Iraq's closest relations in 1988 were with the countries of the Arabian Peninsula, especially Kuwait and Saudi Arabia. This was a reversal of the pattern of relations that had persisted in the 1970s. The original Baathist view of the Arabian Peninsula shaykhdoms was that they were regimes that had been set up by the imperialist powers to serve their own interests. This attitude was reinforced in the period between 1968 and 1971, when Britain was preparing the countries of Bahrain, Oman, Qatar, and the United Arab Emirates (UAE) for complete independence. Iraq wished to have an influence on the governments that would come to power, and it provided clandestine assistance to various groups opposed to the pro-British rulers. Iraqi support of dissident movements was particularly evident in Oman, where an organized guerrilla force was fighting the government from the late 1960s to the mid1970s .

The Baathist perception of Iran's role in the Persian Gulf was an important factor in Iraqi views of the Arabian Peninsula states. In 1969 Iran, which was then providing aid to dissident Iraqi Kurds, unilaterally abrogated a 1937 treaty that had established the Shatt al Arab boundary along the low water on the Iranian shore in 1971 Iran forcibly occupied three small islands in the lower gulf near the approaches to the Strait of Hormuz and by 1972 Iran was again giving assistance to antigovernment Kurds. As Iraq became increasingly concerned about Iranian policies, it tried to enlist the cooperation of the Arab monarchies in an effort to keep the Persian Gulf independent of Iranian influence. Iraq believed it was possible to collaborate with the Arab kings and shaykhs because the latter had proven their Arab nationalism by participating in the 1973 oil boycott against the Western countries supporting Israel. Despite Iraq's new friendliness, the rulers in countries like Kuwait and Saudi Arabia did not easily forget their suspicions of Iraqi radicalism. Nevertheless, political discussions were initiated, and progress was made toward resolving disputes over borders, over oil pricing policy, and over support for subversion.

By the time the Islamic Revolution occurred in Iran in 1979, Iraq had succeeded in establishing generally correct relations with the Arab states of the Persian Gulf. The war with Iran served as a catalyst to develop these relations even further. Although the Gulf states proclaimed their neutrality in the war, in practice they gave Iraq crucial financial support. The unexpected prolongation of the war and the closing of Iraqi ports early in the war had produced a severe economic crunch by the beginning of 1981. In response, Kuwait, Qatar, Saudi Arabia, and the UAE all provided loans to help replace revenues that Iraq had lost because of the decline of its oil exports. Saudi Arabia and Kuwait were particularly generous, providing an estimated US$50 billion in interest-free loans up through 1987. In addition, a major portion of Iraq's nonmilitary imports were shipped to Kuwaiti harbors, then transported overland to Iraq. Saudi Arabia also agreed to provide to Iraqi con1e3 ontract customers part of its own oil from the Neutral Zone, jurisdiction over which it shared with Iraq it was understood that Iraq would repay this oil "loan" after the war had ended.

Data as of May 1988