KUWAIT -- Within two weeks, U.S. warships are scheduled to begin escorting a fleet of 11 tankers, newly registered under the American flag but owned by this tiny Persian Gulf oil emirate.
The Reagan administration has portrayed the escort mission as necessary to protect these ships from the fallout of the Iran-Iraq war and to defend the principle of free navigation in the gulf.
But by escorting those tankers, the United States also will be protecting an important part of what has come to be known as Kuwait Inc., an expanding overseas empire built around oil with a western investment portfolio worth perhaps $100 billion, including massive real estate holdings and a wholly integrated petroleum industry that is challenging the power of multinational oil giants.
The controversial escort task, only nine weeks after 37 American sailors perished in an Iraqi air attack on the USS Stark, has provoked criticism from those who fear that more American lives may be put at risk performing perilous duties in a war zone, where Iran and Iraq have stepped up attacks on foreign shipping after nearly seven years of fighting.
According to Lloyds of London, at least 325 vessels have been attacked or damaged by Iran and Iraq since war broke out in September 1980. The tanker attacks escalated greatly in 1984 as Iraq intensified its campaign to thwart Iranian oil exports. Although the U.S. naval escort ostensibly will be fending off hostile moves by Iranian forces, the majority of attacks on foreign ships in the gulf have been carried out by Kuwait's close ally, Iraq.
As the United States raises its profile in the war, the concurrent role to be played by the Soviet Union, which has leased three tankers to Kuwait, has heightened anxieties that Washington and Moscow may have been cleverly maneuvered by Kuwait into competing to protect the emirate's interests in the gulf's volatile waters.
Late Friday, the Soviets called for the withdrawal of all foreign warships from the gulf and criticized the growing U.S. military presence as an attempt to impose American "hegemony" on the strategic region. The Soviet statement seemed intended to seize the diplomatic initiative from the United States..
The sudden rush by the superpowers to defend Kuwaiti oil exports testifies not only to the emirate's shrewd diplomatic strategy of playing Washington against Moscow, but also to its powerful influence as the Middle East's most commercially active oil producer.
Kuwait, founded by merchant clans that traded in pearls and imports since the days of Sinbad, is unique among the Arab states that meet the western and southern shores of the Persian Gulf. More than any other Middle East producer, Kuwait thinks and acts as a corporation as much as a sovereign state. "We're not like the Saudis," said one prominent Kuwaiti, "we don't mix politics with business."
Oil still accounts for the greatest share of Kuwait's revenues, but foreign investments are becoming increasingly important in this corporate state supervised by the ruling Sabah family.
Until a few weeks ago, the 11 newly registered American tankers represented half the fleet of Kuwait Oil Tanker Co., a state-owned subsidiary of Kuwait Petroleum Corp. The tanker company's chairman, Ali Khalifa, is also the government's minister of oil and a member of the Sabah clan, which has ruled with the support of the major merchant families since the 18th century. The family sits as a board of directors, with one brother as chairman, another as crown prince, foreign minister and so on down the line.
Since the boom days of skyrocketing oil prices, Kuwait has opted to invest its oil fortune in the West rather than build 20th-century monuments to its wealth.
Whereas some of its neighbors, notably Saudi Arabia, have plowed billions of dollars into airports, palaces, universities, weapons systems and unprofitable domestic industries, Kuwait has invested in American and European real estate, corporate stocks and the established heavy industries of West Germany.
During this decade, Kuwait set up two investment funds of $40 billion each. One of them, the Fund for Future Generations, receives 10 percent of state revenues each year, and the government is forbidden from touching either the principal or interest until the year 2001.
This fund and the comparable general government reserve are the financial motors that have given Kuwait a major stake in the West. In a recent analysis, an American economist observed: "Besides exporting oil, Kuwait is a major exporter of capital." Today, Kuwait's investment in the West involves an estimated $80 billion in government holdings and another $20 billion invested by the super-rich upper crust of Kuwaiti society.
With oil reserves subordinate only to those of Saudi Arabia, the Soviet Union and perhaps Iraq, Kuwait also has plowed its money into its own oil industry to maximize national income during the 200 years geologists say Kuwait Inc. will be pumping oil from under the desert.
According to one western economist here, Kuwait now pumps, refines and sells in its own retail outlets in Europe a full quarter of its quota -- set by the Organization of Petroleum Exporting Countries -- of nearly 1 million barrels per day. This insulates the country from sudden market shocks and maximizes its profits at each step from the oil well to the gas pump.
