Every month or so, representatives from the Khudairi Group can be found at a southern port in Iraq processing containers imported from its Copenhagen-based partner, Co-Ro. In so many ways their tasks are identical to the billions of trade transactions that occur around the world: the containers are cleared from the port, and the products subsequently shipped to the firm’s wholesale distributors, then along to the retail outlets that sell to the consumer. Paperwork is completed, funds are deposited in the appropriate bank accounts and orders for the next month are placed.

All told, the Khudairi Group might clear an amount somewhere south of $1m a year from these shipments. It is a relatively low number that belies the national popularity of the imported product – a concentrated orange juice drink called SunQuick, which can withstand the country’s arid climate and doesn’t require refrigeration.


Voice of experience

But this is Iraq, where standard business transactions – especially those that occur outside the US-fortified reconstruction efforts – can go easily awry at each and sometimes, every, stage of the process. From that vantage point, around $1m in sales looks quite respectable.

“I don’t have to tell you all the reasons why Iraq is not an easy place to do business,” says Khudairi Group president Aziz Khudairi, whose family has run the company for generations. “There is the lack of power, water, decent transportation infrastructure in some places, and of course the security situation,” he says from his Houston, Texas-based office in the US, recently back from one of his frequent trips to the country. Then there is Iraq’s per capital purchasing power. “It is very weak now,” he says.

Companies interested in trading with or even investing in Iraq hardly need Mr Khudairi’s description of the situation to know Iraq is the most tenuous of emerging markets in which to do business. But with the election past, and as 2005 continues to unfold, some observers are citing anecdotal evidence that expectations are growing more hopeful for the beleaguered country.

“All the elements are in place for Iraq to become a very wealthy country,” Mr Khudairi says. “The past few years have been very difficult, but I do believe that great opportunities exist for both foreign and domestic companies.”

Post-election hope

Of course, such sentiments have been voiced before. Two years ago when the US-led forces declared victory and it appeared the worst of the violence was in the past, company after company positioned itself to establish a foothold in Iraq. The lure was the considerable oil and other natural resources waiting to be developed and the subsequent wealth expected to trickle down to consumers. The population, too, was considered ideal to foreign investors; despite the turmoil of the past 20 years Iraqis are ranked among the most highly educated in the region.

When the extent of the insurgency became clear, these companies – even the oil corporates eager for the chance to develop Iraq’s untapped resources – quietly withdrew from the scene.

“Companies were very eager to enter Iraq at first,” says Amanda DeBusk, a partner at Washington DC-based law firm Miller & Chevalier and former assistant secretary for export enforcement at the US Commerce Department. With the exception of one firm that went ahead with an investment in the oil sector, she says all of her clients with initial plans to enter the country decided to wait until the country stabilised.

Now, hopes are rising again. This time, however, they appear to be based on more realistic assessments of the situation.

One banker at a regional financial institution notes that the project finance market in the Middle East is more buoyant than it has been at any other time in the recent past – despite the uncertainties currently surrounding neighbouring Iran and the ongoing violence in Iraq. The last time activity was this strong, the banker says, was in 1997, when $12bn in project financing was closed. Not a proponent of many of the US policies in the region, he attributes the influx of investment to the US-led invasion of Iraq and Saddam Hussein’s removal. “The war neutralised a significant political risk to commerce in the Middle East,” he concludes.

Breeding confidence

The January elections – an important, albeit interim political milestone – have inspired confidence.

“Since the election we have had more companies asking us about the opportunities in Iraq,” reports Charles Hollis, a former British diplomat and investment banker with Credit Suisse First Boston, who recently joined Kroll, the global risk consulting company, as head of the Middle East Practice. None, though, he adds, have made a hard commitment to Iraq.

Mr Khudairi says he understands the hesitancy. “The elections were a step in the right direction, but so much is still uncertain.” The results of the next election, he says, will be key in determining the ultimate direction of the country and will hopefully prompt companies to enter the market.

Legal uncertainty


Indeed, it is not just the security concerns keeping firms at bay. Legal uncertainties – heightened, ironically enough, after the election – are sowing new seeds of doubts in some companies already operating in Iraq as the rights of foreign investors have yet to be established by the still unformed legislature.

The shipping line Maersk, for example, announced in March it had decided to stop servicing the southern ports partly for this reason, according to Tom Everett-Heath, a director in Kroll’s Middle East Practice. “They will not bid on the next round of contract extensions mainly because of the security issue,” he says. “But they also felt there were legal issues related to their contract that were worrisome to them.”

Mr Everett-Heath predicts more companies will decamp from Iraq in coming months under the new regime: “We will see an ebb and flow by private and international contractors in Iraq over legal concerns.”

The primary sector of concern to companies, not surprisingly, is oil, which is quietly being opened to waiting foreign investors in order to develop additional fields. The ownership structure for these would-be investors is patently opaque though. The best guess observers are willing to make is that reserves will remain under government ownership, with foreign oil companies acting as partners in their exploitation under a one-off production-sharing agreement.

