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Iraq Suffers Less from Global Financial Crisis

Iraq may be in a priviledged position due to its lack of linkage to the global financial system

Iraq has had a rough time since 2003. Tens of thousands of Iraqis have died in five years of rampant bloodshed. Much of the country's public works and infrastructure has been reduced to rubble. Educated Iraqis have fled the country en masse and reconciliation remains elusive. However, Iraq may currently be in a privileged position.

Iraq has not been woven into the fabric of a global financial system that is in the grips of its worst crisis since the Great Depression of the 1930s due to years of sanctions and isolation under Saddam Hussein's rule. Iraq is not that tied into the international economy like other countries.

As of July, only about half of Iraq's banks were set up to make international wire transfers. Major transactions are often conducted in cash, with businessmen toting bricks of dollars.

While slowing global growth could depress private investment flows into some industries outside the vital oil sector, Iraq is sheltered from the worst of world financial market turmoil.

"In that sense, they're insulated from these shocks," agreed Erik de Vrijer, International Monetary Fund Iraq mission chief, who says Iraq's problem has been finding ways to spend the money it does have.

However, a sharp drop in oil prices in recent weeks could spell trouble in the long run for Iraq, where oil exports account for over 90 percent of government revenues.

Struggling to find its feet as violence drops dramatically, Iraq is desperate to improve basic services such as electricity and water, to attract investment and create jobs.

Many people fear bloodshed could erupt anew if services, jobs and prosperity don't materialise.

Iraq is lucky enough to sit atop the world's third largest oil reserves, and the U.S.-backed government of Prime Minister Nuri al-Maliki is taking steps to boost production.

Last week, Oil Minister Hussain Shahristani held court in London with the world's major oil companies, like Exxon Mobil and Royal Dutch Shell, who are jockeying for contracts to operate eight huge big oil and gas fields.

A surge in world oil prices - peaking at over $147 a barrel in July - has helped improve Iraq's fiscal position.

In August, the United States predicted oil revenues could spike as high as $79 billion this year, more than twice the average annual amount Iraq generated from 2005 through 2007.

Yet oil prices have lately taken a nosedive, falling more than 50 percent from July as global growth sputters. On Wednesday, U.S. crude was trading below $70 a barrel.

Lower prices may not deter oil investors, who tend to look far past the day's market vicissitudes, but they do threaten to undermine Iraqi government spending if prices stay low for good.

Iraq has already revised the oil price on which it based its $79 billion proposed budget for 2009 to $80 a barrel, and may do so again. The government said on Wednesday it was reviewing the 2009 budget because of falling oil prices.

Onlookers say plunging oil prices do not immediately endanger crucial reconstruction projects - improving power and water supplies, for instance.