The crisis in the gulf brought on by the escalating tanker war comes at a time when Kuwait has embarked on a bold expansion "downstream" to seize new oil markets and compete directly with the international oil giants, such as Exxon, Mobil and Shell.A Strategy of Integration
The country's business strategy, played out by young Kuwaiti technocrats well-trained and deeply involved in their national enterprise, has been to "vertically integrate" the country's oil industry.
Over several years, Kuwait has made a series of corporate purchases to endow its oil industry with exploration and production companies, refineries and storage terminals in Europe and a string of more than 4,000 gasoline stations in seven European countries.
Among the largest and most controversial of those purchases was the $2.5 billion acquisition of Santa Fe International Corp., the U.S. exploration giant.
In May, officers of Santa Fe created Chesapeake Shipping Inc. in Delaware for the sole purpose of assuming title to the 11 tankers used in the reflagging operation. The tankers then were chartered back to the original owner, the Kuwait Oil Tanker Co., a wholly owned subsidiary of Kuwait Petroleum.
The Kuwait Oil Tanker Co. was established in 1959, owned 49 percent by the Kuwaiti government and 51 percent by private Kuwaiti investors. In 1979, following two years of heavy losses, the Kuwaiti government announced it was buying up all privately owned stock as part of its "drive toward greater coordination in the oil industry."
As part of this plan to assume greater control over the shipment of Kuwaiti crude and refined oil products, Kuwait Oil Tanker upgraded its tanker fleet at a time when the world shipbuilding industry was severely depressed. Four new liquefied gas carriers were purchased from a French shipmaker in 1979, along with four 80,000-ton tankers from Japanese firms at a cost of $25 million each.
The following year, two very large crude carriers (VLCCs) were ordered from Ishikawazima Harimi Heavy Industries for a total price of $156 million. The 10 vessels, along with a steam tanker built for Kuwait by Mitsubishi Heavy Industries in 1977, comprise the reflagged fleet that soon will enjoy U.S. naval protection.
Kuwait's strongest markets for crude oil sales are in the Far East, where Kuwaiti crude is the staple of many refineries from Singapore to Tokyo.
But it is the growing "captive" distribution system in Europe that makes Kuwait unique in its emergence as a formidable competitor against the multinational giants that traditionally have controlled these markets.
Kuwait's oil arm has not made its purchases all at once. It picked up Gulf Oil Corp.'s stations in northern Europe in 1983 after Gulf was purchased by Standard Oil of California (Chevron). Last March, the state oil combine purchased British Petroleum's stations and distribution network in Denmark.
Most of these stations have operated under the names of previous owners, but this year Kuwait unveiled a new "Q8" logo -- intended to sound like the country's name -- printed on a field of brightly colored sails like those that fly above dhows, the boats that sustained commerce on the Persian Gulf for centuries.
Earlier this spring, when analysts were predicting that Kuwait's oil revenues would continue to slump as a result of an oil glut, one western economist noted that the decline would be "alleviated by the large and growing profits from refining and marketing realized by Kuwait Petroleum's downstream activities."
Outside the oil industry, Kuwait holds substantial real estate assets on several continents. The country's investment authorities have the second largest stake in Britain's real estate market, according to one knowledgeable official. In Washington, Kuwait has purchased choice properties, including the Columbia Plaza development near the State Department. In a major resort development project, Kuwait has developed Kiawah Island off the South Carolina coast.
"They still have half of the island to sell off and their profits already are several times the original purchase price," said one economist.
In West Germany, Kuwait owns 15 percent of Daimler (Mercedes) Benz, a share of Volkswagen and the giant Hoechst chemical firm.
More than half of Kuwait's vast investment portfolio is tied up in American corporations, with holdings in virtually every company on Fortune's list of the 500 largest industrial corporations.
Kuwait Inc. has been discreet, however, in buying into the West, especially the United States, where a wave of anti-Arab and anti-OPEC sentiment swept through Congress following the twin oil shocks of the 1970s. There still are fears here that a new wave of resentment could flare against foreign investment in the United States.
"To avoid disclosure requirements such as that of the U.S. Securities and Exchange Commission on holdings of 5 percent or more, Kuwait has generally spread its equity investments in the United States among many companies," noted one economic analysis of the country's investment strategy.
