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CNN PRESENTS

CNN Presents: Countdown To Handover Of Iraq

Aired June 27, 2004 - 20:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ANNOUNCER: This is a special edition of CNN PRESENTS.
As the U.S. prepares to hand over sovereignty, we go inside Iraq to ask tough questions about the nation's future.

What actually is being handed over? Will the Iraqis or the U.S. embassy be in charge?

UNIDENTIFIED MALE: No U.S. ambassador goes out expecting to run a foreign country. Even if that were in his mind, the Iraqis wouldn't let him.

ANNOUNCER: With the daily toll in violence, can the war against the insurgents be won?

PAUL WOLFOWITZ, U.S. DEPUTY SECRETARY OF DEFENSE: I'm absolutely sure that these evil people will be defeated.

ANNOUNCER: But how do you define winning in a complicated guerilla war?

COL. PAUL HUGHES, U.S. ARMY: You can win all the battles in a war and still lose the war if you don't understand what it is you're really trying to achieve.

ANNOUNCER: Has the war served as a magnet for terrorists? Why are so-called foreign fighters coming to Iraq?

We hear one man's story in an exclusive interview.

AHMED (VOICE OF INTERPRETER): There are American patrols everywhere. Anywhere you want to target them, you set up with bombs, light weapons and rocket-propelled grenades.

ANNOUNCER: Finally, how is Iraq playing in the presidential campaign? Our Jeff Greenfield looks for answers in the battleground state of Pennsylvania.

UNIDENTIFIED MALE: I think there was more support in the beginning for it than there is now.

UNIDENTIFIED FEMALE: You have to be there for as long as it takes.

ANNOUNCER: All ahead on this special edition of CNN PRESENTS: Countdown to Handover.

Now, reporting live from Baghdad, here's Anderson Cooper.

ANDERSON COOPER, CNN ANCHOR, BAGHDAD, IRAQ: XX on the brink of history. It is nearly dawn here, a scary time.

Often, that's when the bombs start going off - bombs timed for maximum civilian casualties, when men and women - Iraqis, most of them - just starting to go to work. It is a difficult time of the day here.

The combination we have seen the last several days of bloodshed and terror, but also progress and possibilities. The combination tells you a little bit about the difficult days that may lie ahead.

Just a few hours ago, the Arab language network Al-Jazeera aired a videotape purporting to show an American Marine held hostage.

We are not going to show you the tape until we know the video is real and until we know the Marine's family has been notified by the U.S. government.

The video does, however, show XX shows his I.D. and his name. The Marines have said - the U.S. coalition has said - that a Marine has been missing for about a week. They have not confirmed that he is the Marine being held captive.

Unfortunately, it is not the only hostage video we have seen this weekend. Take a look.

(BEGIN VIDEO)

COOPER: Earlier, another Arab channel showed a Pakistani hostage held by four masked gunmen. And this man, Abu Musab al-Zarqawi, Iraq's most wanted terrorist, threatened to kill three Turkish hostages if Turkey refused to cut all business ties with Iraq. The Turkish government has rejected the demand.

The hostage takings came amid another round of deadly attacks across Iraq. Two car bombs in Hillah, south of Baghdad, killed more than 20 people. Nearly all the dead were Iraqis - policemen, civilians. The goal: divide, demoralize and destroy the new government's ability to rule.

President Bush is in Turkey tonight looking for help from NATO leaders. He wants NATO to help train Iraq's new army.

COLIN POWELL, U.S. SECRETARY OF STATE: Every indication I have now is that NATO is coming together to say that they would be willing to provide police and military training to Iraqi forces. Exactly how that would be done, where it would be done - all of that remains to be determined.

COOPER: Iraq's new government needs all the help it can get. The security services here are poorly equipped, poorly trained and, in recent months, have failed to put up a fight.

Iraq's new prime minister, Ayad Allawi, a man who has vowed to get tough with insurgents and terrorists, told CNN's Christiane Amanpour today that he's also considering an amnesty program.

AYAD ALLAWI, INTERIM IRAQI PRIME MINISTER: There are some in the so-called resistance, who have not been really the hard-core, or those who have been involved in criminal activities and terrorist activities. Those could be given a pardon.

CHRISTIANE AMANPOUR, CNN INTERNATIONAL CORRESPONDENT: A pardon.

ALLAWI: Provided they come forward and give information about the hard-core people, or the people whom they have assisted.

COOPER: Allawi stopped short of saying he would declare martial law in Iraq. But he did promise an all-out assault against the insurgents and terrorists.

(END VIDEO)

COOPER: Well, Abu Musab al-Zarqawi, the man the U.S. describes as perhaps the most wanted terrorist here in Iraq, has been or claimed responsibility for bloodshed - untold blood XX.

Even recently, this past week, he has threatened to kill the new Iraqi prime minister, Allawi, as well as other members of Iraq's government.

He said, and I quote, "We have prepared a special poison for you, a sharp sword." Threatening words, indeed.

The U.S., of course, has targeted al-Zarqawi and his network three times in recent days, striking at what they describe as terrorist safe houses. They've killed dozens of what they've described as foreign fighters.

