Reuters Inside Special Report on Iraq

FEATURE-They're buying what? US investors latch onto Iraqi dinar

By Gertrude Chavez-Dreyfuss

NEW YORK | Thu Nov 15, 2012 4:35pm EST

Nov 15 (Reuters) - The U.S. stock market almost wiped out his retirement account, but retired pilot Ronald Scarpa hasn't lost his taste for risk. Lately he has turned to one of the chanciest investments in the world - the Iraqi dinar.

"It's not a question of if, but when Iraq revalues its currency," said the Las Vegas-based Scarpa, who keeps dinars in his retirement account. "The dinar will eventually have substantial value, possibly the highest in the world."

He's not alone in risking his money on an investment that can charitably be described as a long-term turnaround project that will pay off only for the extremely patient. Thousands like Scarpa in America are buying the dinar, hoping someday the war-torn nation can revalue a currency worth just a fraction of a penny.

The fundamentals for buying the dinar are precarious. The United States invaded the country in 2003 and has only recently removed most of its troops. The country's political situation remains unstable, and destabilization in the Middle East - most recently with rockets fired between Israel and the Gaza Strip - could undermine the fledgling republic further.

U.S. retail investors' interest in Iraq's currency is part of a broad push for investment opportunities that will give some yield. Most of them cite near-zero interest on their U.S. savings and certificates of deposits as a reason for buying dinars and other exotic currencies.

The dinar, worth just a tenth of one U.S. cent, is experiencing additional downward pressure as a result of international economic sanctions imposed on neighboring Iran and Syria.

Also, buying the dinar is a task in and of itself. The currency is only traded in Iraq, so it can only be purchased by U.S. customers through a handful of dealers around the U.S. who get their dinars from Iraqi banks. If a customer wants to sell his dinars, the dealer will only buy it back at a 30 percent discount - so no quick trades here.

But Scarpa said he is prepared to wait. The country has the second-largest oil reserves in the Middle East and exports 3.4 million barrels of oil per day, making it one of the world's largest oil producers.

"If the dinar rises to just even a penny, you would have realized a profit of 900 percent," Scarpa said.


In the last four years, the dinar has barely moved. Since 2008, it has appreciated by just 5 percent against the dollar, and at a tenth of a penny, the Iraqi dinar is the weakest currency among oil-producing Arab nations.

The Kuwaiti dinar is worth about $3.50, while Saudi Arabia's riyal is equivalent to roughly 26 U.S. cents.

The old dinar was worth $3.20 before the United Nations embargo that followed Iraq's invasion of Kuwait in 1990. By August 2002, the dinar had plummeted to a fraction of a penny.

Speculators are betting that given Iraq's potential as an oil-driven economy, the dinar could rise to a value of $1 to $3.

"I looked at the risks and I decided that this is not going to bankrupt me," said 35-year-old Ryan Williams, a former sheriff in Bakersfield, California.

"You invest a couple of hundreds or a couple of thousands of dollars and even if it just appreciated by 10 to 15 percent a year, that's still a lot better than investing in certificates of deposits here."

The Iraqi central bank sells dollars daily at a fixed price of 1,166 dinars through two state-run financial institutions and some private lenders Those institutions set the market rate through sales to customers. The current market rate is 1,215 dinars to one U.S. dollar.

Hassnain Ali Agha, founder of Las Vegas-based currency dealer Dinar Trade, is the biggest U.S. market-maker in Iraq's currency. He also sells other exotic currencies such as Afghanistan's afghani and the Libyan pound.

The United States is a huge market for Agha's firm, which has nearly 900,000 customers, 90 percent of which have purchased dinars. His customers are U.S. mom-and-pop investors - teachers, police officers, and construction workers. He also sold dinars to many U.S. soldiers coming back from Iraq.

Agha, who formerly traded at the Chicago Mercantile Exchange and New York Futures Exchange, himself holds more than $2 million in dinars, he said.

In 2011, Agha said, his firm sold about $577 million in dinars to U.S. customers, most of whom hold dinars for investment purposes.

