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POLITICAL storm erupted on June 28 over a controversial logging deal signed by

the country's two prime ministers that some analysts have criticized as

illegal.

The agreement, signed earlier this month, transfers the

responsibility for overseeing logging deals with Thailand from the Finance

Ministry to the Defense Ministry.

The move will deprive the Finance

Ministry of key revenue-raising powers and provide a lucrative cash source for

the Defense Ministry.

Sources close to the government said the decision

contravenes Cambodia's budget law, which stipulates the Finance Ministry is the

sole recipient of state revenue prior to disbursement.

"It's totally

illegal ... it's really outrageous," said one diplomat, who said the deal had

been kept secret from the Finance Minister Sam Rainsy and Foreign Minister

Prince Norodom Sirivudh.

"I was not informed about this," Sirivudh

confirmed to Reuters. "It seems my ministry was not informed. Normally it must

pass through this ministry."

"First, I say to my government ... I'm quite

surprised as foreign minister. Before we had legal procedures."

The

decision was outlined in a June 17 letter to Thailand Prime Minister Chuan

Leekpai signed by Cambodia's First Prime Minister Prince Norodom Ranariddh and

Second Prime Minister Hun Sen.

"According to the newly established

procedures and modalities, the Ministry of National Defense of the Kingdom of

Cambodia was entrusted to deal directly with the matter of timber export," said

the letter, a copy of which was passed to Reuters.

The old laws governing

the export of timber have apparently been scrapped without any parliamentary

mandate.

Timber export previously required the approval of the Ministry

of Agriculture, Forestry and Fishery, the Ministry of Commerce, the Ministry of

Finance and Economics, and the Ministry of Foreign Affairs and International

Cooperation.

But, the letter said, these rules "were no longer

valid."

Since March 1, Cambodia has banned the export of unprocessed

timber. But the agreement allows two Thai logging companies to recover an

unconfirmed 180,000 cubic meters of cut but unprocessed timber valued at $5.5

million.

A government official said the export license fees had already

been paid to the Defense Ministry by Chaophraya-Irrawaddy Co Ltd and the BLP

Import Export Co.

The Japanese Embassy has written a "bluntly worded"

letter to the Foreign Ministry seeking clarification of the terms of the

agreement. An Indonesian company with local logging interests is also

questioning the deal, which gives exclusive export rights to the two Thai

companies.

The unprecedented arrangement means the Ministry of Finance

will be deprived of substantial earnings from export taxes and licensing fees,

senior government officials said.

"It makes a mockery of the whole

environment question. It makes a mockery of the International Monetary Fund

(IMF) control of finances," said a senior official close to the

government.

"The IMF has set limits on financial spending .... and it

shows they're [Defense Ministry] desperate because they're not getting arms from

anybody," he said.

When asked if the deal was viewed as a "desperate step

to obtain money for military purchases", one senior government official said,

"Yes, yes, yes. That's why the defense ministry will say they don't need a

special permit, no need to certificate our policy, no need to talk with the

Ministry of Agriculture, no need to discuss with Commerce [ministry] or Finance

[ministry] because they (Defense Ministry) need money."

He warned the IMF

would reject the logging deal.

"I think if the prime ministers do this,

it is wrong. It is very wrong, and if the IMF know this, they will not accept

it."The official said no government ministries were briefed about the decision

by the two prime ministers apart from the Defense Ministry.

Defense

Minister General Tea Banh told Reuters all the revenue from the timber deal

would be paid to the Defense Ministry. Banh justified the deal on the grounds

the timber would "rot" if it lay uncollected.