The question is, how many more remain? And where did these foreign fighters come from?

That's what we asked CNN's Jim Clancy to look into, and he discovered a chilling videotape - an interview with a foreign fighter from Syria, given to a German journalist. Take a look.

(BEGIN VIDEO)

JIM CLANCY, CNN CORRESPONDENT, DUBAI: The faces of young men, honored for dying in the fight against America. But this isn't Baghdad or the Sunni Triangle.

These pictures come from Yarmouk. It's a combination suburb and Palestinian refugee camp on the outskirts of Damascus, Syria.

Ahmed, who spoke on the condition he remain anonymous says, he first went to Iraq when the coalition invaded. Ahmed says he's been back several times, most recently in January.

"AHMED," FOREIGN FIGHTER, YARMOUK, SYRIA (VOICE OF INTERPRETER): There are American patrols everywhere. Anywhere you want to target them, you set up with bombs, light weapons and rocket-propelled grenades.

CLANCY: All across the Arab world, Iraq has become a rallying cry against the United States. Moreover, it is a place where arms are easily available. There is an abundance of U.S.-linked targets and, therefore, the opportunity to claim having taken part in the jihad against America.

Ahmed says he and a few others went by bus and taxi to the Syrian-Iraqi border, then paid up to $100 each to be smuggled across. There they met up with members of the Iraqi resistance and other foreign fighters. He said some had come by way of Jordan or Saudi Arabia.

AHMED (through translator): There are groups of Syrians and Palestinians, Saudis, Yemenis. They were from all nationalities.

CLANCY: Ahmed says he then went to the Sunni Triangle. He was in Fallujah and Ramadi, staying with Iraqi families, passed off as a cousin or a brother.

He says they were given weapons and orders by the Iraqis. The attacks on the Americans were hit-and-run.

AHMED (through translator): We tried to hide among civilians. We hit and try to hide.

CLANCY: Suicide bombers, not hit-and-run attacks, seem to be the main threat from the foreign fighters.

This propaganda tape, put out by a group calling itself Jaieesh (ph) Ansar al-Sunnah, contained the last will and testaments of several purported suicide bombers who made their way to Iraq, mostly from Yemen. Then there was video of their attacks.

Without a doubt, the prominent foreign fighter active in Iraq appears to be this man, Abu Musab al-Zarqawi, who like his sometime ally, Osama bin Laden, has declared war on the West - and not just in Iraq. He's allegedly the man behind the mask who executed Nick Berg.

Zarqawi is a Jordanian terrorist who has claimed responsibility for some of the bloodiest attacks in Iraq, including this one in Karbala during Shia Muslim religious commemorations. Hundreds have died in these suicide bombings.

BRIG. GEN. MARK KIMMITT, U.S. ARMY: One of the chief suspects in this would be Zarqawi, just by the methods that have been used in the past - suicidal, spectacular, symbolic.

CLANCY: Even with Zarqawi's high-impact terrorist actions, the foreign fighters are believed to be just a small part of the Iraqi resistance. Right now, the U.S. says there are about 200 of what it calls third-country nationals in coalition custody.

As to how many foreigners are actually fighting in Iraq, military estimates have ranged from the hundreds to the thousands. DONALD RUMSFELD, U.S. SECRETARY OF DEFENSE: Oh, it's tough to know. The borders are porous. We know a lot of them came in from Syria. We know some came in from Iran.

CLANCY: Osama bin Laden has made Iraq a centerpiece of his messages, urging its people to wage war against the occupying Americans and urging Muslims everywhere to support the insurgency.

The war in Iraq may have already given al Qaeda and its affiliates a boost and led to more terror attacks. The International Institute for Strategic Studies takes note of that in a new report, pointing out that terror attacks have spread from Iraq to neighboring Saudi Arabia and to Turkey, even to Spain.

JONATHAN STEVENSON, INTERNATIONAL INSTITUTE FOR STRATEGIC STUDIES: Our assessment is that the intervention in Iraq actually, at least in the short term, increased al Qaeda's recruiting power, on account of essentially planting a large U.S. military presence in a historically important Arab and Muslim country.

CLANCY: Ahmed came from Syria, drawn by the American military presence. His reason for going, he said, was simple - he's a Palestinian.

AHMED (VOICE OF INTERPRETER: America is the mother of Israel, so our enmity to Israel, which is a part of America, naturally explains our enmity to America.

CLANCY: While Ahmed doesn't consider himself a member of al Qaeda, or even a follower of Osama bin Laden, he may already be part of a new generation of jihadis attracted to Iraq and fighting the Americans in the way his predecessors were attracted to Afghanistan and a chance to fight the Soviet Union back in the 1980s.

STEVENSON: Those who have gone to Iraq will stand in similar shoes to those who went to Afghanistan.

CLANCY: Ahmed admits that many of those that he fought alongside in Iraq have now died. He says he's willing to become a suicide bomber himself, should he decide to go back.

AHMED (VOICE OF INTERPRETER): You're in a conflict. You're in a war. There will be people who will fall, get killed, become martyrs.

(END VIDEO)

COOPER: Now, the borders are certainly porous, adding to the problem that foreign fighters come and go, blending in with civilians and then they strike. Not an easy enemy for the U.S. or Iraq to fight.

