New Wheelings and Dealings With Libya

At the moment, the most interesting fiduciary transactions are taking place on a global scale as governments attempt to prop up failing banks. Still, there are some exceptions. Yesterday Libya began making payments into a nearly $2b "humanitarian fund" to compensate the families of American victims killed in terror attacks during the 1980s.

An unclassified, though "substantial," deposit has been made into a US government account, which signals that start of a financial agreement between American and Libyan officials reached back in August. That deal stated that once Libya paid the full $1.8m compensation it would receive immunity from any additional terrorism-related cases.

Two decades ago, Libya was involved in three high-profile terrorist attacks that earned the North African state pariah status among the international community. In 1986, the La Bella discotheque in Berlin (a popular locale among American servicemen) was bombed, killing two US soldiers and injuring 50. In 1988, Pan Am Flight 103 exploded over Lockerbie, Scotland en route to New York, killing all 269 people on board. The following year, a French airliner UTA Flight 772 crashed due to an explosion over the Saharan desert. Once again, all 170 passengers and crew were killed.

The Libyan government has consistently failed to clarify outstanding claims about its involvement in these attacks. Libyan nationals stood trial in each case, but there are lingering questions about the role of Colonel Muammar Gaddafi and his intelligence services. Nevertheless, American officials describe the initial down-payment into the humanitarian fund as a good faith effort by Mr Gaddafi's government. These recent negotiations are part of the gradual normalization of diplomatic relations between the US and Libya, which started in 2006. 

For its part, the US will also contribute some $300m to the fund. In the wake of the discotheque bombings, President Ronald Reagan ordered Operation El Dorado Canyon, in which the US military launched retaliatory air strikes against Libya. American forces bombed targets in Tripoli and the Benghazi region, killing military personnel and 15 civilians. The Bush administration has claimed that tax payer dollars will not be used to make the payment, though it remains unclear what alternative sources would be tapped.

Libya is also scrambling to find financiers for the outstanding contribution it must make to the fund. The government has petitioned private businesses for donations, but the current economic crisis has evidently undermined such prospects. Back in 2003, Libya reached an agreement to pay $2.7b to Pan Am victims, but failed to fulfill the compensation deal after legal disputes arose. The most recent agreement stipulates that no payments will be made to victims' families until the entire $1.8b is in the humanitarian fund. Given the bleak financial climate, any final resolution looks a long way off.

In recent days, Libya has made other headlines of the more conventional sort. The country's top energy official, Shokri Ghanem, called for OPEC to cut production ahead of the cartel's meeting on November 18. When member-countries meet in Vienna next month, they will likely address the significant decline in oil prices, which have slumped some 45% since their peak in July. 

On Friday, the Paris-based International Energy Agency (IEA) lowered its projected oil demand in 2009 by 440,000 barrels per day (bpd), on account of the worsening liquidity crisis. OPEC, which has a production quota of 28.8m bpd (about 1/3 of the world's demand), would like to keep the price window between $80 and $100 per barrel.

Libya's first payment into the humanitarian fund comes just days after an American trade office was established in Tripoli. While Congress has yet to lift funding restrictions for an ambassador position or an embassy building, there are signs that the US sees an economic benefit from its relationship with Mr Gaddafi. Libya has the world's 9th largest oil reserves and has been a major player in the European energy equation. 

On Thursday, Libya announced it would pull $7b out of Switzerland and halt oil shipments to its refineries. Back in July, Mr Gaddafi's son, Hannibal Gaddafi, was arrested along with his wife for mistreatment of their servants in a Geneva hotel. The charges were dropped, but the diplomatic spat continues. Cash and oil are precious commodities at this time, and there is no doubt the US would like to step in and replace the Swiss as trading partners.

The Americans will have to tread carefully, however. Mr Gaddafi is still a mercurial leader with an abysmal human rights record. Libya has much to offer, but perhaps it should fill its humanitarian obligations first.