"People in the U.S. really feel that Iraq is the next frontier market to make money on," said Agha. "There will come a time when the Iraqi government will have to adjust the dinar exchange rate given the country's oil exports. That will start fueling the fire."

Agha sells dinars in 1 million lots for $1,120. For the U.S. investor, however, it has to be a long-term holding. Dinar Trade will buy Iraqi notes at $850 per million, so the dinar would have to appreciate by about 30 percent before an investor could sell and break even.


In Iraq, prices are quoted both in dinars and dollars, but many prefer the greenback, locals interviewed by Reuters said.

Saja Majeed, a 30-year-old civil servant in Baghdad and a mother of two, said she carries dollars in her wallet because it is safer and she sees little opportunity for the dinar to rise.

"There is no industry in Iraq except oil. The dinar is linked to oil, but oil will run out one day," Majeed said.

Revaluation will only happen once the Iraqi government stabilizes. Iraq's central bank hopes to make one dinar equal to $1 at some point through redenomination and central bank-induced appreciation.

Iraq's deputy central bank governor Mudher Kasim told Reuters that process could take three years.

America investors are remaining patient.

"The big question is: where do you put your money in the U.S.? You can't get any interest in your money. Banks give you almost nothing on deposits," said Donna Simko, a real estate agent in her mid-sixties in Riverside, California.

"The gold rush into Iraq is just getting started."

MIDEAST MONEY-Iraq dinar is short-term disappointment, long-term bet

Wed Oct 3, 2012 10:00am EDT

* Iraqis still prefer hard currencies for many transactions

* But some foreign speculators see long-term opportunity

* External, budget surpluses could eventually boost dinar

* For now, central bank wants to keep currency stable

* Any major appreciation unlikely before two or three years

By Aseel Kami

BAGHDAD, Oct 3 (Reuters) - Many Iraqis have lost faith in their dinar currency but to some foreign speculators, it promises big profits. The contrast underlines the uncertainties of investing in Iraq as the country recovers from years of war and economic sanctions.

The logic of the dinar bulls is simple. Iraq's oil exports rose to 2.6 million barrels per day in September, their highest level in three decades; the country aims to hit 6 million bpd by 2017, which would put it close to Saudi Arabia's current level.

Even if unstable politics, militant violence and bureaucratic inefficiency prevent that target from being hit, Iraq still seems to be on the threshold of an oil boom that will transform its finances.

Inflows of new oil revenue could give the country big external surpluses and push state finances deep into the black by late this decade - the classic recipe for a strong currency.

"As far as our investors are concerned, when they buy Iraqi dinars they do know it is a long-term investment. You know it takes time for a country to rebuild itself," said Hassnain Ali Agha, president of Dinar Trade, a U.S. dealer of exotic currencies.

Because the dinar is not freely traded by banks outside Iraq, online dealers of banknotes such as Dinar Trade are the only way that most foreigners can invest in the currency. The Las Vegas-based company says it sells as much as hundreds of thousands of dollars worth of dinars daily, shipping dinar notes to thousands of customers in the United States and elsewhere.

Agha said that because of optimism about Iraq's oil wealth, there had been solid demand for dinars since his company was founded in 2004, a year after the U.S. invasion which triggered years of political violence and economic turmoil.

Back in Baghdad, however, Iraqis themselves are not convinced. Many take what opportunities they have to change their dinars into hard currency, and conduct all but small day-to-day transactions in U.S. dollars.

"We have no trust in the Iraqi dinar - we feel afraid to save it. We trust the dollar more. The dollar does not go up and down, it is fixed," said housewife and mother-of-two Eman Saadeldine.


The dinar has endured wild swings over the past three decades. In the 1980s, one dinar bought around $3, but economic sanctions imposed on Iraq around the time of the 1991 Gulf War sent the currency into decline and stoked inflation, which the government fuelled by printing money. By late 1995, $1 bought as much as 3,000 dinars.

After the 2003 invasion, the central bank intervened in the currency market to strengthen the dinar, using its supplies of dollars to manage the exchange rate.