Coming up next, the search for a winning strategy in a guerilla war.

Also, later, he's been called the Bush administration's man in Baghdad. U.S. administrator XX. We'll take you along for the ride. Stay with us.

(COMMERCIAL BREAK)

COOPER: Welcome back. Live from Baghdad, I'm Anderson Cooper.

As we mentioned at the top of the program, just a short time ago, Al-Jazeera showed a video purporting to show a hostage U.S. Marine.

Now, until we know this video is real and that the man's family has XX are using to demoralize and defeat the U.S. and the new Iraqi government.

It's a classic guerilla war tactic. The U.S. military, are they employing the right strategy? That's the question. The debate tonight from CNN's senior Pentagon correspondent, Jamie McIntyre.

(BEGIN VIDEO)

JAMIE MCINTYRE, CNN SENIOR PENTAGON CORRESPONDENT: This is what victory in Iraq looked like last year.

Today, it's a different story.

UNIDENTIFIED MALE: Take cover!

MCINTYRE: The surge in car bombings, convoy attacks, kidnappings, political assassinations and oilfield sabotage makes U.S. hopes for a peaceful, stable and democratic Iraq look like a pipedream.

Victory has acquired a new meaning.

COL. PAUL HUGHES, U.S. ARMY: Victory is no longer the last gladiator standing on the battlefield holding up his sword.

MCINTYRE: Colonel Paul Hughes was the first director of strategic planning for the U.S. coalition in Baghdad.

HUGHES: Victory is now the re-imposing of peace on our terms.

MCINTYRE: Deputy Defense Secretary Paul Wolfowitz, one of the Pentagon's chief advocates for the war, has no doubt the insurgents will fail, and insists the upsurge in attacks shows they are desperate.

PAUL WOLFOWITZ, U.S. DEPUTY SECRETARY OF DEFENSE: I am absolutely sure that these evil people will be defeated.

All they offer - and they're very good at it - is death and destruction.

UNIDENTIFIED MALE: OK. No I.D., XX.

MCINTYRE: The U.S. is banking on the handover of sovereignty to help it shed its occupier label, and pinning its hopes for the future on Iraqization. WOLFOWITZ: The key to victory here is Iraqis governing themselves and Iraqis defending themselves.

MCINTYRE: In the insurgent stronghold of Fallujah, U.S. Marines engaged in some of the fiercest fighting since the early days of the war, promising to pacify the city by force.

Instead, the Marines fell back. And U.S. commanders tried an exercise in Iraqization.

They created a Fallujah brigade of former Iraqi soldiers, led by one of Saddam's old generals, to restore order.

But Fallujah is still a hotbed of resistance, and the Pentagon now concedes it was an experiment that didn't work.

WOLFOWITZ: Fallujah is not a model. I mean, Fallujah was probably the worst place in the country. And the Fallujah brigade was patched together to try to begin to manage that problem. And we haven't - we're not at the end in Fallujah.

MCINTYRE: Before the war, the Pentagon knew a lot of things could go wrong. But none of the top civilians thought the U.S. would be locked in a fierce guerilla war more than a year after invading the country.

RUMSFELD: If you had said to me a year ago, describe the situation you'll be in today, one year later, I don't know many people who would have described it - I would not have - described it the way it happens to be today.

MCINTYRE: While Rumsfeld has argued that the tenacity of the insurgency could not have been anticipated, it was a top concern of military thinkers here at the Army War College.

In February of 2003, a month before the war began, they issued a report that was remarkably prescient.

Professor Andy Terrell (ph) co-wrote the report, which among other findings said that, "Without an overwhelming effort to prepare for occupation, the United States may find itself in a radically different world over the next few years, a world in which the threat of Saddam Hussein seems like a pale shadow of new problems of America's own making."

ANDY TERRELL, STRATEGIC STUDIES INSTITUTE, U.S. ARMY WAR COLLEGE: We felt that that part of the world had enough of a history of concern about Western domination, that if even a very small portion of the population chose to resist us by force, that this could be a very serious problem for our troops.

MCINTYRE: One of the recommendations of the report was to keep the 400,000-strong Iraqi army intact. But the Pentagon decided to disband it.

TERRELL: The Iraqi army was one of the most important sort of forces for unity within that country.

I would have tried to reach out to those lower ranking people.

HUGHES: One of the things that is a cardinal sin for combat soldiers is to lose contact with the enemy. We have lost contact with them. We don't know where they went. We don't know what they took with them. We don't know what their intentions were.

MCINTYRE: Col. Hughes says, even if the U.S. crushes the insurgents militarily, it's not enough.

HUGHES: To say that we win militarily on the ground is good. It's important.

But have we won in reestablishing the educational system? Have we won in eradicating corruption?

And if those are not happening, then our occupation of Iraq is going nowhere.

MCINTYRE: The Bush administration argues its occupation will lead to a better Iraq, even if it comes at a high price in lives and treasure.

WOLFOWITZ: Jamie, we didn't have a choice. I mean, we lost 3,000 in one day on September 11.

