In 1990, two years after a decade-long campaign against the Ayatollahs of Iran, Saddam Hussein’s sent his military south across the border into Kuwait with little resistance. His forces were driven from the Gulf emirate seven months later by a US-led coalition, but he remained a perennial fear for his neighbours for the rest of his leadership.

It is common for Iraqi officials to plead with Kuwait to forgo some … reparations, citing a need for revenue [to rebuild]

Ahmed Ali, Washington Institute for Near East Policy

Saddam Hussein’s Baathist regime was dismembered in 2003. The dictator himself was executed – hung on 30 December 2006 – the day of Eid al-Adha at Camp Justice, northeast of Iraq capital Baghdad. Yet even from his gallows, he has continued to cast a long shadow over Iraqi relations with Kuwait.

War reparations to Kuwait

A democratically elected government has held power in Baghdad for five years, but the two states have only just reinstated full diplomatic relations. In May, Iraq sent its first ambassador, Mohammad Bahar al-Uloom, to Kuwait since the outbreak of the first Gulf War. It is a welcome development, but does little to address the differences between the nations.

There are two sets of unresolved issues, says Ahmed Ali, a research associate at The Washington Institute for Near East Policy.

“They can be characterised as tangible and intangible. They are closely related and are sources of continuous friction between the two countries. Additionally, they have ability to feed off of each other,” says Ali.

The result is an almost perpetually tense atmosphere between the two countries.

The most tangible problem is the UN-mandated reparations Iraq must pay to Kuwait as a result of its 1990 invasion. The war reparations scheme began in 1994 and totals more than $52bn. Since then, 5 per cent of Iraq’s annual oil revenue has been allocated to compensation. On 1 August, the UN Compensation Commission released $650m in compensation to Kuwait – $24bn remains outstanding.

Few would dispute the fact that the Kuwaitis suffered tremendously as a result of the invasion. “Nonetheless, it is commonplace for Iraqi officials to plead with Kuwait to forgo some of the reparations, citing Iraq’s need for the revenue for rebuilding purposes,” says Ali.

With oil accounting for 60 per cent of Iraq’s gross domestic product, Kuwait currently receives 3 per cent of its neighbour’s total economic output. Iraq’s oil minister, Hussain al-Shahristani, renewed the call to ease reparations in May, saying his country could not sustain the obligation. Once the envy of the Arab world, the country’s economy and infrastructure have been crippled by three wars in 30 years and more than a decade of economic sanctions. It is now the second-poorest nation in the Arab world after Yemen.

As well as the reparations, debt accumulated during Saddam Hussein’s time in power continue to hold Iraq back. Even though large sums have been written off by creditor nations, the level of debt still stands at about $55bn. Some observers say it is difficult for Kuwait to maintain the appearances of Arab solidarity and support for the new Iraqi regime without forgiving some of its debt – even though a number of non-Arab countries have done so.

Baghdad appears to have the backing of the US. Iraq’s current prime minister, Nouri al-Maliki has raised the issue with UN Secretary General Ban Ki-Moon, but the pleas are being met by outright rejection by Kuwait. For now, Iraq has little to offer Kuwait in return for forgiving its debts.

The 1990 invasion is still traumatic for Kuwait and has created a psychological barrier against dealing with Iraq. The Kuwaiti government funded a $974,000 project in 2010, with the UN Assistance Mission for Iraq, to help build up Iraq’s Ministry of Human Rights capabilities in mass-grave excavation and the identification of missing persons. The emirate continues to search for the remains of Kuwaitis who were rounded up and bussed into Iraq in 1990.

Iraq asset seizure

Earlier this year, relations between the two countries took a turn for the worse. In May, Iraq began dissolving its national airline after Kuwait Airways obtained an order from the High Court in London that included freezing the worldwide assets of Iraqi Airways. The decision forms part of the long-running dispute over war reparations. Included in the billions of dollars Iraq owes Kuwait is $1.2bn related to aircraft and aircraft parts seized during the invasion.

“The airline tussle is the latest episode in a long-running show of tension between the two countries,” says Ali.

This reached embarrassing proportions for the Iraqi carrier. Kifah Hassan Jabbar, Iraqi Airways chief executive officer, had his passport confiscated as he landed at Gatwick airport in London on 25 April on the carrier’s first commercial flight from Baghdad to London in 20 years.

A lawyer for Kuwait Airways also tried to seize his plane. Jabbar was able to return to Iraq on 6 May after he complied with the court order and provided a statement on the airline’s assets. No flights between Baghdad and London have taken place since.