But over the last several years, even as Iraq's oil production has expanded, there has been none of the appreciation for which speculators have been hoping. The central bank now sells dollars in daily auctions at a fixed price of 1,166 dinars, a level barely changed since 2009.

In fact, the dinar has recently faced downward pressure as a result of the international economic sanctions imposed on neighbouring Iran and Syria. Iraqi traders rushed to buy dollars to sell on illicitly to residents and businesses in those countries, which are hungry for hard currency.

The dinar fell as low as 1,280 in the open market this year before Iraqi authorities reacted by allowing two state-run banks and some private lenders to sell dollars, helping push the exchange rate back to around 1,200 currently.

Another factor counting against the dinar is the fact that the largest banknote is only 25,000 dinars. This often makes the currency unattractive to use in an economy where the banking system is primitive and deals are often done in cash.

Saadeldine recalls paying in cash for a new house in 2009.

"If our money had been in dinars, it would have been impossible for us to carry it. It was in dollars and we carried it in a small suitcase," she said.

The central bank has been considering plans to knock three zeros off the nominal value of banknotes to simplify financial transactions. This would not in itself increase the real value of the dinar, since prices would adjust in line with the redenomination, but economic experts say it could improve confidence in the dinar and thus boost its value eventually.

"It would increase trust in the dinar even though its value would not change," said Baghdad-based economist Majid al-Souri. "Indirectly, when trust increases there will be appreciation."

Earlier this year, however, the cabinet decided to suspend the technically complex redenomination plan until further notice, saying the economic climate was not suitable.

The biggest obstacle to dinar appreciation is the fact that for now at least, Iraqi authorities appear content with the exchange rate in its current range.

In a memorandum to the International Monetary Fund on economic and financial policies for 2011, written in March that year, the Iraqi government said it saw benefits in keeping the dinar stable.

"We believe that the policy of maintaining a stable exchange rate continues to be appropriate, as it provides a solid anchor for the public's expectations in an otherwise uncertain environment and in an economy with a still very low level of financial intermediation," it said.


In the long term, however, Iraq's finances and economy may improve so dramatically that authorities feel comfortable allowing the dinar to appreciate under the pressure of flows of oil money into the country.

The IMF expects this year's estimated budget surplus of just 0.2 percent of gross domestic product to balloon to 12.1 percent in 2017. The country's balance of trade in goods and services, in deficit as recently as 2010, is projected over the next five years to shift to a large surplus of 11.3 percent of GDP.

Deputy central bank governor Mudher Kasim told Reuters that he expected redenomination of the dinar to go ahead in 2014 or later, by which time the amount of Iraqi currency in circulation would have increased significantly, making financial dealings in cash even harder.

In the long term, the central bank aims to make 1 dinar equal to $1 with a combination of redenomination and appreciation, although that will take over three years because of instability in the Middle East, Kasim said: "If not for the regional circumstances, we would proceed faster with that plan."

Some analysts think the appreciation could go further. Kamal al-Basri, research director at the Iraqi Institute for Economic Reforms, an independent research body in Baghdad, said he expected the dinar to stay stable for the next three years, but that afterwards it might strengthen beyond parity against the dollar, including the effect of redenomination.

For that to happen, Iraqi politics will have to stabilise, skill and education levels rise and the economy diversify so that it is not so heavily dependent on oil exports, he said.

Speaking at the Baghdad currency exchange shop that he owns, Ahmed Abdul-Ridha said the dinar's stability in the past three years was good, but it did not indicate the long-term trend.

"We wish the dinar's value would go back to what it was like before, when it used to equal $3 in the 1970s and even in the 1980s," he said.

"I expect that day will come. Why not? What we are going through is an abnormal condition...We are an oil country."

Between Iraq and a rich place


    * Foreign oil firms lay basis for economic transition

    * Shaky political scene no deterrent for bravest

    * Calls for diversified economy

    * Hurdles: corruption, sectarianism, skills shortage


    By Nick Carey and Aseel Kami

    BAGHDAD, (Reuters) - Apart from the 9mm automatic pistol at his right hip, Christopher "Kiffer" Andress is just your average CEO. "Regardless of the situation today, our security measures haven't changed since 2007 at the height of the violence here," said the head of AISG Inc on a tour of the firm's yard in Baghdad where Iraqi workers were turning abandoned cargo containers into temporary housing units and storage rooms.