And anyone who thinks that this was over when we got to Afghanistan doesn't understand the extent of penetration of these terrorist networks, doesn't understand the way in which every state that supported terrorism - and Saddam was one of the most prominent state supporters of terrorism - was going to feed this problem over time.

MCINTYRE: While Saddam's link to terrorism is now subject to debate, it's a debate perhaps rendered irrelevant by what some in the military argue has become a self-fulfilling prophecy.

HUGHES: Iraq has become a part of the war on terror. I'm not convinced that it was part of the war on terror before the war. But it certainly is in the play now.

And while we can eliminate insurgents, we can eliminate terrorists, there are more popping up all the time, because they're attracted to this place.

(END VIDEOTAPE)

CAROL LIN, CNN CENTER, ATLANTA: I'm Carol Lin at the CNN Center in Atlanta.

So, can the United States and its Iraqi allies win this guerilla war in Iraq? Will this handover of sovereignty help them do that? And is there a clear exit strategy for the U.S. forces in Iraq?

Two points of view tonight. I'm joined from Little Rock, Arkansas by former NATO commander and recent Democratic presidential candidate, General Wesley Clark.

And in Washington, a member of the Pentagon's Defense Policy Board, Ken Adelman.

Good evening, gentlemen.

First to you, General Clark. Has the administration done anything right in Iraq? Can you see a light at the end of the tunnel?

GEN. WESLEY CLARK, FORMER NATO COMMANDER: Well, I think the administration has moved in the direction which John Kerry and I and others had been advocating for a long time, which is to try to bring in the international community and use international authority to help take away some of the stigma of occupation in Iraq.

The administration didn't have an exit strategy, didn't have a plan for success. Now they have a plan. We don't know if it's going to be successful.

But, yes, they're attempting to cope with the situation, and they're moving in the direction which we've advised them to do.

LIN: Ken, fundamentally, what is going to change after the handover starting July 1?

KEN ADELMAN, DEFENSE POLICY BOARD: It's their country. That's the main thing that's going to change.

And so, Iraqis have to think, who are the resisters and what are they resisting? They're not resisting American occupation, because now they have an Iraqi government. And they're on the way to have a democratically elected Iraqi government.

So, what are they blowing up? And for what purpose?

And what you can say is, they're nihilists, they're anarchists. They're terrorists. And they're blowing up nothing that is going to help Iraq. They're blowing up a lot of Iraqis, that is going to hurt the future of their country.

LIN: General Clark, Prime Minister Allawi has made it pretty clear that he wants the Iraqi forces to secure the country. Obviously, these Iraqi forces need a lot of training.

Is this the right strategy to fight this kind of insurgency that's going on right now?

CLARK: I think, if it's possible to build forces, that it could help unify the country.

But this is a deep problem, because you've got not only terrorists in there, you've got people who are fighting for their own self interests. You've got Kurds who are ready to declare independence at the slightest opportunity, Sunnis who are afraid of Shiite domination and some in the Shiite community who are allied with Iran. So there's a multiplicity of motives. This is a stewpot of violence in there. It's going to be very difficult for anybody to sort this out democratically.

LIN: General, you know that President Bush is going to the NATO summit in Istanbul this coming week to ask the allies there to contribute, if not troops, at least military advisors - trainers on the ground for those Iraqi forces.

What in NATO's history of warfare has ever compared with the insurgency fight that we're seeing on the ground in Iraq right now?

CLARK: Well, NATO has done a pretty good job of helping bring peace to the Balkans, both in Bosnia and Kosovo. It's got its forces now in Afghanistan.

Frankly, it doesn't have a lot of forces left over to put into Iraq. But it could help by training, and I hope it will do so.

LIN: Ken, is there a clear exit strategy, do you think? I mean, what would be the precipitator to the U.S. forces withdrawing completely from Iraq?

ADELMAN: Well, Carol, the point of the exercise is not to have an exit strategy. The point of the exercise is to hand over an Iraq that is going to be freely elected, at least is safe and is on the road to progress.

Iraq has something today that it did not have for the last 30 years, and that is hope - hope that they can create a better future. And under Saddam Hussein, it was just hopeless.

LIN: Ken, ...

ADELMAN: And Saddam ...

LIN: ... but a hope based on what? I mean, we've got five ...

ADELMAN: Hope based on ...

LIN: ... hostages right now being held in that country.

ADELMAN: Right.

LIN: And the militants seeming to be running free, kidnapping at will, killing at will.

What can the Iraqi people, much less the American people with forces on the ground, look for in terms of hope right now?

ADELMAN: They can look for hope that the Iraqi is going to take over as prime ministership on Wednesday. There's going to be an Iraqi president. There's going to be on the road to democratic leadership. And, therefore, it's going to be their country. And that is a very different thing than it has been for the last three decades.

You are absolutely right, Carol, that there are terrorists there. And they are people blowing up and taking hostages.

They are - we know that this is the age of terrorism. We know that this is a worldwide problem, and they're focused on Iraq today.

LIN: General Clark, several of the experts that I've spoken to today - take a look at the big picture of Iraq. Take a look at the fact that American forces have withdrawn from Fallujah.

