Economic Crisis Threatens to Crush Kurds of N. Iraq : Mideast: Democratic institutions could fail, forcing enclave’s residents to fall again under Baghdad’s control.

WASHINGTON —  The Kurdish enclave in northern Iraq is facing a new crisis as a rapidly deteriorating economy, squeezed by a double dose of sanctions from the United Nations and Baghdad, is on the verge of accomplishing what neither Saddam Hussein’s military might nor Baghdad’s political pressure could do: crush the Kurds.

According to relief agencies and recent visitors to the isolated region, the situation is so critical that the number of displaced or aid-dependent Kurds is expected to grow this year from 700,000 to up to 1.1 million. At the same time, unemployment has reached 70%, Kurdish development experts say.

Without some dramatic reversal in the near future, nascent democratic institutions could founder and force the Kurds to fall again under Baghdad’s control. The worst-case scenario is another mass exodus of destitute Kurdish refugees to international borders this winter, U.S. officials said this week.

“The economic squeeze will eventually lead to a collapse of Kurdish society, the decline of law and order and possibly the new democratic institutions,” said Henri Barkey, a U.S. Institute of Peace fellow and professor of international relations at Lehigh University who recently returned from the enclave. “Second, there will be serious starvation--there is already malnutrition--and people will be on the move again. And possibly it will drive the Kurds into the arms of Saddam--which is exactly what Saddam expects.”

The crisis, a result of longstanding hatred between Hussein and the Kurds--comes as both the U.N. humanitarian program and the U.N. guards deployed in Iraq’s isolated and vulnerable north are being threatened by funding problems.

“We have so many needs now all over the world that we are having great difficulty funding our humanitarian program,” said Jan Elisson, U.N. undersecretary general for humanitarian affairs. “And if we don’t have the money, then we can’t stock up on humanitarian goods. And if we don’t do it now during the summer, then we will have a problem in the winter.”

Funding problems already have led to a reduction in the number of U.N. guards in the enclave, down from 242 to 182 in recent weeks.

“If we reduce the number of guards, then it could send a political signal to Baghdad that we are sort of moving out,” Elisson added.

The Kurds’ desperation is helping Hussein’s regime survive U.N. sanctions. Despite the protected zone above the 36th Parallel established by Operation Provide Comfort and the post-Gulf War political autonomy that has allowed most of the Iraqi portion of the region known as Kurdistan to break from Baghdad’s control, the Kurds are still tied to Baghdad economically.

U.N. sanctions make the purchase of Kurdish produce by other countries illegal, so Kurds have no option but to sell their grain and agricultural products to Baghdad.

At least 60% of Iraq’s wheat comes from the agriculturally rich north, according to Jamal Fuad, a Kurdish-born American and former World Bank official who also just returned from the Iraqi north. Without access to those supplies, Hussein would face a real economic crunch--and possibly greater resistance in the areas he does control.

Over the past month, Baghdad has further exploited the Kurds’ economic dependency--and worsened their plight--by rendering obsolete the 25-dinar note, the country’s largest denomination. Worth about $1.25 at the official rate and 75 cents on the black market, it was the amount in which most Kurds kept their cash.

Hussein closed off the border with the Kurdish enclave, so Kurds were cut off from exchanging the old notes for new ones in the allotted time. Up to 40% of the Kurds’ assets simply evaporated, Barkey said.

Hussein is now paying for Kurdish crops with new currency printed in Iraq--different from the dinar notes printed in Europe before the Gulf War--that has little to support its value and that many outlets either do not accept or halve in value.

The sharp reduction of what the Kurds can get for crops, one of their few remaining sources of income, may be the last straw.

“The Kurdish economy is on the verge of collapse,” says a report released this week by Fuad. “The basic infrastructure is in a state of ruin. Telecommunication has been disrupted, internal roads and highways have worn out.

“The few industries . . . have daily problems of shortages of fuel supply or spare parts. Electricity is available only on special days and only for a few hours. The Iraqi dinar has devalued one hundredfold, making it difficult for people to cope with runaway inflation.”

Free movement of essential equipment, spare parts and raw materials into the Kurdish enclave are blocked by U.N. sanctions, which only allow transshipment of humanitarian supplies such as food and medicine.

Even tougher sanctions imposed by Hussein block the import of virtually everything from other parts of Iraq.

“The people in Baghdad are now much better off than the people in Kurdistan,” Barkey said.

The Kurds’ latest problems are tied to two issues, several sources said.

First, the outside world has been reluctant to move beyond the boundaries established by Operation Provide Comfort, the relief effort that responded to the first flight of hundreds of thousands of Kurds to Turkey and Iran in 1991.

Second, any move to alleviate the Kurdish crisis either by allowing other countries to buy its crops or to lift U.N. sanctions would in turn signal that the outside world was prepared to recognize Kurdistan as a separate entity. That would revive fears of the dismemberment of Iraq. The result is a tragic Catch-22, relief agencies say.

“Sanctions haven’t worked,” said Brian Brown, a special adviser to the human rights monitoring group Freedom House and a lawyer who has also been to the Kurdish area. “Baghdad has been able to rebuild and it’s on the way back. But everyone seems to be locked on denying a separate Kurdish administration and trying not to help it, even if it means the Kurds will suffer.”

At a meeting in Geneva earlier this month, the U.N. Humanitarian Program allotted $4 million to buy some of the Kurdish crops, which will be stored and used for humanitarian purposes next winter. But the amount will purchase only a fraction of the produce. It would take at least $25 million, and possibly up to $50 million, to buy the Kurds’ surplus so their produce would not go to Baghdad, according to relief agencies and Kurdish representatives.

The harvesting of this year’s crop began last week, but the program has not yet begun, leading to fears that the effort may be both too little and too late.

“The major issue is whether the United Nations can now move fast enough for this year,” a U.S. official conceded.