Since the Iran-Iraq war began in 1980, Kuwait, which has no natural defenses or even sufficient natural drinking water, has been anything but neutral. Historically caught between its large and powerful neighbors, it has lived, as one Kuwaiti put it, like a desert Finland "trapped between two Russias."
In the name of Arab solidarity with Iraq, and fearful of Iranian-inspired Shiite Moslem subversion, Kuwait became a stalwart supporter of President Saddam Hussein's government in Baghdad and still contributes a large portion of its crude oil production to finance Iraq's war effort.
It has allowed Soviet war materiel for Iraq -- tanks, artillery, ammunition and crated aircraft -- to pass through the port of Shuaiba. It has tolerated overflights of Iraqi warplanes on their way to bomb Iranian targets.
Its news media have openly favored Baghdad, and there was Kuwaiti alarm when Iranian troops established a foothold at Iraq's southern port of Faw and threatened Basra, Iraq's major southern city.
Kuwaitis argue that they have little choice but to help Iraq, although it has never been a tranquil neighbor. In 1961, Kuwait's brand new independence was challenged by Baghdad, and only the dispatch of a British aircraft carrier stopped a threatened invasion. Iraqi troops again crossed the border in 1973 but quickly withdrew.The Price of Backing Baghdad
In the present conflict, Kuwait pursued its partisan role with relative impunity until December 1983. Then Iranian-inspired Arab Shiites sabotaged Kuwaiti oil installations and the French and American embassy compounds in a series of bomb attacks.
Kuwait came under further pressure in the spring of 1984 when Iraqi warplanes inaugurated attacks on ships carrying Iranian oil exports in the hope of crippling Iran's financial capability to pursue the ground war. Iran, totally dependent on shipping to export its oil, retaliated by attacking ships trading with the Arab gulf states that help Iraq's war effort.
Fearful of the spreading impact at home of Iranian belligerence, Kuwait began removing members of its important Shiite minority from sensitive jobs in the armed forces and the police. But subversion continued with an attempt on the life of the ruler, Sheik Jaber Ahmad Sabah, in May 1985, and sabotage at the Ahmadi refinery in June 1986.
The sabotage efforts, plus even more brazen attacks against oil installations in January and May this year, were said to have profoundly disturbed Kuwait's rulers. For the first time the perpetrators were not foreign terrorists, but Kuwaiti citizens, well-educated Shiite members of the generously subsidized society that oil had made possible.
This discovery magnified the government's fears, since much of the Arab gulf state's oil is located in traditionally Shiite areas.
The revolutionary call of Iran to this large Shiite population is believed by some analysts to be the driving force behind Kuwait's defensive steps aimed at bolstering internal security.
At the same time, however, some analysts have expressed concern that Shiite radicalism will become a self-fulfilling prophecy because of government attempts to control or suppress the Shiite populations on the Arab side of the gulf.
Meanwhile, Iran last September brought the shooting war to Kuwait's doorstep. For the first time, Iran began almost exclusively to attack shipping, especially oil tankers, trading with Kuwait.Dominoes in the Gulf
Kuwait suddenly had become, if not a combatant, at least a front-line victim in a new phase of the war that terrified Kuwait's ruling family, Saudi Arabia and other Arab gulf states.
"If Kuwait goes, it's just a question of a new domino theory," said one prominent Kuwaiti. "Next will be Iraq, then Qatar, Dubai, one after the other, and then the Saudis will be subjected to similar pressures."
Some Middle East diplomats see such talk as overly alarmist, perhaps reflecting Kuwait's narrow commercial interests rather than an accurate reading of Iranian intentions.
In any case, Kuwait felt compelled to consider a new high-stakes diplomacy and to rethink the fundamentals of its foreign policy, which had stood for "positive neutrality" between the superpowers.
Like its other gulf neighbors, Kuwait had espoused mutual self-defense. To that end, it helped form the Gulf Cooperation Council in 1981, with Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
No member country was more insistent on keeping the United States "over the horizon" than Kuwait.
In its travail, Kuwait tried to enlist the council's military power to guarantee the safety of the gulf's vital shipping lanes. But in the aftermath of last November's council summit, it was clear that this discordant group of states had failed to find a workable formula for collective defense efforts.
Left alone and increasingly fearful of subversion at home, Kuwait played what its rulers felt was the city-state's only remaining card.
