The address given by Iran’s new president, Hassan Rouhani, to the UN General Assembly in late September may have stolen the headlines, but another set of talks in New York revealed a more advanced rapprochement between two former regional antagonists.

The talks between Kuwait’s Prime Minister Sheikh Sabah al-Ahmed al-Sabah and Iraq’s Vice-President Khudair al-Khozai on the sidelines of the UN meeting, point to an increasing closeness that stands in sharp contrast to the troubled relations that have persisted since Iraq invaded its neighbour in August 1990.

Iraq was removed from the provisions of Chapter VII of the UN Charter in June this year, which concerns the return of Kuwaitis and other nationals (or their remains) and their property seized by Baghdad during its 1990 invasion of Kuwait. This heralded the most significant stride forwards in the normalisation of relations between the neighbours in more than two decades.

Diplomatic reconciliation

Chapter VII grants the UN Security Council the authority to impose economic sanctions and take military steps if states do not agree to the councils’ demands. Shifting Iraq to Chapter VI, which deals with the peaceful settlement of disputes, represents a significant improvement in the country’s standing.

Iraq has always been a strong [threat] to Kuwait, but since 2003, [that] threat [is] weak. That makes all the difference

Kristian Ulrichsen, Baker Institute

Iraqi officials were upbeat about the development, with Foreign Minister Hoshyar Zebari claiming that “all negative aspects of the relationship between the countries have become part of the past”. Now, he said, the two sides could focus on the present and the future, and what brotherly relations can achieve to consolidate peace, security and stability in the region.

There is more to this than Middle Eastern diplomatic niceties. A joint Kuwait-Iraq ministerial committee to maintain border markers is now up and running, addressing an issue that has attracted violent protests in recent years.

Some substantial obstacles remain, however. Baghdad still owes Kuwait $11bn in compensation, which is unlikely to be paid off until 2015. Iraq is forced to pay 5 per cent of oil exports under UN Security Council resolution 1483 to finance war reparations to Kuwait. This is a cause for aggravation for many Iraqis, who feel they are being punished for the actions of a tyrant who did as much damage to Iraq as to its neighbours.

Nonetheless, recent diplomatic efforts have transformed one of the more problematic bilateral relationships in the Middle East into a relative beacon of hope. This was notably enhanced by the Kuwaiti emir’s decision in December 2012 to make an appearance at the Baghdad-hosted Arab League Summit, unlike every other Gulf leader.

Kuwaiti policymakers’ willingness to go out on a limb and curry influence with Baghdad reflects a calculation that the country’s interests are not best served by pretending Iraq in 2013 is the same as the Iraq of Saddam Hussein.

Other GCC states, meanwhile, seem to prefer to continue to give Baghdad a diplomatic cold shoulder.

Under Hussein, the threat to Kuwait was from a strong neighbour, says Kristian Ulrichsen, Kuwait fellow at the US-based Baker Institute. “Iraq has always been a strong, threatening neighbour to Kuwait, but since 2003, the threat posed to Kuwait has been that of a weak state,” he says. “That makes all the difference.”

This change in circumstance has underpinned the shift in Kuwaiti diplomacy towards Iraq. There is now a growing impetus from Kuwaiti officials to use the improved contacts to advance key strategic goals, in particular, obtaining more assistance from Iraq’s government in repatriating the bodies of Kuwaiti prisoners of war.

Kuwait strategy

Although Iraq too has much to gain from the closer relations, the momentum for change has come from the Kuwaiti side. Zebari’s personal contacts with high-ranking Kuwaitis have assisted the efforts, helped by the fact that the Kurdish-born foreign minister is no fan of Iraq’s distrusted prime minister, Nouri al-Maliki. Baghdad, however, has not yet evolved a coherent strategy towards its southern neighbour beyond wanting to end its Chapter VII status and encourage Kuwaiti investment.

Kuwait is giving thought to how it could deploy its commercial clout to greater advantage. In this context, Turkey’s example in developing ties with former enemies in Iraqi Kurdistan is instructive. Ankara has invested heavily in the Kurdistan Regional Government, binding the Iraqi Kurds into a tight energy and commercial relationship.

“Kuwait believes it makes sense to learn the lesson of how Turkey treated the Kurds and developed economic interdependence between the two,” says Jane Kinninmont, a Gulf analyst at the London-based think-tank Chatham House.

A series of investments has empowered this strategy, ranging from National Bank of Kuwait (NBK) and Burgan Bank, majority owners of Iraq-based financial institutions, to independent oil company Kuwait Energy’s activities in southern Iraqi gas fields, alongside real estate and services sector plays.

These investments should not be viewed simply as part of a geopolitical gameplan hatched by Kuwait government strategists. Iraq’s untapped market presents a huge opportunity for Kuwaiti businesses, so it also makes sense from a pure profit-driven corporate perspective.

“Within the Mena [Middle East and North Africa] region, Iraq is one of the countries where we see great potential; it has a lot of resources coupled with many development needs,” says Mouayed Makhlouf, director of Mena at the Washington-headquartered International Finance Corporation, which has co-invested with NBK in Credit Bank of Iraq. “Gulf investors see that growth potential in Iraq, and as most of their home markets get more and more saturated, they see Iraq as a natural fit for their growth targets.”

