Suicide bombs blow up with the regularity of an artillery barrage in Baghdad. I no longer always go up onto the roof of the al-Hamra Hotel, where I am living, to see the black smoke rising and to try to work out where the bomb went off. On a single day recently 12 suicide bombs exploded in the city, killing at least 30 people.

The streets are unusually empty. Many Iraqis have decided that the best way to survive is to stay at home or, if they have the money, to leave the country. A sick friend spent hours ringing up surgeries only to be told in each case that the doctor had gone to Jordan, Syria or Iran. Those who stay in Baghdad often don’t go to work until 10 a.m. because suicide bombers, though prepared to work all hours, seem to favour the morning rush hour.

It is only when a bomb explodes in a place where I might have been or when the atrocity is particularly grotesque that I pay much attention. One day three bombers – one in a vehicle, two on foot – attacked the entrance to the Green Zone normally used by journalists attending press conferences. A surviving policeman said that one bomb was concealed in a coffin strapped to the roof of a van. The driver had got through a checkpoint by saying he was delivering a body to the police forensic laboratory.

Few of the bombers are Iraqi (so they say), though the number may be increasing. But the organisation, the vehicles, the explosives, the detonators, the safe houses and the intelligence must all be home-grown. Hoshyar Zebari, the foreign minister, told me that the Iraqi army recently found a workshop capable of turning out seventy cars rigged to explode every day. He was expecting an attack on his ministry, a tall white building in the centre of Baghdad, and had just moved into a new house after a vehicle packed with nearly a tonne of explosives had been found near his home. He showed me with some pride a photograph of heavy artillery shells and a torpedo looted from a naval arsenal, spread out on the ground after they had been defused and removed from the bomber’s car.

According to Iraqi government intelligence, bombers are given a primary target, but if they can’t reach it they drive around Baghdad looking for someone else to kill. They are always told never to come back. Some buildings have been hit again and again, the army recruitment centre at the old al-Muthana airport no fewer than seven times. Every time I drive past there I see hundreds of young men, dressed in white robes and flip-flops, probably from southern Iraq, waiting to be interviewed. The guards try to herd them away, shouting: ‘You’ll make yourselves targets.’ But they are desperate for jobs and frightened of losing their place in the queue. A few weeks ago a young man started making a speech to the would-be recruits, complaining that they were being forced to wait while successful applicants were paying bribes. Nodding their heads in agreement, the volunteers gathered around the speaker. When a large enough crowd had assembled he pressed a switch and blew himself up, along with 25 of those listening to him.

Gloom is deeper in Baghdad now than at any time since the overthrow of Saddam Hussein in 2003. Even Iraqi officials in the relative safety of the Green Zone, once invariably optimistic, are beginning to despair. It is not only the increase in the number of suicide bombs. There is a water shortage in some parts of the city. Electricity supply is down to five hours a day. People buy small generators for $200, but these work only the lights and the television and do not provide enough power for air conditioners, though the temperature reaches 45ºC most days. To keep cool at this time of year people used to sleep on the roofs of their houses. But this has become dangerous: prowling US helicopters may suspect a sleeping figure of being a sniper lying in wait for a US patrol.

Hatred between Sunni and Shia Arabs has been intensifying over the past few months. Iraqis used to claim that sectarianism had been fomented or exacerbated by Saddam. In reality the tension between Sunni, Shia and Kurd has always shaped Iraqi politics. All the exiled parties returning after the fall of Saddam had a sectarian or ethnic base. The Sunnis opposed the US invasion, the Kurds supported it and the Shias, 60 per cent of the population, hoped to use it to give their community a share of power at last.

The army and police recruits killed by the suicide bombers are mostly Shia. Al-Qaida in Iraq, the shadowy group led by Abu Musab al-Zarqawi, denounces the Shia as apostates. There are also near daily massacres of working-class Shias. Now the Shias have started to strike back. The bodies of Sunnis are being found in rubbish dumps across Baghdad. ‘I was told in Najaf by senior leaders that they have killed upwards of a thousand Sunnis,’ an Iraqi official said. Often the killers belong, at least nominally, to the government’s paramilitary forces, including the police commandos. These commandos seem increasingly to be operating under the control of certain Shias, who may be members of the Badr Brigade, the military arm of the Supreme Council for the Islamic Revolution in Iraq and the country’s largest militia, with up to seventy thousand men.

