At the palace, Uday greeted Luguev warmly, showing off his collection of expensive cars, rare cognac and Cuban cigars–and, oddly, going on about his insatiable craving for Kit Kat candy bars. Saddam’s son then explained to Luguev how he could help make the Russian rich. The Iraqi government would set up Luguev with contracts to buy tankerloads of Iraqi oil at below-market prices. Luguev could then turn around and sell them to major oil companies at a higher price, and pocket the profit. Best of all, the deals were entirely legal under the Oil for Food program, a U.N. relief effort that allows Iraq to sell oil to purchase food and medical supplies. The money Luguev paid to Iraq for the oil would be deposited in a U.N.-controlled bank account, and used to feed starving Iraqi kids. “We need to help the children,” Luguev recalls Uday’s saying with a smirk.
There was just one catch. Uday and his dad wanted a cut of the profits. In exchange for arranging the oil shipment, Iraqi officials later told him, Luguev would have to secretly wire $60,000 into a numbered account in Jordan. Luguev was informed that everyone who bought oil from Iraq paid a similar “deposit” on each oil contract. “It is our rule,” he says an Iraqi official told him. Luguev says he wired the money and waited to hear back.
The call never came. At first, Luguev says, Iraqi officials told him that his oil shipment was delayed. When he complained, they canceled the contract entirely–but kept his $60,000. Luguev was furious. “They think they are like God,” he says. “They can do what they like.” In retaliation, Luguev did something remarkable: he squealed on Iraq–and, in effect, on himself. Last month, in a formal complaint to the United Nations obtained by NEWSWEEK, the Russian detailed his under-the-table dealings with Baghdad. Luguev’s allegations provide, for the first time, hard evidence of how Saddam has cleverly used the world’s weakness for oil–and oil profits–to bypass the strict sanctions imposed on his regime after the gulf war to make himself stronger. (In response, Iraq has said Luguev is “incorrect”–but offered to return his money.)
United Nations officials, who are now investigating the charges, could hardly pretend to be shocked by Luguev’s revelation. For years it had been an open secret that Saddam was plundering the Oil for Food program–netting a huge cash windfall that the CIA believes the Iraqi dictator has used to finance his weapons programs. U.S. government figures estimate that Iraq has received at least $2.3 billion in oil-contract kickbacks since 1997. Yet these allegations are difficult to prove, and until now no one involved has been brave–or foolish–enough to rat out Saddam. U.N. officials in charge of policing the oil sales instead unwittingly approved corrupt deals. All the while Western countries, the United States included, seemed willing to tolerate, or at least ignore, the dubious trade–in part because the glut of Iraqi oil had a noticeable upside: keeping gasoline prices low.
They aren’t ignoring it anymore. As the U.N. Security Council prepares to vote on an Iraq resolution this week, the fate of the world’s second largest pool of oil remains a critical question in the bitter war debate. Arab nations–and even some U.S. allies–see the entire conflict through the lens of oil, believing the United States aims to overthrow Saddam not because he is a threat, but because it wants to claim control of the estimated 112 billion barrels lurking beneath Iraq. Russia and France have been especially hesitant to go along with the U.S. war plan, worrying it could spell the end of their lucrative relationships with Iraq. (Just two weeks ago a Russian oil company inked a contract with Iraq to export a staggering 20 million barrels of oil–a deal worth an estimated $5 million.)
But some administration supporters say the new evidence about Saddam’s oil scams demonstrates why war may be the only way to prevent Iraq from amassing the money, and means, to develop weapons of mass destruction. “The United Nations is, in these matters, 50 percent corrupt and 50 percent incompetent,” says Richard Perle, a top adviser to the Pentagon on Iraqi policy. “The end result is, they cannot enforce a serious set of sanctions, and they’ll do no better conducting weapons inspections.”
Saddam himself seemed to realize that the crooked scheme was hurting his efforts to paint himself as a victim of American aggression. As the push toward war intensified in September, Iraq abruptly stopped demanding money under the table.