Fostering ties

Kuwait has another significant advantage it can draw on to help bolster its ties with Iraq. Compared with other Gulf states with sizeable Shia populations, relations between Sunni and Shia Muslims (the latter comprising about one-third of Kuwaiti citizens) are much better.

Some influential Shia-owned Kuwaiti family businesses are seeking out opportunities north of the border. The prominent Kuwaiti-owned Al-Shaya Group, for example, has opened retail outlets in northern Iraq.

The restoration of direct flights between Kuwait and Baghdad in March 2013 has also done much to foster business and political relations. The countries have put behind them the diplomatic embarrassment of 2010, when Iraq Airways’ first flight to London in 20 years ended with the aircraft being impounded at the behest of lawyers representing Kuwait’s state carrier.

Yet one major sticking point remains that could wreck the expanding commercial and political ties, namely Kuwait’s controversial Mubarak al-Kabir port development on Bubiyan Island. The port is due to start operations in 2016, with capacity of 2 million 20-foot equivalent units.

Baghdad has registered strong objections to the port project, alleging it will interfere with its shipping lanes into the Gulf through the Shatt al-Arab. Iraqi MPs claim the port’s location at the very tip of Kuwait’s territory effectively puts a hand around the throat of the Iraqi sea outlet, potentially enabling the Gulf state to control all of Iraq’s seaborne trade. They say the project also impinges on Iraq’s development of its own port project at Faw. 

Threat to relations

For now, the two rival port developments are proceeding (although the Kuwaiti project is far more advanced) following an agreement under which the Kuwaitis have committed to reducing the number of berths at Mubarak al-Kabir from 60 to 24. 

Such disputes threaten to set back the improvements in bilateral relations. The fact that both Iraq and Kuwait boast legislatures with outspoken nationalist MPs is proving a drawback. “Both Iraq and Kuwait have very vocal parliaments, which means that populist MPs who want to make a name for themselves have an incentive to make an issue out of these things. MPs on both sides of the order are busy drawing red lines and whipping up a frenzy,” says Ulrichsen.

Kuwait Reparations near closure for Iraq

In 2015, one of the longest-standing claims for compensation from one Middle Eastern state to another will be concluded.

In April 1991, after combat operations against Iraq by the US-led military alliance had concluded, the UN Security Council issued Resolution 687, establishing the legal foundation for the imposition of war reparations claims against Iraq. This arose from the invasion and occupation of Kuwait by Saddam Hussein’s regime beginning in August 1990. Resolution 687 led to the creation of a fund to pay for war reparations claims as well as the formation of the United Nations Compensation Commission (UNCC).

The UNCC imposed a total of $52.4bn in war reparations on Iraq, the bulk of which relates to damage wrought on Kuwait’s oil sector and infrastructure. Just under a quarter of the total claims cover those filed by Kuwaiti individuals who suffered losses from the occupation.

In 2000, the Kuwait government submitted a claim on behalf of Kuwait Petroleum Corporation (KPC), which resulted in the award of $14.7bn for oil production and sales losses as a result of damages to Kuwait’s oil field assets. This represented the largest award by the UNCC’s governing council. Baghdad was forced to pay compensation awards from the UN Compensation Fund, which receives 5 per cent of the revenue generated from the export of Iraqi petroleum and petroleum products, pursuant to UN Security Council Resolution 1483.    

Compensation payments are made on a regular basis, helped by the revival of Iraq’s oil exports in recent years. On 25 July this year, the UNCC made available $1.07bn to Kuwait towards the commission’s remaining claim.

With this payment, the UNCC has paid out $42.3bn of its total awarded amount of $52.4bn relating to more than 1.5 million successful claimants in all claim categories, leaving about $10.1bn remaining to be paid. Not all of these compensation claims are to Kuwait.

The Iraqi authorities have ramped up the compensation payments, imbued by rising oil revenues. Actual reparations paid by Iraq rose from ID3 trillion ($2.57bn) in 2010 to ID4.6 trillion in 2011, then to an estimated ID5.5 trillion in 2012.

The Washington-headquartered IMF expects reparations to peak in 2014 at ID6.3 trillion, before declining to ID2.1 trillion in 2015, the final year of payments owed to Kuwait.

Recent months have also registered progress towards the compensation of those Iraqi citizens relocated from the border area with Kuwait, pursuant to UN Resolution 899. In May, Iraq formally requested the compensation funds (originally provided by Kuwait) be transferred to it from the UN for distribution to identified beneficiaries. 

These UN mediated claims are separate to the Saddam Hussein-era legal claims from Kuwait Airways against Iraq Airways.

In March 2012, the two governments agreed to wipe out $1.2bn in legal sanctions against the state-owned Iraqi carrier. In return, Iraq committed to pay $300m in reparations and another $200m to set up a joint airline operated by the two countries. The long-standing dispute centred on Kuwait’s accusations that the regime expropriated 10 aircraft and millions of dollars in equipment and spare parts from its fleet during the 1990 invasion.