The commandos, whose units have macho names such as Wolf Brigade and Lion Brigade, certainly look and act like a militia. They drive around in pick-up trucks, shooting into the air to clear the traffic, and are regarded with terror in Sunni districts. In one raid the commandos arrested nine Sunni Arabs who had taken a friend with a bullet wound in his leg to hospital. (The commandos claimed they were suspected insurgents, even though wounded resistance fighters generally keep away from hospitals.) The men were left in the back of a police vehicle which was parked in the sun with the air conditioning switched off: all were asphyxiated. Zarqawi has announced that he is setting up a group called the Omar Brigade specifically to target the Badr militia.

Unlike the death squads that used to operate in Latin America, the commandos rarely try to conceal their responsibility for killings. They arrive in full uniform, a garish green and yellow camouflage, at the homes of former Sunni officials and arrest them. A few days later the bodies – sometimes savagely tortured, with eyes gouged out and legs broken – turn up in the morgue.

All this has created terror in Sunni neighbourhoods, particularly among the hundreds of thousands who served under the old regime. The Badr Brigade, which fought on the Iranian side in the Iran-Iraq war of 1980-88, is often said to be an arm of Iranian intelligence determined to settle old scores. Air force pilots believe they are being singled out for assassination because they are suspected of having bombed Iranian cities nearly twenty years ago. This may not be true, but fear of the death squads is certainly pushing the Sunni community as a whole towards sympathy with the insurgents, who are seen as armed fellow Sunnis who might protect them.

More than two years after the US invasion the Iraqi state remains extraordinarily weak. At 5 a.m. on one day in mid-June, resistance fighters walked into Dohra, a large district of south Baghdad, and took it over: the local police disappeared. The insurgents retreated only when US helicopters arrived overhead. The army and police are often less well armed than the insurgents. Yet immense sums of money have been spent on training and equipment. ‘The Ministry of Defence and the Ministry of the Interior spent $5.2 billion under the interim government of Iyad Allawi,’ a senior official told me, ‘but we don’t know what happened to the money.’ He added sorrowfully that he had asked the ministry of the interior for 50 pistols for the presidential bodyguards; he was told they had none.

The most notorious scandal in Iraq at the moment is the government’s purchase of 24 military helicopters as part of a $300 million deal with a Polish engineering company. They were paid for up front. When an Iraqi inspection team went to Poland, they found that the helicopters were 28-year-old Soviet army machines that, according to the manufacturer, should have been put out of commission three years ago. The Iraqis are now trying to get their money back. The Ministry of Defence says it is investigating forty questionable contracts, for everything from machine-guns to armoured vehicles. One shipment of MP5 machine-guns was received at a cost of $3500 a gun: the guns turned out to be Egyptian copies that should have cost $200 each.

Defence procurement in the Middle East, as in much of the world, is corrupt. But in most countries usable equipment, however overpriced, does eventually turn up. In Iraq the corruption is on a different scale: often the money disappears entirely and nothing is received in return. For two years the Iraqi administration has been less a government than a racket, as Ed Harriman has made clear (LRB, 7 July). The corruption doesn’t stop with defence. Laith Kubba, a senior aide to Ibrahim al-Jaafari, cites the case of ‘a power station ordered at a cost of $500 million but the contract details covered just one sheet of paper. A ministerial committee refused to sign that contract so the minister sacked them and appointed a committee which would sign.’ Salam al-Maliki, the transport minister, says: ‘Everything has been stolen in the ministry bar its name.’ Commuter buses were sold for spare parts and new trucks simply disappeared. Even the bed-sheets for the police guarding the ministry were stolen.

The looting of Baghdad which began in the days after Saddam’s fall has never really ended. ‘Security is our biggest problem and after that corruption,’ said Kamaran Karadaghi, President Jalal Talabani’s chief of staff. Another official warned me against investigating corruption. In Iraq, he said, more money had been stolen by a few people ‘than a Colombian drug lord could make in a year’.