Looking back, it’s hard to see why he was ever given the chance to start. At the time the U.N. program was launched in 1996, tight post-gulf-war economic sanctions had begun to take a serious toll on Iraqi civilians. Many were malnourished, and medication was in short supply. Oil for Food was seen as a way to ease the crisis without benefiting Saddam. Under the rules of the program, Iraq was allowed to sell a relatively small amount of oil–$2 billion worth–every six months, under the watchful eye of a special U.N. committee. Any food or supplies Iraq wanted to purchase with the profits had to be approved by the United Nations, and shipments were inspected before they were allowed into the country. At first, even U.S. and European oil companies lined up to legally purchase the crude oil, including Texaco, Shell and British Petroleum. But there were weaknesses in the program that Saddam exploited. For one, though the United Nations monitored the contracts, Saddam was allowed to pick which companies he would sell to. Naturally, the dictator favored those who agreed to split with him a 30 cent to 50 cent “premium” on every barrel of oil they bought. (With the exception of Luguev’s, it’s not known which companies went along with Saddam, since none has come forward to say that it paid kickbacks.) Payoffs weren’t always in cash. One customer vying for a contract showered Uday with a $440,000 Rolls-Royce and a giant yellow diamond. Saddam’s side schemes were made possible by another of the program’s quirks. The United Nations required him to sell his oil at below market price–evidently to prevent profiteering on the humanitarian program. Instead, it had exactly the opposite effect. Since the price was so low, Saddam’s suitors could afford to pay his ransom and still turn a profit when they sold the crude oil. If Saddam’s oil was priced the same as everyone else’s, potential buyers would have laughed at his demands.
In the years that followed, the United Nations gradually raised the ceiling on the amount of oil Saddam could sell, and ultimately eliminated it altogether. Since 1996, U.S. figures show, Saddam has sold more than $50 billion worth of oil through the program, and used the money to buy about $25 billion worth of supposedly humanitarian supplies. At the same time, dozens of new corporations sprang up to get in on Saddam’s oil rush. Companies were formed in banking havens like Switzerland and Liechtenstein, where secrecy laws make it difficult for authorities to find out who is behind the companies, or where the money is going. U.S. oil companies refused to pay Saddam’s kickbacks. Instead, they bought oil through middlemen, like Luguev, who were willing to ante up. In Liechtenstein alone, nearly a dozen front companies have handled an estimated $1 billion in Iraqi oil. But nervous local authorities recently suspended any further oil deals with Iraq.
Saddam beat the system in other ways. U.N. officials say the Iraqi dictator may have taken advantage of the program’s success to smuggle in banned industrial and military equipment. “The quantity of goods moving into Iraq under [Oil for Food] contracts is so enormous,” says one U.N. official, “we can’t… be sure that the shipments include what they say they include.”
U.N. officials weren’t ignorant of Saddam’s maneuvering. “We have long known that the Iraqis were asking for illegal kickbacks on their oil contracts,” says one flatly. But they say few countries were interested in doing anything to stop it. When Iraq expelled U.N. weapons inspectors in 1998, the United States tried to persuade the United Nations to price Iraqi oil at market value, robbing Saddam of his kickbacks. But other Security Council members refused to sign on. “A number of countries–particularly France and Russia–have significant business interests here,” says one U.N. official familiar with the oil program. “I look at them and see dollar signs in their eyes.” The French and Russians weren’t the only ones benefiting from the supply of cheap oil. Though few people realize it, there’s a good chance that’s Iraqi oil sloshing around in the gas tank of your SUV. Between 30 percent and 50 percent of the oil Iraq exports each day makes its way to America–some 8 percent of our total oil consumption.
Instead of pushing hard to contain Saddam’s ill-gotten profits, the Clinton administration largely let the matter drop. The Bush White House didn’t make an issue of Iraq’s plundering, either–until after 9-11, when the president began pressing for war against Baghdad. Earlier this year the United States finally persuaded the United Nations to go along with a new way of pricing oil that should make it more difficult for Iraq to shake down its customers in the future. But with billions already in the bank, Saddam can afford to live off his savings.