Senior Kuwaiti officials long have felt that only the superpowers could end the war -- if they could be motivated to do so. But a number of analysts saw in the superpowers' reluctance an apprehension about becoming involved in a way that inevitably would bring them to blows with Iran.
This apprehension reflected a widespread belief that the superpowers were powerless to influence Iran's revolution as long as Ayatollah Ruhollah Khomeini remained committed to pursuing the war.
Kuwait moved fast. In early December, it sent negotiators to Moscow to broach the unthinkable. Within days they had hammered out the broad outline of a new strategy to involve first the Soviets, then the United States in protecting Kuwait's tanker fleet.
In this single diplomatic stroke, Kuwait had touched the competitive dynamic of the superpowers and drawn them into the gulf conflict through a side door.
For the Soviet Union, whose invasion of Afghanistan worsened its already delicate position in the Middle East, the risks were well worth taking. For the first time Moscow was to take up a naval presence in the warm waters it had coveted for centuries. And the Soviets were invited in informally on the same footing as the United States, the country that represented dominant western influence as the inheritor of the British security presence dating back to the early 19th century.
Once the Soviets had agreed, the United States, initially cool to Kuwaiti overtures, began to push ahead with a larger protection scheme. The American embrace appeared all the more surprising since recently, the American-Kuwaiti relationship had been cool as the United States concentrated its security attentions on Saudi Arabia and Oman.
Nonetheless, Secretary of Defense Caspar W. Weinberger went on television in March to announce that Washington was eager to protect Kuwait shipping.
Privately, American officials said they were appalled that the Soviets had scored such a quick diplomatic coup. Yet analysts also were convinced that the Reagan administration had other motivations, including a desire to atone for the scandal of selling arms to Iran.
American credibility among moderate Arab regimes had been eroding for other reasons: the administration's increasingly close "strategic alliance" with Israel, the withdrawal of U.S. Marines from Beirut and Washington's apparent unwillingness to follow through on assurances first made by Jimmy Carter about protecting the flow of oil through the gulf.A Plan Without Opponents
If only to recoup lost ground, the reflagging deal seemed at first to be a workable policy for the times in Washington. There was virtually no congressional opposition to administration plans for Kuwait, even after word leaked in early May that the U.S. Navy was soon to be escorting 11 Kuwaiti tankers into and out of the gulf.
Everything changed on May 17, when an Iraqi warplane attacked the USS Stark as the guided missile frigate patrolled gulf waters.
Suddenly, Congress began questioning the wisdom of the commitment. Legislators started visiting the gulf to ask their own questions.
And Iran, which had criticized the deal from the beginning, stepped up its warnings, which now were viewed with increasing seriousness in Washington and other capitals.
Administration officials were loath to be seen retreating in the face of Iranian bravado or to give the Soviets a free hand in the gulf. Some worried that an Iranian attack against American shipping, hitherto treated with scrupulous respect, would entail a massive U.S. reprisal.
That, in turn, could jeopardize Washington's relations with Tehran for decades and play into the hands of the Soviets, who share a 1,600-mile frontier with Iran.
Kuwaiti officials reportedly were upset both by the publicity in the United States and the repeated delays in inaugurating the protection.
Yet to mollify congressional critics, the administration beefed up the naval force in the region and even assigned a World War II battleship, the Missouri, to patrol the waters outside the gulf. That, in turn, irked Iran, which spoke of a virtual American "declaration of war."
Meanwhile, the American plan, designed to protect no more than an estimated one-third of Kuwaiti oil exports, could soon become irrelevant if Iran chooses to continue hitting other ships trading with Kuwait.
The superpowers, some diplomats fear, could easily be made to look like paper tigers if Iran operates with stealth and impunity in continuing to deliver its blows against other gulf shipping.
As an indication of Iran's ability to hit and run even as the reflagging operation is about to begin, four Soviet-built mines damaged ships within a half-mile of each other last month in the channel leading to Kuwait's Ahmadi oil loading port.
At face value, that mining constituted an act of war not in keeping with Iran's previous policy of hitting shipping on the Arab side of the gulf only after Iraqi attacks on its own oil exports.
But last Sunday, Iran seemed to suggest that the mines, one of which damaged a Soviet tanker under charter to Kuwait, had another message.
"The two superpowers' flags proved ineffective" in preventing damage to a Kuwaiti ship, the commander of Iran's Revolutionary Guard Navy said. "They realized that a flag cannot bestow credibility." Washington Post correspondent Karen DeYoung contributed to this report from London.