And I have spoken to a journalist who was embedded with the insurgents in Fallujah. He says that the terrorists there are building bombs freely, training their future terrorists freely.

What he envisions is that Fallujah becomes the equivalent of the northwest province in Pakistan, that it is given over to the insurgents, and the rest of Iraq, 80 percent victory for the United States, the U.S. coalition, to say that, yes, Iraq is now a democratic country.

CLARK: Well, we're going to have to go back into Fallujah with forces. But I think you've got to also look at the big picture in the region, Carol.

You have Iran trying to build a nuclear weapon. What we're now doing in Iraq is, we're totally bogged down with the United States Army.

This serves the Iranians' interests. We are distracted while they are building a nuclear weapon.

And when we need to muster our resources and work with the Europeans to put the pressure on the Iranians to come clean, instead we're begging the Europeans to come and help us get out of a mess we created for ourselves in Iraq.

So, in my view, Iraq was a strategic blunder by the United States. If we'd look for who was really helping terrorists, we would have gone directly at Iran right after 9/11. They are connected. They were collaborating with al Qaeda.

And we have a real problem on our hands in Iraq right now.

LIN: Ken Adelman?

ADELMAN: Now, listen. I talked to Wes Clark many times after 9/11, and I never heard him saying that we should invade Iran. And I did hear him say that under the right conditions we should go into Iraq.

Now, I think his position has been all over the lot, just like John Kerry's position has been all over the lot, voting for the resolution, voting against the resolution, voting - saying we can't cut and run, voting for zero funding so that we cut and run. I mean, there has been a great inconsistency.

But if Wes Clark was saying after 9/11, that we should go in with force into Iran, that is a startling thing to say, and I'd like to see some evidence that ...

LIN: Well, gentlemen, ...

CLARK: Well, I'd like to have that discussion, Carol, just a moment here, if I could.

Number one, I said we should be working against Iran. I didn't say invade.

But now we don't have the military options, because we are committed in a way we didn't have to be committed.

Number two, I would have supported the president taking the Iraq situation to the United Nations. I would have never given him a blank check to invade Iraq as he did. It was necessary, ...

ADELMAN: No, but John Kerry ...

CLARK: Just a minute.

ADELMAN: ... but John Kerry XX ...

CLARK: Iraq was not an imminent threat.

LIN: Gentlemen, ...

CLARK: And, Ken, ...

ADELMAN: But John Kerry voted for the ...

LIN: Our intention, gentlemen ...

CLARK: You said it would be a cakewalk, Ken. It hasn't been a cakewalk.

ADELMAN: John Kerry voted for the resolution.

CLARK: It won't be. Carol, this is a very important question, and I hope that we'll be able to look at it in a regional context, because that's the way we must deal with it.

LIN: All right, Ken. So, in conclusion here, what do you think the United States needs to do next?

ADELMAN: Well, I think that what the United States is doing is trying to have the Iraqis step up to the plate and take more of their own security, take more of their own future into their own hands.

I think it is absolutely critical to keep the date of next January for the free elections going. And it is absolutely critical to have a consistent policy.

And, tell you the truth, Wes Clark and John Kerry have been all over the lot ...

LIN: All right. I have to leave it there. CLARK: Carol, I don't think ...

LIN: We don't mean to go down the campaign trail tonight, gentlemen. Thank you very much.

(CROSSTALK)

LIN: Ken Adelman, thank you very much. General Wesley Clark. The two of you will have to continue on your own time.

ADELMAN: Great. OK.

LIN: Next on CNN PRESENTS, Iraq between security and sovereignty. The U.S. is pulling back, yet staying put. So, who is really going to be in charge after the handover? This man? Or this one?

(COMMERCIAL BREAK)

LIN: There are a couple of big questions Iraq's new government has to answer almost as soon as it takes power. First, what happens to Saddam Hussein? Iraq's Interim Prime Minister told CNN his government will take custody of Saddam early next month.

However, also on CNN Secretary of State Colin Powell said a transfer of legal custody does not mean the U.S. military will transfer physical custody any time soon. That should be quite a perp walk.

Another big question is without well-armed and well trained security forces, how will Iraq's new government deal with the violence? Will they impose martial law? Here is Interim Prime Minister Iyad Allawi.

(BEGIN VIDEO CLIP)

IYAD ALLAWI, IRAQ INTERIM PRIME MINISTER: What we are considering is a public safety defense, or public safety law. And other laws that we implanted definitely we are mobilizing our police force. We definitely are mobilizing our army. And make it ready to confront the enemies of Iraq.

(BEGIN VIDEO CLIP)

And the criminals and the terrorists. And we really intend to turn every stone in the country to look for these guys. And capture them. And put them through to justice.

LIN: The questions about security and Saddam Hussein's custody point to an even more fundamental question. After the handover, who is in charge here? David Ensor looks at the potential for cooperation and conflict between Iraq's brand new government, and the United States' brand new ambassador.

(BEGIN VIDEOTAPE) DAVID ENSOR, CNN NATIONAL SECURITY CORRESPONDENT (voice over): Workman in Baghdad rushing to transform one of Saddam's former palaces into the new U.S. embassy. Like the embassy, the future of the Iraqi nation is a work in progress.

