LONDON -- Overshadowed by the drama of military confrontation in the Persian Gulf, there is a second, more hidden conflict being waged in the world's banks and financial markets -- the war over money.
In the shooting war, Iraq's massive army swallowed up tiny Kuwait in less than a day. But in the money war, the two sides are more evenly matched, and analysts say the struggle is just beginning.
Iraq plundered Kuwait's domestic assets like "a thief walking into an unguarded bank," one exiled Iraqi financier said. It now hopes to use those resources and its own gold and hard currency to bust the United Nations embargo and buy the food and supplies it needs to survive.
But Kuwait's exiled government and business leaders are fighting back by consolidating the sheikdom's overseas assets from their offices in London. By rewarding allies and punishing foes, they hope to dry up Iraq's sources of cash and credit like a desert river.
The financial upheaval that has ensued is shaking everyone from billionaire bankers in the oil-rich gulf states to unemployed Palestinian laborers in the Israeli-occupied West Bank in ways that analysts say could permanently redefine politics and economics in the Middle East.
"It's going to fundamentally change the way people live and the way they do business throughout the region," said P.B.V. Rajan, a financial specialist who edits the Middle East Financial Directory here.
Despite all the rhetoric and analysis that has surrounded the Iraqi invasion of Kuwait, many financial experts see the invasion as a brutally simple cash transaction. Iraqi President Saddam Hussein's government was broke, with a foreign debt exceeding $70 billion and an annual shortfall of hard currency of at least $7 billion by reliable estimates. Kuwait was next door, rich and vulnerable, so Saddam helped himself to his neighbor's treasury.
"He was in dire straits economically with nothing to show for eight years of war with Iran," said an exiled Kuwaiti businessman. "He had to get out of his economic stalemate. We should have seen it coming, but we didn't."
How much he got is still an open question. While banking experts say most of Kuwait's gold and cash was deposited outside the country, the International Monetary Fund has estimated that Iraq could have seized about $800 million in foreign reserves and $32 million in gold bars from the central bank, plus $1 billion from commercial banks.
Kuwaiti banking sources here put the figure far lower -- "he got millions, certainly not billions," said one banker, who insisted on anonymity. But they concede that the Iraqis also systematically looted the country of spare parts and automobiles -- hundreds of Mercedes Benzes and Toyotas were seized from showrooms and driven off to Baghdad. The gold souk, Kuwait's private gold and jewelry bazaar, was also plundered, they say. No one knows how much of the spoils went to Iraq's treasury and how much wound up in the pockets of soldiers.
Saddam had hoped to channel the funds and the enormous profits from Kuwait's oil production into paying off Iraq's debts and meeting the expectations of his war-ravaged population, still recovering from the Persian Gulf war. Instead, analysts say, much of the money will have to go into a mass sanctions-busting campaign to pay for illicit goods and the high premiums of those willing to smuggle such goods into Iraq.
"There are always plenty of people willing to break an embargo," said Pamela Smith, an analyst with the Middle East Economic Digest. "But a potential exporter has got to be assured he's going to get paid." Given the worthless state of the Iraqi dinar, she adds, sanctions-busters will insist on hard currency or gold.
Meanwhile, the Kuwaiti government and its massive financial apparatus have begun to fight back. Reassembling in London, exiled cabinet ministers, bankers and oil officials have surveyed and consolidated their total overseas assets -- estimated at somewhere between $100 billion and $200 billion -- and begun calculating how to mobilize some of those assets in the money war against Iraq.
"Kuwait is a small country that survived on its wits and diplomacy for a long time," said a senior executive at Kuwait Petroleum International, the country's giant oil exporting firm. "We have the funds, the financial muscle and the human resources to handle this."
KPI's executives have spent the past two weeks locating new supplies of crude oil to feed the company's vast overseas refining facilities so that the company can keep supplying gasoline and other oil products to its customers in the West. They estimate that with the assistance of the other Gulf Cooperation Council states, they can make up most of the 400,000 barrels per day they had been receiving from Kuwait before the invasion.