But the legal problems that are manifesting now in the oil sector also apply to just about every other sector of interest to foreign investors, although the stakes are clearly not nearly as high.

“The CPA [Coalition Provisional Authority] put together a rudimentary legal structure that was part pre-invasion law, partly transitional administration law that the CPA brought in and partly developed on the spot,” Mr Hollis says. Even so, it provided greater certainty to investors than what is in place currently. “Once a permanent government is established next year, the legal uncertainty will hopefully clear,” he says.

Financial support


But here is the rub: for all the political and legal uncertainty – not to mention, unfortunately, violence – trade and investment is steadily developing. New patterns are growing even, most tellingly, outside of the reconstruction efforts.

Some of this is due to financial institutions establishing – and even expanding – operations in the country. “Developments in the financial sector will shape the formation of the Iraqi economy,” Kroll’s Mr Everett-Heath says. Over the last year or so a handful of banking licences have been granted to private banks from the UK, Kuwait, Iran and Jordan, although few have begun operations.

More encouraging is the ongoing expansion of the Trade Bank of Iraq. Established in November of 2003 by an initial consortium of 13 banks from 14 countries, the bank’s goal was to underwrite letters of credit, mainly in support of the reconstruction. In 2004, it issued 1500 letters of credit worth about $3.8bn, and expects a 25% increase in volume this year.

New plans now call for the bank to move beyond its original mandate and offer such services as corporate and commercial banking. It is also in discussions with private banks and export credit agencies to establish medium-term finance products.

In a separate initiative, Citigroup and the Overseas Private Investment Corporation (OPIC), a US government agency, have recently established a $131m lending facility aimed at small and medium-sized businesses in Iraq. The facility will provide loans to Iraqi financial institutions, which in turn will lend the funds to the Iraqi businesses. Under the terms of the agreement, Citigroup will provide a $92.8m facility backed by an investment guaranty from OPIC as well as arrange a $15m syndicated bank facility. The CPA will provide a $23.2m grant.

Developing trade

However, even prior to these relatively recent developments, imports managed to find their way into Iraq – television sets from South Korea, refrigerators from Iran, cars from Japan and toasters from Germany, according to a US government report. The range of items for sale reflects recent events both positive and negative: portable kerosene stoves are plentiful in response to the demands of consumers without a reliable source of cooking fuel, as are satellite dishes, once banned under the Hussein regime.

According to the US Congressional Research Service (CRS), regional trading relationships have become more important to Iraq with Saddam Hussein out of power. Jordan and Morocco, in particular, the CRS says, have gained in importance. New trade partners, such as Vietnam, have also become more important to the country.

In 2003, Iraq’s top 10 export trading partners were the US, Canada, Jordan, Italy, Morocco, Brazil, Spain, the Netherlands, Japan and Australia, according to IMF statistics (see chart). In terms of Iraq’s imports, Jordan was its largest trading partner in 2003, followed by Vietnam, the US, Germany, Russia, the UK, France, Italy, Australia and Japan.

The CRS’s report, completed in the autumn of 2004, also cited Economist Intelligence Unit statistics, which forecast GDP growth of 40.3% in 2004 and 25% in 2005, after a 21.8% contraction in 2003 due to the war.

Much of the economic growth can be traced back to US and allied funds allocated to the reconstruction of Iraq’s infrastructure. But a portion can also be attributed to Iraq’s nascent business community. “The private sector in Iraq is making significant progress,” the report says. “Since April 2003, over 5000 new Iraqi companies have been established. Businesses are registering [the equivalent of incorporation] at a rate of almost 30 per day.” Furthermore, the report says, informal estimates indicate that as much as $2m per day may be flowing into Iraq to purchase real estate and fund businesses.

Times change

With the Khudairi Group dating back to the days of his grandfather, Mr Khudairi can hardly count his company among the newly registered businesses. Yet in many ways the company is an accurate reflection of Iraq’s recent history.

During Mr Khudairi’s grandfather’s and father’s time – essentially the era prior to Saddam Hussein’s accession to power – the firm owned and managed Volvo and General Motors dealerships. With the difficulties of the Hussein regime now past, Mr Khudairi and his sons are eager to expand the company’s activities. The firm has moved quickly, for example, to act as a local partner to the reconstruction efforts, Mr Khudairi says, mainly by importing John Deere construction equipment from its showroom and sales office in the Sa’adoun business district of Baghdad. “That is probably our most lucrative work right now,” he says.

In the longer term, the Khudairi Group would like to build up its consumer goods trade. It plans to launch a TV advertising campaign this summer – the hottest time of year – to promote SunQuick. “We are also open to distributing other products, such as carbonated drinks. If a company such as Pepsi Cola, for example, came to us, we are well positioned to work with them,” he says. “We have the trucks and distribution and marketing operations already in place.”

Beyond those immediate goals, Mr Khudairi foresees the eventuality of Iraq serving as an export platform to the rest of the region, particularly Turkey and Iran. Not that he is positioning himself for that. “We must first service Iraq through trade,” he says. “Everything that you can think of, Iraq wants to buy right now.”