    He looked down at the gun for a moment then grinned. "So far, I've never had a reason to use it."

    Andress is accompanied by two bodyguards who both also carry pistols and always keep the CEO a set distance between them, eyes constantly on the move.

    Some things haven't changed for AISG, a U.S. contractor based in Iraq for the past six years. But much like Iraq, the company faces a major transition.

    AISG has 500 employees, 80 percent of them Iraqis.

    The company provides construction, security and "life support" services -- food, water, waste management -- to a single employer: the U.S. military. But seven years after the U.S.-led invasion to topple Saddam Hussein, the U.S. military is
on the verge of halving its numbers to 50,000 troops and preparing to leave Iraq -- where sectarian violence has abated but daily attacks and bombings are still a fact of life -- by the end of 2011.

    For AISG, which has its headquarters in Baghdad, and other firms like it employing 100,000 contractors here, that means looking for a new source of revenue.

    "For those contractors that have survived this far, the choice is clear," Andress said. "Either find a commercial line of business, or leave."

    Like Iraq, AISG is betting on the oil industry.

    The country has the world's third-largest known reserves and the current government has signed 11 ambitious oilfield development deals with major oil firms including Royal Dutch Shell, Italy's Eni, Exxon Mobil, Occidental Petroleum Corp and
South Korea's KOGAS. In theory, those deals should take Iraq to second place among oil producing nations from 11th now and boost its capacity within seven years to just under Saudi Arabian levels of 12 million barrels per day from 2.5 million today.

    Whether Iraq could or should make that target, however, is an open question -- sucha volume of oil could push prices down. What is not in doubt is a huge production boost is in the pipeline.

    "Most people, myself included, think the Iraq targets are very optimistic and some would argue that they are over-optimistic," said Samuel Ciszuk, an energy analyst at IHS Global Insight. "But unless things go very wrong in Iraq, it's going to be huge.

    "There's just no other way to say it: it's huge."


    The oil majors and their service companies are here or on their way, preparing vast projects to revamp Iraq's crumbling oilfield infrastructure and export facilities, plus build new

    For AISG, this means new business. It is already working with oil industry firms to get them registered in Iraq and aims to provide the same services as it has for the U.S. military because Iraq is still a dangerous place.

    "These companies want to know 'How do we execute these contracts without having to look over our shoulder?'" he said. "That's where we come in."

    The oil deals have also grabbed the attention of other investors because they could be the trigger needed for broader investment throughout the economy.

    "The oil deals really raised the profile of Iraq in the international business community," said Zaab Sethna, head of the Baghdad office of investment firm Northern Gulf Partners LLC. "When people see major household names sign huge deals to invest
in Iraq, it really puts the country on the investment map."

    That interest, Sethna says, reflects the fact that after decades of war and sanctions, Iraq "needs practically everything". That could mean hundreds of billions of dollars in
infrastructure projects.

    "The country is impoverished, but it has the potential to be rich."

    According to a November 2009 report from Dunia Frontier Consultants, after the energy sector more than 50 percent of nearly $160 billion in announced foreign investment projects last year involved commercial and residential real estate, plus
"manufacturing, processing, service-sector and other productive infrastructure". Most of that investment remains in the pipeline -- hoped for rather than real -- but the time for investors to take the plunge may be close.

    Northern Gulf Partners looks for viable Iraqi investments of between $10 million and $30 million and helps Iraqi firms raise private equity for amounts above that. Where there is no local company providing a particular service, the firm sets up its
own. Sethna said a heavy equipment leasing firm is in the works to provide machinery for the construction projects that lie ahead.

    In the short term, some investors are watching to see how Iraq's inconclusive March elections are resolved and whether the Iraqis can form a new government without a return to the wholesale sectarian violence that followed elections in December


    Beyond the elections, the promise of oil money is also seen placing Iraq at a crucial crossroads -- where it must choose between remaining a centrally planned economy that uses oil wealth alone to provide jobs and homes for Iraqis, or use it to
fund public private partnerships and help kick-start free-market reforms.