John Negroponte, America's first ambassador to the new Iraq insists the U.S. will no longer be running the country. In Baghdad he says, he will be just another diplomat.

JOHN NEGROPONTE, U.S. AMBASSADOR TO IRAQ: I also don't see myself as running some kind of super embassy Senator. I see it more as obviously not a traditional embassy. It's going to be an embassy operating under very challenging circumstances.

ENSOR: Very challenging circumstances may be diplomatic understatement. Though protected by U.S. troops and miles of razor wire, American diplomats in Iraq like James Jeffrey will more than earn their danger pin.

JAMES JEFFREY, AMERICAN DIPLOMAT IN IRAQ: We received incoming rocket and mortar fire in this city quite often. But our goal is to be sure that we are not overrun. That we do not get significant hostile fire. And so far we have been lucky.

ENSOR: From this building in the heavily protected green zone of Baghdad, Negroponte will lead an embassy of about 1,000 Americans and 700 Iraqis. Their priorities will be security. Preparing for Iraqi elections, and overseeing $18 billion of reconstruction assistance for Iraq.

FRANK RICCIADONE, U.S.-IRAQ TRANSITION OFFICIAL: That is the largest foreign assistance program anywhere.

ENSOR: That is huge.

RICCIADONE: That is huge. And that takes people to administer properly.

ENSOR: Critics say that the U.S. embassy will be much to big. Signaling that the Bush administration plans to hang on to control of Iraq.

IVO DAALDER: FMR NATIONAL SECURITY COUNCIL STAFF: This is going to be the largest embassy the United States has ever created anywhere. Larger than embassy Saigon during the Vietnam War. And that sends a message.

ENSOR: U.S. officials say such concerns are misplaced.

RICCIADONE: No (UNINTELLIGIBLE) ambassador goes out expecting to run a foreign country. Even if that were in his mind, the Iraqis wouldn't let him.

ENSOR: Among Iraqis, the man to watch is the new prime minister. Dr. Iyad Allawi. Fifty-eight-year-old Shiite Muslim and a long time emigre who makes no apologies for his past contacts with the CIA. IYAD ALLAWI, IRAQ INTERIM PRIME MINISTER: We don't feel ashamed of being in touch and having been in touch to liberate Iraq from the evil forces of Saddam.

ENSOR: Reuel Gerecht, a former CIA officer knows Allawi's past well.

REUEL GERECHT, FMR. CIA OFFICER: He likes to think of himself as a man of ideas. And he also has a certain -- how do I want to put this politely? Respect for the use of force.

ENSOR: In the mid 90's, Allawi tried to organize unrest against Saddam Hussein. U.S. officials predict he will be inclusive, but tough.

RICCIADONE: I know he's a strong leader. He's a total patriot.

ENSOR (on camera): But analysts say Allawi has no political base. That he will be dependent on the continued good will of the most influential man behind the scenes. The reclusive Ayatolla Sistani.

The real test of how much control Allawi has may come with the next Fallujah. The next military challenge to the 140,000 or so American troops who remain on the ground in Iraq.

COLIN POWELL, SECRETARY OF STATE: U.S. forces remain under U.S. command. And will do what is necessary to protect themselves.

GERECHT: If you have an insurrection and a Sunni Triangle. If you have people attacking the Americans, the Americans may want to respond with force. There may be individuals in the government who don't want them to. And how this is resolved quickly in a way that one needs to if one is fighting encountered insurgency. It's not evident to me how that is going to work yet. We'll have to see.

ENSOR (on camera): Do you think that the handover is really a handover? Or will Ambassador Negroponte end up being procounselor of Baghdad?

THOMAS PICKERING, FMR. UNDERSECRETARY OF STATE: We all know that you won't end the CPA one day. And have a fully independent Iraq with a typical American embassy that does the (UNINTELLIGIBLE) and holds dinner parties. And does a lot of useful things, but is not involved on the next day.

GEORGE W. BUSH, PRESIDENT, UNITED STATES: Prosperity and freedom and dignity are not just American hopes.

ENSOR: But Pickering warns, Washington can't continue to pull the strings in Iraq.

PICKERING: And if we think in fact that it's got to be operated in a kind of dark room way, as an American colony forever, we won't get there. In fact, the Iraqis are in my view very critical along with the international community in bringing about the solution that we seek.

ENSOR: Like the embassy, Iraq's future is a project under construction. And under fire. Finding the right balance between security and sovereignty for Iraqis will not be easy.

(END VIDEOTAPE)

LIN: Another open question involves who will be calling the shots from Washington come January. Next, how the advent (ph) flow of news from Iraq effects the political fortunes of George W. Bush, and John Kerry.

Jeff Greenfield takes us to a battleground state in the presidential election when we return.

(COMMERCIAL BREAK)

LIN: Iraq. The mounting casualties and the long-term consequences of the war are not only concerns here of course. But also back at the U.S. where -- well actually right here in the U.S. where Americans appear to be growing increasingly anxious. A new CNN "USA Today" gallop poll finds that for the first time since the start of the war, a majority of Americans believe the U.S. made a mistake sending troops to Iraq.