Kuwaiti banking officials have been seeking exemptions from the freeze on Kuwaiti and Iraqi assets so that they can regain control of their money. The London-based United Bank of Kuwait, for example, has been allowed access to its $3.7 billion in assets by the Bank of England. The funds are being denied to Iraqi depositors, including the Iraqi Embassy here, which last week was prevented from withdrawing funds from the bank to pay its own employees.
Kuwaiti officials are also attempting to help those countries that suffer economic losses in their effort to enforce the embargo. Officials said Prime Minister Saad Abdulla Salim Sabah made a firm pledge of support during a visit last week to Turkey, which stands to lose up to $3 billion in trade after closing its border with Iraq. After Sabah left Ankara, Turkish officials announced they had refused to unload ships carrying frozen food for Iraq and had seized 12,500 tons of cargo destined for Baghdad.
Other countries have a lot to lose if the embargo sticks. Analysts say Zambia receives almost all of its oil from Iraq in exchange for copper and raw materials. Bulgaria has a similar barter arrangement for spare parts, textiles and industrial goods. Brazil isa big customer. Few of them can afford to pay hard currency for oil from other suppliers and many are expected to approach the Kuwaitis and Saudi Arabia for financial help.
"Turkey, Pakistan and some other countries are all under the presumption that if they lose money, we will make it good," said a Kuwaiti banker. "The name of the game is cash."
The Kuwaitis are taking grim pleasure in the plight of one group reliant on their financial largesse -- the estimated 200,000 Palestinians who work in Kuwait. Their savings in Kuwaiti dinars were wiped out overnight and their salaries became nontransferable when Saddam effectively destroyed the currency by tying it to the Iraqi dinar.
Remittances from Kuwait have been a key element in keeping alive the economies of the West Bank and Gaza Strip during the 32-month-long Palestinian uprising. Yet Palestinians by and large have applauded the Iraqi invasion, much to the disgust of their Kuwaiti hosts.
"The Palestinians normally get paid on the 20th of the month," said a Kuwaiti oil official. "So in a few days we'll hear from them. All those guys who are demonstrating against us, let's see what they say when the checks don't come."
Jordan is also suffering. Besides the threat to its economy if the Port of Aqaba, its only outlet to the sea, is closed, bankers say Jordan is falling behind in foreign debt repayments of $1 billion this year. The value of the Jordanian dinar plunged nearly 20 percent over a two-day period recently, causing private money changers in Amman and Jerusalem to shut their doors, according to one dealer.
But the biggest economic losers so far are Kuwait's neighbors along the gulf. Analysts say their banks have been squeezed at both ends by the crisis -- by panicked depositors who have withdrawn billions in cash from the region in the past two weeks, and by Western creditors who have cut off lines of credit and other sources of ready cash.
Besides Kuwait itself, the worst hit gulf state so far has been Bahrain, which has no oil revenue of its own and has prospered over the last two decades as an offshore banking haven for the huge wave of funds generated by the oil boom. There are 55 offshore banks in Bahrain, but its two largest -- the Gulf International Bank and Arab Banking Corp. -- control 40 percent of the market.
Analysts say both banks are in serious difficulty and not just because of the recent run on their reserves. The Gulf International Bank is partly owned by the governments of Iraq and Kuwait, and that puts its financial activities under a cloud during the crisis. Arab Banking Corp. is 25 percent owned by Kuwait and 25 percent by Libya, and that renders it suspect. Both institutions are being watched closely by U.S. and British banking officials, who reportedly are concerned they could be used for sanctions-busting, and analysts say the uncertainty surrounding their future has had a domino effect on smaller offshore banks.
The gulf states had hoped to use their huge banking industry to help finance privatization and economic redevelopment in the 1990s. Now that strategy is in serious trouble, said Stephen Timewell, editor of Arab Banker magazine here.
"The devastating consequences have already happened," Timewell said. "Even if Saddam Hussein were assassinated today and life returned to the status quo ante, the damage has already been done to gulf banking. There's been a flight of capital -- and none of it looks likely to return."