    Analysts say Iraq must diversify because its population is too large to be supported by oil money alone, making it dangerously reliant on high oil prices.

    Another problem is that the oil industry employs relatively few people. Although oil contributed around 56 percent of Iraq's gross domestic product in 2008, it employed only one percent of workers.

    "Even though oil will generate a lot of revenue, it's not going to generate a lot of employment," said a U.S. official who was not authorized to speak to the media.

    But becoming a free-market economy involves painful choices.

    To succeed, the next Iraqi government must reform a labyrinthine bureaucracy, simplify red tape that makes it hard for investors to do business here, plus battle endemic corruption. The Iraqis have found it relatively easy to dictate tough terms to the oil majors because the country's vast, high-quality and easily accessible reserves make it a rare and attractive prospect, but attracting investment beyond oil will
take a lot of work.

    The next government also faces a politically sensitive problem posed by some 200 state-owned enterprises that produce little but employ 800,000 people.

    Officials like Sami al-Araji, chairman of Iraq's National Investment Commission, insist while it will not be easy, the government is committed to reform.

    "Everyone (in the government) wants to use oil to create a diversified economy," he said, adding, "not just a one-way- ticket economy."

    But this needs to be done quickly because U.S. officials and others fear once oil money, which accounts for 95 percent of state revenues here, really starts to flow the Iraqi government will find it easier to rely on that wealth than enact reform.

    "The choice is whether to become a petrostate or to open up the economy," said Patricia Haslach, the U.S. embassy's assistant chief of mission for assistance transition. "There is a small window of opportunity available to make this happen. Now
is the time to focus on these issues."

    For a slideshow of images related to the story, click here:


    After decades of war and sanctions, Iraq is a mess.

    The country's infrastructure is damaged or crumbling. Seven years after the U.S.-led invasion, basic services like electricity and water are intermittent and inadequate. Iraq
badly needs new roads, bridges, hospitals, schools, railways and much else besides.

    "This is a country that needs an awful lot of work done to it," said Gavin Jones, a partner at Upper Quartile, which advises firms on investing in Iraq. "Iraq has a very long way to go."

    The people here have also suffered.

    In an April 30 quarterly report to the U.S. Congress, the Special Inspector General for Iraq Reconstruction (SIGIR) estimated some 7 million Iraqis live on less than $2 a day.

    The national unemployment rate is around 18 percent, but Mudher Kasim, a senior adviser at the Iraqi central bank, said including those employed at idle state-owned companies the real
rate is 30 percent or more.

    The good news is the situation here has improved since the height two years ago of sectarian bloodshed between once dominant Sunnis and majority Shi'ites propelled into power by the invasion. According to the SIGIR April 30 report, security incidents in Iraq including all reported attacks on civilians and Iraqi or U.S. forces hit an average of 884 per month in the first quarter, compared with almost 5,800 incidents per month in

    "Back then, you wondered if you'd get through the day," said Loay Almaleika, CEO of internet service and phone company Itisaluna. "But we have passed rock bottom. The only way now is up."

    Backed by Middle Eastern investors, Itisaluna has spent $150 million to build its network and is close to breakeven point three years into the 15-year contract it purchased from the Iraqi government to provide data and voice services. The work
has been tough, but Almaleika said much of the company's success has been down to its tenacious, informally trained engineers.

    "Our engineers know how to work without electricity," he said. "They know how to work under fire. They are capable of being Shi'ites when they need to be, or Sunnis or even Christians."
    "It's amazing what they can achieve."


    Despite continuing attacks by insurgents, the improved security situation has left Iraqis longing for better services and economic growth.

    "If there were a good standard of living here, I wouldn't have to work outside my full-time job," said Hassan Abbas, 37, a school teacher who sells fruit on the street in Baghdad to supplement his income. "My salary is not enough and I have a
family of four to support."

    Abu Salah al-Rubaie, 60, bemoaned the fact that many Iraqis have been left destitute. "We want the government to improve the quality of life here by improving services," he said. "We want them to find work for our jobless sons."