The war here or the war in Baghdad is certainly on the minds of some key voters in one battleground state. With more on that, here is CNN's Senior Analyst, Jeff Greenfield.

(BEGIN VIDEOTAPE)

JEFF GREENFIELD, CNN SENIOR ANALYST (voice over): The fighting goes on here. In the cities, on the road, in the counsels of government far from home.

JOHN KERRY, PRESIDENTIAL CANDIDATE: These people are so petty.

BUSH: Anger is not an agenda for the future of America.

GREENFIELD: And the political fighting goes on here.

KERRY: Discarded, and disrespected.

GREENFIELD: Competing claims to make Iraq and the world a safer freer place. But the judgment on the war and on the presidency will be rendered in places like this. Pennsylvania's Lehigh Valley. About 40 miles north of Philadelphia. Where 600,000 people live in a battleground region of a key battleground state.

Smoke Stack Industries (ph) symbolized by this giant Bethlehem steel plant are mostly gone. While new enterprises, Boar Sure Technologies (ph), the Lakovia (ph) Bank, the energy giant PPI, have brought new jobs.

It's a region that includes urban centers like Allentown and Bethlehem. Suburbs, farms, and rural communities as well. REP. PAT TOOMEY, (R) PENNSYLVANIA: I think of it often as a slice of America. You know. My district has a little bit of almost everything America has.

GREENFIELD: Republican congressman Pat Toomey.

TOOMEY: It really runs the gamete. And is probably one of the more diverse congressional districts in the country.

GREENFIELD: Politically, it is an unpredictable region. Pat Toomey won the district as a staunch conservative. And Ronald Reagan carried the district twice. But so did Bill Clinton. And Al Gore narrowly beat George W. Bush here four years ago.

So how do the people of the Lehigh Valley see the war in Iraq? There is no dominant theme. But the shift in the nations' calculus has been mirrored here. Nationally, polls show Americans are now more pessimistic about the war. More skeptical about the reasons for waging it. And prospects for it's success.

And while they fly a lot of flags in the Lehigh Valley to show support for the troops...

UNIDENTIFIED MALE: Support for the war, for the President has decreased. And we are hearing more and more doubts about why we are there. And what are accomplishing.

Glenn Cransley (ph) edits the editorial page of "The Morning Call." The dominant newspaper in the region.

UNIDENTIFIED MALE: The one thing that I believe that holds people back from being more negative about the war is this very strong sense of wanting to be supportive of the men and women who are serving over there.

ENSOR: To hear for ourselves, we invited eight voters to join us at the Lehigh University Library. All voted last time. Four for Bush. Four for Al Gore.

GREENFIELD (on camera): But you are definitely voting in November.

GREENFIELD: And all of them say they are now undecided. Their comments tell us a lot about how the core Iraq messages of President Bush and Senator Kerry are being received right now.

UNIDENTIFIED MALE: Saddam certainly from the standpoint of being a dictator, and slaughtering thousands of people a day, you can't argue with him being gone.

GREENFIELD: Dr. Jeff Black, a chiropractor backed the war, and agrees it was good for Iraq. It's the pace of progress he says that now worries people.

UNIDENTIFIED MALE: We were all under the impression that regardless of why we went in, and what the ultimate intention was in the beginning, we would go in and just solve this. Be done with it. Clean it up. Wash our hands and leave. And that obviously hasn't happened.

GREENFIELD: Those who were skeptical from the beginning have grown more so. They hear the president's optimism, but they don't buy it.

BUSH: We believe that freedom can advance and change lives in the greater Middle East.

UNIDENTIFIED MALE: As the war has progressed, it seems like they cannot justify the cause that they went in for. They cannot find what they said was there.

GREENFIELD: Craftsman, Glenn Kern (ph).

UNIDENTIFIED MALE: And everyday, you see in the news more and more people dying for things that they thought they knew. But they really didn't know.

BUSH: There are difficult says ahead. And the way forward may sometimes appear chaotic.

GREENFIELD: Helen Seccle (ph) accepts the President's call for patience for a very personal reason.

UNIDENTIFIED FEMALE: My son fought in the war. And as he pointed out, you cannot go in, bomb a country, and expect to leave right away. And just leave them left to pick up the pieces. You have to be there for as long as it takes.

GREENFIELD: You can also hear echoes of discontents from earlier wars. A sense that there is no light at the end of the tunnel. Teacher Pam Meyers (ph).

UNIDENTIFIED FEMALE: ...that there is no clear end. We don't see when can we bring our boys home? And I understand that you can't put a timeline on something like this. But there doesn't seem to be any end in sight.

KERRY: Attracting international support in a situation like Iraq is a presidential leadership.

GREENFIELD: But if President Bush is losing support on his (UNINTELLIGIBLE) of the war, has John Kerry convinced voters that he has a way out? No. Or at least not yet.

The latest ABC news, "Washington Post" poll showed that while 48 percent think the president has a clear plan on Iraq, 42 percent think Kerry does. And the gap widens on the broader question of a clear plan to fight terrorism. Bargo (ph) suggests that it's part of a bigger problem for Kerry.