A few Iraqi officials have been suspended; a few arrest warrants have been issued. Several of the more dubious arms procurement deals were negotiated by Ziad Tareq Cattan, the former deputy defence minister. Returning to Iraq after 27 years in Europe, he was rapidly promoted by Paul Bremer, the US envoy. He was sacked in June and a court order for his arrest issued on 7 July. He is currently in Irbil in Iraqi Kurdistan and claims innocence. He argues that while he worked there the defence ministry was under the control of US generals: he could not have committed the alleged frauds without their knowledge. ‘We could do nothing in the ministry without decisions from the generals,’ Cattan was quoted as saying. ‘We couldn’t move a single soldier from east Baghdad to west Baghdad without their permission. We had to ask them, to plead with them for one machine-gun.’

Nobody knows how many soldiers and policemen actually turn up for work. Mahmoud Othman, a veteran Kurdish political leader, says that an army unit supposedly numbering 2200 men was sent to Kirkuk. The Kurds counted them: there were just 300 men in the unit. Nobody knew what had happened to the other 1900. ‘They say that there are 150,000 men in the army and police,’ Othman says, ‘but I believe the real figure is 40,000.’ The rest either appear only to draw their pay or never existed in the first place. Establishing the real strength of the army is important because the US and Britain want to reduce the number of their troops. The British want to decrease the size of their force in the south from 8500 to 3000 over the next nine months. In cities such as Basra and Amarah this means handing over power to the local Shia militias: the Badr Brigade and the Mehdi Army.

The Iraqi government is embattled. Aside from the Kurdish parties and the Supreme Council for Islamic Revolution in Iraq, none of the parties making up Ibrahim al-Jaafari’s administration has a strong popular base. Government members live in the Green Zone and are as cut off from the rest of Baghdad as they would be if they lived in a different country. Entering al-Qadassiyah, the fortified compound where ministers live, is a dangerous business. Problems start even before you reach the first checkpoint in the perimeter wall. As we approached, a blue-uniformed Iraqi policeman, with US troops standing beside him, waved at us frantically. He was trying to warn us that if we didn’t get out of the car fifty yards in front of the checkpoint to hold up our ID cards the troops would open fire.

Members of the government, often exiles who have spent decades abroad, don’t understand the depth of the unpopularity of the occupation. Iraqi Arabs, Shia as well as Sunni, blame the US for everything that has gone wrong since Saddam’s fall. In Baghdad everybody I asked on the streets said they wanted the US soldiers to leave. ‘I feel sure that most of the problems inside the city are made by these troops,’ Bassem Mehdi Khalid, a driver, said. ‘They close the streets or drive the wrong way down them. They fire in all directions when they are attacked. They do much more harm than good.’

Mahmoud Othman is convinced that US troops should pull out in two stages, first out of the cities and then out of Iraq. He argues that the main political justification for the guerrillas is that they are fighting against a foreign occupier. Take this justification away and Iraq would begin to return to peace. At the same time, Othman says, talks should take place with the resistance movement. Maybe he is right. But the administration is still wholly reliant on the 135,000 American troops. The few government battalions ready to fight are recruited from Kurdish or Shia militiamen and are detested in Sunni areas. As sectarian hatreds deepen it would not take much for districts of Baghdad to barricade their streets against Sunni suicide bombers or Shia death squads.

The chances of a unitary Iraq emerging from the conflict are dwindling. The Kurds, triumphant after fighting for half a century, are not going to give up the oil city of Kirkuk or abandon a level of autonomy close to independence. The Shias want as much power as they can get. The Sunnis have shown by their armed resistance that they can destabilise Iraq for as long as they want. But the insurgents will not be able to spread resistance beyond the Sunni community because of the savage attacks by the suicide bombers on Shia mosques and children playing in the street in Shia districts. The appeal of Iraqi nationalism is ebbing.

There is unlikely to be peace in Iraq while US forces remain. Their presence fuels the war. There are frequent leaks from Washington and London about reducing the number of troops. In the al-Rashid Hotel on the edge of the Green Zone, US officials meet repeatedly, to the annoyance of the Iraqi government, with the former Baathist leaders they were trying to arrest two years ago. The Americans don’t have a long-term plan for Iraq. Their main priority is for the White House’s actions to be presented in the US as a success. One Iraqi official complains that the Americans make up policy as they go along: ‘They make a mistake and then they try to correct it by making a bigger mistake.’ American policy in Iraq has always been disjointed, since it has always been determined by the domestic political needs of the White House. But, as the war enters its third year, the extent of American failure in Iraq is becoming more and more difficult to conceal.

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