    Security specialists like Rohan Gunaratna, professor at the International Center for Political Violence and Research in Singapore, note a marked mood shift among war-weary Iraqis as the security situation has stabilized and the Americans get ready to leave by the end-2011 deadline.

    "The Iraqi people are angry with the insurgents and they want peace and prosperity," Gunaratna said. "They also now realize the Americans didn't come here to stay or to take their oil, so they have a vested interest in making Iraq work."

    Polls ahead of the March election showed Iraqis want improved basic services and jobs. This was reflected in a shift in tone for the elections, with political parties promising to deliver just that.

    "The next government will be an economic government, not a political one," the central bank's Kasim said. "The Iraqi people are fed up with politics."


    But there's no getting away from either politics or oil.

    Iraq's massive reserves will play a key role for the next government and for luring foreign investors to Iraq. According to the November report by Dunia Frontier Consultants, investors announced $156.7 billion worth of projects in Iraq in 2009 through to November -- with the caveat that not all of those will necessarily come to fruition.

    Energy sector projects alone accounted for $73 billion of that total.

    Those deals have fuelled interest in Iraq, but the post-election mess has led some investors to pause.

    The cross-sectarian Iraqiya coalition, heavily supported by Sunni voters and led by former prime minister Iyad Allawi, took 91 seats in Iraq's 325-seat parliament in the March 7 election, just two ahead of the Shi'ite-led State of Law alliance of Prime
Minister Nuri al-Maliki. Neither had enough seats to form a government on their own.

    That has resulted in weeks of uncertainty, interspersed by bomb attacks such as the ones that killed 56 people near Shi'ite mosques in Baghdad on April 23 and attacks across the country on May 10 that killed more than 100. These have raised the spectre
of renewed sectarian tensions.

    "There has been a little bit of a lull in interest because of the elections and uncertainty over who will form the next government," said David Tafuri, a lawyer at Patton Boggs LLP, who spent 15 months from mid-2006 in Iraq as the U.S. State
Department's rule of law coordinator. "Once the government is formed we should see interest go up again."

    Some government officials, like the National Investment Commission's Araji, have been vocal about the need to court foreign investors.

    But one of the main problems and an obstacle to greater investment here is corruption. According to anti-corruption watchdog Transparency International's 2009 Corruption Perceptions Index, Iraq ranked 176th out of 180 countries, ahead of only Sudan, Myanmar, Afghanistan and Somalia.

    Nonetheless, analysts say the government has made some progress, including holding auctions for oilfield service deals on live television.

    "I was struck by how open the process was," said Rachel Ziemba, senior research analyst for China and the oil exporting economies at Roubini Global Economics in New York. "But in the current global economic climate there is a lot of competition
for investment, so Iraq has to present itself as more of a sure thing than a gamble."

    Another issue investors complain of is the sheer volume of red tape they must wade through at multiple ministries to start a business. Each official interprets the rules differently.

    "We call this phenomenon the shifting sands of Baghdad," AISG's Andress said.

    The World Bank's Doing Business 2010 report ranks Iraq 153rd overall out of 183 countries, but 175th when it comes to starting a business. According to the report, it takes 77 days to start a business in Iraq compared with an average of 13 days
among the member countries of the Organization for Economic Cooperation and Development.

    Araji says the government is trying to create a "one-stop shop" whereby all procedures for setting up in Iraq will be under one office. But he said the country's massive centrally planned bureaucracy -- with its myriad different offices -- was slowing that process down.

    "It is not easy to penetrate that centrally guided way of thinking," he said. "Some bureaucrats live in their own world and don't want to give up their power.

    "It's not that anyone is against free-market reforms, everyone is in favour of them in theory," Araji added. "But making it a reality and making everyone understand what the free market is will take some time."

    Kamal Field al-Basri, an economist who compiled the Iraqi section of the World Bank's Doing Business 2010 report, said a lack of qualified personnel at government ministries is also a major problem. According to a study he compiled, in 2008 Iraq
government ministries only used 68 percent of the funds allocated to them.