Joni miller, Allentown, Pennsylvania, "I don't feel like he is really firm on any real issues. I just don't feel like -- I don't have a gut good feeling for him." GREENFIELD: But in the end, it is the President who took the nation to war in Iraq. And it may be that if the news from Iraq is bad, if voters lose faith in the reasons for the war, or it's prospects, it will jeopardize his reelection even if Kerry's policies remain murky.

"The Morning Call" backed Bush four years ago. But if they had to make a call now...

UNIDENTIFIED MALE: I think we will go the other way. I think we would not support his reelection.

GREENFIELD: And it is the comment (ph) of the war crimes he says that is the key.

(END VIDEOTAPE)

LIN: No matter who is running the war, U.S. taxpayers are footing most of the bill, and the costs are staggering. Why aren't they getting more help from Iraq's oil wells? Some answers when we return.

(COMMERCIAL BREAK) '

LIN: The U.S. may be stepping aside when it hands over sovereignty in Iraq. But in many ways, it is also staying put. American troops are not going anywhere any time soon. And that is getting pretty pricey. Can the U.S. AFFORD IT? CNN'S Drew Griffin investigates.

DREW GRIFFIN, CNN CORRESPONDENT (voice over): Just over a year ago, the 101st airborne, the Screaming Eagles captured Najaf. The army's 3rd Infantry Division took down Baghdad's airport. And then 3rd Battalion Fourth Marines pulled down the statue.

Mission accomplished. Their work was done. Or so it seemed. The Pentagon planned that by this summer, troop levels would be coming down. But today the screaming Eagles, the 3rd ID, the three (UNINTELLIGIBLE) Marines, and others expect to go back.

BUSH: Some are preparing to head out. For a second tour. For the foreseeable future, 138,000 troops will stay in Iraq. And for the foreseeable future, taxpayers will foot the bill, $30,000 a month for each soldier.

GRIFFIN (on camera): The White House says the war in Iraq has cost nearly $120 billion so far. And is asking congress for 25 billion more. Even in federal terms, and here on Wall Street, that is starting to sound like real money. The question is, can we afford it? Can the U.S. taxpayer continue to support a mission with a monthly bill of $4 billion?

DAVID WEISS, CHIEF ECONOMIST, STANDARD AND POORS: I'm not saying it is a drop in the bucket, but we can do it.

GRIFFIN: David Weiss, Chief Economist at Standard and Poors. WEISS: But if this war continues for another four or five years, and we're still having military actions, then it does start to become an issue.

GRIFFIN: In the long term, he says raising the deficit to pay for the war can increase inflation, and pull money from other government programs. In the short term, Iraq is already effecting the U.S. economy. Instability in the Persian Gulf raises the cost of oil.

WEISS: Basically the more you spend filling up your gas tank, is money you don't have to spend at the shopping mall. So it's harder to get job growth in the United States.

GRIFFIN: Many people expected lower oil prices because the Bush administration forecast -- abundant oil from the new Iraq. Although there was evidence before the war that Iraq's oil infrastructure was badly neglected, the administration talked as though production would soon double.

WOLFOWITZ: The oil revenues of that country could bring between 50 and $100 million over the course of the next two or three years. We are dealing with a country that can really finance it's own reconstruction. And relatively soon.

GRIFFIN: This year, Iraq's oil exports are on target to hit $15 billion, not 50.

ED CHOI (ph), FMR OIL COMPANY EXECUTIVE: It was wishful thinking. A lot of wishful thinking.

GRIFFIN: Ed Choi (ph) is a former oil company executive who has worked on international deals. He says Iraq has the second largest oil reserves in the world. But that billions of additional dollars are needed to explore, drill, and pump it.

CHOI (ph): In the most optimistic scenario, you may be able to achieve doubling of production in ten years. That would be a remarkable achievement.

GRIFFIN: Remarkable under ideal conditions. But in Iraq, pipelines, and ports are prime targets of saboteurs. There have been more than 130 attacks in the last seven months.

UNIDENTIFIED MALE: When we can get security in Iraq, and we are not there yet, I would -- I think people will want to invest in the Arab world are going to see Iraq as a base in which operate. Because Iraq has huge resources. We are not talking about an international basket case. We are talking about a country with rich natural resources. By which of course we mean mostly oil.

GRIFFIN: The administration talks long-term. Predicting Iraqi forces will bare more of the burden. But vowing to send a many American troops as necessary. Can the U.S. afford this mission? The President says the country and the world cannot afford to lose.

BUSH: America and all the world will be safer when hope has returned to the Middle East.

(END VIDEOTAPE)

LIN: Some final thoughts when we return.

(COMMERCIAL BREAK)

LIN: U.S. officials are quick to point to their accomplishments in Iraq. Rebuilding schools, medical facilities. Placing the country on the road to democracy. The road however, is anything but clear. Even the most optimistic U.S. general will tell you nothing changes over night. The handover is happening, but it's unlikely American troops will leave any time soon.

It's easy amidst the daily borage of bombs and bullets to be pessimistic. But it's also easy to overlook Iraq's possibilities, the progress that has happened thus far.

That's it for this special edition of CNN PRESENTS. Thanks for joining us.

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