What is the ‘Oil for Reconstruction’ Framework of Cooperation?

On May 11, 2018, the Iraqi Finance Ministry and the China Export and Credit Insurance Corporation (Sinosure) signed the “Export Credit Insurance Cooperation Framework.” The main points of this framework are:

1. An Iraqi-Chinese Reconstruction Fund is to be established, supervised by the Iraqi government and an International consulting company that will be selected by the [Iraqi] Central Bank to monitor the implementation of the agreement. The fund is placed in a Chinese bank account. The base capital of ($10 billion) is partially generated by placing of the revenues of 100,000 barrels per day of Iraqi oil purchased by two Chinese oil companies (Zhenhua Oil and China National Offshore Oil Corporation (CNOOC)) in the account. Iraq sells about 850,000 b/d to China. Iraq sells 3,800,000 b/d to international buyers. So, the 100,000 b/d for the reconstruction fund makes up only a small portion of total Iraqi oil sales.

2. Duration of the agreement: 20 years.

3. The Chinese party guaranteeing the agreement is the China Export and Credit Insurance Corporation (SinoSure).

4. Chinese banks will issue credit to the Iraqi Reconstruction Fund with a credit ceiling of $10 billion, with the interest rates subsidized by the Chinese side. The credits for these investments then come jointly from Chinese banks and from the Fund itself, in a ratio of roughly 6:1. This means, when the accumulated revenues of the oil sales reach 1.5 billion, the Chinese banks would add 8.5 billion. So, each construction project will be financed 15% by Iraqi oil, and 85% by Chinese loans.

5. Following that, the sums will be transferred to another new account called an “investment account.” Another account, a “repay account,” is created for debt servicing over the 20-year period.

6. If the two parties wish to expand the fund after the first package of projects are completed, they can increase the share of Iraq’s oil sales in the fund and thus increase the capital of the Fund.

7. When the capital of the Fund (from Iraqi oil and Chinese banks) reaches the $10 billion level, the Iraqi government will provide a list of priority infrastructure projects to the Chinese side. The Chinese side will then provide three different Chinese companies for each project to start a bidding process. The international consultant (hired by the Iraqi government) examines these three companies and choses one to build the proposed project.

10. The Fund will cover the financing of the following types of projects:

Building schools and hospitals, airports, ports, railways, paving highways, power plants and electric distribution lines, residential clusters and new cities, dealing with pollution and rehabilitating the Tigris and Euphrates rivers, water supply and sewage systems. Other projects in the industrial and agricultural sectors can be presented by the Iraqi government in accordance with its priorities.

Hamiltonian Credit

According to Paul Gallagher, Economics Editor of EIR, the agreement between Iraq and China shows an understanding and application—perhaps at the Chinese initiative—of Alexander Hamilton’s principles of national banking and credit, as set out in his 1790 Report on the Public Credit, commissioned by the first U.S. Congress.

In addition, the overarching development idea at work is the “oil for technology” concept developed by Lyndon LaRouche in his “Oasis Plan” of July 12, 1990 for Mideast development. The credit, in the form of loans against Iraq’s oil revenues from sales to China, comes from Chinese banks, forming most of the operating capital of a Reconstruction Fund. (In the case of Hamilton’s Bank of the United States, that bank’s major equity “partners” were Dutch bankers.) The credit issued to the Fund by China’s banks is a multiple of the oil revenue, whereby roughly $2 billion per year in oil revenues is the basis for $20 billion (or later, $3 billion per year the basis for $30 billion), in what appear to be 20-year project loans. (It is a 20-year MoU.) The oil revenues essentially guarantee the interest for a number of years.

As Hamilton wrote regarding the First (National) Bank of the United States, such a “national debt” of the Reconstruction Fund is a “national blessing” for Iraq, because the “means of its extinguishment” are provided—short-term interest and minor principal repayment, by the repayment account; long-term principal repayment, by the increased productivity and wealth of Iraq’s economy and people, resulting from this reconstruction.

The investment account, like the operating capital of a Hamiltonian national bank, is itself also investing in the critical projects. And, its dedicated oil revenues are capable of backing more than China’s $20 billion or $30 billion development loan—the Reconstruction Fund could, if desired, issue additional debt to Iraqis and Iraqi institutions as Hamiltonian national banks do.