    "The problem is that while they have the money, they are not able to execute," he said.

    Basri also warned of what he called "muhasaseh" once the next government is formed -- whereby new ministers will replace skilled technocrats with their own loyalists.

    "That will contribute to the low performance of the next government," he said. 


    Most Gulf Arab producers are on a long drive to diversification and have used the oil income windfall they received during oil's 2002-8 rally to build infrastructure and
heavy industry as they look to wean themselves off dependence on oil revenues. Oil price falls in the past have forced them to cut state spending, which provides generous benefits for citizens.

    Many of Iraq's near neighbours such as Saudi Arabia and the United Arab Emirates have a mixture of free-market and state-planned economies, with the private sector confined to services and smaller industries and the state running oil, gas and heavy industry.

    In Iraq's case, for decades oil was used to prop up the rest of the economy. As it currently provides nearly all state revenue and the state employs some 60 percent of the workforce, some fear the government will stick to that easy path.

    Countries that have become too dependent on oil have suffered for it. Russia, for instance, has become too reliant on oil and other commodities, while Nigeria's failure to use its oil wealth wisely has resulted in intense poverty in its oil-producing delta.

    Roubini's Ziemba said Iraq's large population of some 29 million is simply too big to be able to rely on oil in the long run.

    "Government subsidies are not really sustainable in the long run because to make that model work you need ever-increasing oil prices and ever increasing production," she said. "The oil buys the Iraqi government a little time as it has allowed them to
avoid having to cut back on fiscal spending, but it won't support them forever."    While U.S. officials say that using oil revenues to create a
free-market, diversified economy is what Iraq needs, it is also a matter for a sovereign Iraq to make that call.

    "It's not like in the days of the Coalition Provisional Authority (in 2003-4) where we could tell the Iraqis to fix this, or fix that," said the U.S. embassy's Haslach. "Now we
have to persuade them that something is in their own best interest. "It's really up to the Iraqi government."

    "It's their oil and their resource."

    Araji and other reformers talk of using oil to prime the pump through public private partnerships that would entice foreign investors into Iraq to help rebuild the country.

    He says he has a wish list of 750 infrastructure projects worth $600 billion -- most but not all of which are included in a five-year economic plan approved by the government -- which would include power generation, roads, bridges, hospitals, water
treatment and housing.

    "How many projects we will get will depend on how clever and how open we are," he said.

    The National Investment Commission's plan for the roughly 200 dilapidated state-owned enterprises will be based on "production sharing". Under this model these firms will not be sold but investors will be asked to restructure and operate them, then share the profits with the government.

    France's Lafarge, the world's largest cement maker, recently launched a $200 million renovation of an Iraqi cement plant under just such an arrangement, potentially a watershed for non-oil investment in post-invasion Iraq.

    "I think the majority of our state-owned enterprises can be salvaged in this way," Araji said.

    Ingo Sahlmann, CEO of construction company GSI Business Services and vice president of the International Business Council of Iraq, said that based on the experiences of eastern Europe following the fall of communism, many of those companies are beyond saving.

    "But because they employ 800,000 people it's too politically sensitive just to shut some of them down," he said. "So the government will try to find a way to save as many jobs as possible and hope the construction boom will provide work for
the others."

    Timothy Moore is the CEO of FastIraq, which is working to connect Iraq's fibre-optic network to the rest of the world and thus improve its communications and internet access. The network is owned by the government and FastIraq has already secured connections through Turkey and Kuwait, plus will connect via Jordan by the fall and via a submarine cable by the end of the year.

    Moore says that negotiating a deal with the Iraqi government was a "painfully slow process" and involved the state retaining ownership of the fibre-optic network.

    "It took a long time, but it's the Iraqi government's resource and the model works," he said. "The government is working out these things as it goes and is taking its time to try to get it right. It's worth sticking around to see that happen."

    "Iraq is the world's leading emerging market right now," Moore added. "If you can't get excited about that then you don't understand what you're looking at."

 (Additional reporting by Simon Webb, Khalid al-Ansary and
Michael Christie; editing by Janet McBride)