The future of $5.5bn-worth of aircraft on order is now unclear in light of the carrier’s dissolution. Iraqi Airways is due to take delivery of 65 aircraft, including Canada’s Bombardier CRJ and Boeing 737 and 787 aircraft from the US by 2017. Baghdad now looks likely to establish two or three private companies that will replace Iraqi Airways’ operations.

The aircraft may be safe, but Ali says the impact of the episode on the Iraqi public was a profound sense of humiliation.

Kuwaiti investment in Iraq

It is difficult to tell if relations between the two sets of people, who share a common cultural heritage, are healthier than at government level. These relationships nearly always develop faster. Kuwaitis certainly do not seem inclined to hinder Iraq’s development. In fact, they are major investors in the country.

“We can see that with the considerable presence of Kuwaiti investment and the number of Kuwaiti visitors to the cities of Karbala and Najaf. The same can be said of people-to-people relations between Iraq and its other neighbours,” says Ali.

But many in Kuwait regard the emirate as having stagnated since the Iraqi invasion. Kuwait’s oil has continued to flow, yet the spectre of Saddam Hussein continues to haunt the country, forcing it to focus on security over reform and development.

There are signs the Kuwaiti government wants to move ahead. Ad Melkert, the UN’s Special Representative for Iraq, travelled to Kuwait in June to meet Kuwaiti officials. After a report on the state of Iraqi security and its political deadlock to the UN Security Council on 5 August, Melkert stated that the Kuwaitis “highlighted the need to make progress quickly in resolving outstanding matters between Iraq and Kuwait, especially in fulfilling Iraq’s international obligations under outstanding Security Council mandates”.

While Iraq struggles to unlock the economic potential of its oil industry, the money it is paying in reparations to Kuwait is badly needed to fund its reconstruction efforts. Following two oil licensing rounds in 2009, Baghdad is targeting 12 million barrels a day of production capacity by 2017. It will take some years before this ambitious goal can even partially be met.

But the development of Iraq’s vast oil and gas resources could open up an area of cooperation between Baghdad and Kuwait. The two countries are in discussions over opening a new border crossing that will facilitate the movement of oil workers, materials and equipment. Talks focus on reopening a road running through Iraq’s Rumaila oilfield, an extension of Kuwait’s Ratqa field that lies along the border.

Kuwait’s border with Iraq is close to most of the fields awarded to international oil companies (IOCs) for development in the two licensing rounds in 2009. The companies are under tight deadlines to deliver their promised increases in oil production capacity, but complain of bureaucratic holdups and inadequate road and port infrastructure.

Iraq has only a sliver of shoreline, pinched between Iran and Kuwait. The overstretched Umm Qasr port handles more than 80 per cent of the country’s imports, while the Basra oil terminal and Khor Alamya handle approximately 77 per cent of its oil exports. Both sit on estuaries rather than on the coast and access for larger vessels to Basra is impossible.

Kuwaiti-Iraqi border delineation

IOCs at work in the south of Iraq aim to add 150,000 b/d to the current production capacity of 2 million b/d by the end of this year. The oil terminals will struggle to cope as production increases.

“If they are clever, they will use Kuwait as a hub for the Iraq development. Work could start immediately,” one Kuwait city based IOC source tells MEED.

But moves to resolve border issues are painfully slow, even when politicians demand quick action. There is no need to rush a solution on this issue, which is potentially more sensitive and difficult to resolve than either reparations or debt.

“Solving border disputes can only be done through incremental steps that will need a great deal of time. It will certainly need an outside mediator as well,” says Ali.

Iraqi government officials are exercising increased self-restraint when discussing the most sensitive issues. Although the current power brokers in Baghdad may not have been involved, it was still Iraq that invaded Kuwait. With border delineation and compensation still bedevilling the two countries, the relationship is going to be tense for the foreseeable future.

Kuwait could certainly gain from becoming a transshipment hub. Firms working in Iraq are also likely to want to base non-operational staff outside the country due to the continued difficult security situation. As such, Kuwait is well placed to profit from Iraq’s oil boom – if Baghdad can get it going.

In February, Kuwaitis will celebrate the 20th anniversary of their liberation, but the country has yet to shrug off the legacy of the invasion. The overriding intangible issue and the most difficult to overcome is the profound lack of trust. Escalation is unlikely, but it will take serious and frank diplomatic discussions to prevent a return to the hostile atmosphere of the early 1990s.