005, JAPEX has been conducting a feasibility study of data on Iraqi oilfields, including one near Baghdad, one in the Western Desert, one in the northeast and one in the south, through computer data processing in Japan.

Under the renewed contract, JAPEX and the Iraqi ministry are cooperating in developing technology to produce light oil from crude oil. The Japanese government is JAPEX's largest shareholder, with an almost 50% stake. JAPEX president Yuji Tanahashi is a former top bureaucrat at the Ministry of Economy, Trade and Industry (METI). Baghdad has said the technical assistance may help JAPEX to win drilling business when Iraq starts to auction exploration rights.

Promisingly for the Japanese government, Iraq's oil production rose to 2.5 million barrels per day in June. Iraqi Oil Minister Hussein al-Shahristani said production was expected to rise to 2.7mbpd by the end of the year. Before the war, output was around 3mbpd, and peaked at a record of 3.5mbpd. Shahristani also confidently asserted that Iraq's target now was to challenge Saudi Arabia's position as the world's leading oil producer. To that end, the oil minister said he expected output to rise to about 4mbpd by 2010 and to 6mbpd by 2012.

Though this is some way off Saudi Arabia's production levels, Iraq has the potential to ramp up output considerably. Resource-poor Japan imports almost all of its oil, nearly 90% of which comes from the Middle East. But at present, Iraqi oil accounts for only a minuscule proportion of Japan's overall oil imports. By extending loans and increasing involvement in the reconstruction process, Tokyo is hoping it can acquire a large share of the prize, Iraq's massive oil reserves.

However, it should be remembered that Baghdad has found it difficult to persuade overseas oil companies to invest in its hydrocarbon industry. If this reluctance continues, Tokyo could be waiting for some time before it sees any reward for all the money it has poured into the Middle East state. Moreover, there is little reason to think that Japanese firms will be more eager to invest than other foreign oil companies. The main problem is daily violence in many parts of Iraq, which has given the impression that much of the country is a state of anarchy and on the verge of civil war.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. His e-mail address is yiu45535@nifty.com.