http://observer.co.uk/international/story/0,6903,425913,00.html

But al-Suhail knows it is not much of a problem. Jammed in the road outside the four-month-old fake fort are rows of Mercedes, BMWs and Japanese 4x4s. Most of his tables have been booked for days. 'I've been in worse situations in the last 10 years,' he says. He smiles and crosses his arms and his silver watchstrap reflects the neon that glares from the false battlements above.

He is not alone in his high spirits. From the nouveaux riches sampling the Castello's châteaubriand to the beggars who have barely tasted meat in a decade, everyone in Baghdad agrees that things are looking up. Once, the city's streets were full of rubble and stank of sewage, rotting rubbish, violence and fear. Now - as the trade embargo imposed after the Iraqi invasion of Kuwait moves into its 11th year - they are full of traffic, brightly lit shops and consumer goods. There are still spots of appalling misery and deprivation, but everyone says things are changing, that the worst is over, that they have survived.

In fact, they have done more than survive. Baghdad is now a city where $35,000 cars are bought within minutes of being driven into showrooms, where women in leopardskin coats and miniskirts go to the National Theatre to watch the latest avant-garde plays, where you can get a PlayStation2 without waiting, where the cafés are full until late and markets open around the clock.

Baghdad is also a city that is proud: proud of having survived the sanctions, proud of having survived three bouts of bombing by US and British planes, and proud, above all, of the man whose heavy, jowly features are on a wall in every office and classroom, on a corner on every street, on 20ft-high posters, placards and banners, on book covers, newspapers and magazines.

Last Wednesday - the anniversary of the start of the air war in the Gulf - Saddam Hussein, now 63, received a 21-gun salute and addressed the nation on television. He spoke of the great victory won in the Umm al-Marrik (Mother of all Battles) against the 650,000-strong allied forces 10 years ago. The victory, he said, was continuing and growing. The Iraqi people, and the Arab and the Islamic worlds, could expect further greatness in the years to come.

Saddam's satisfaction is understandable. Ten years ago he was a pariah. Defeated militarily and diplomatically, his economy was in tatters and his hold on power looked shaky. Now everything is different.

The 500-mile-long road from Jordan to Baghdad cuts across one of the bleakest, hottest deserts in the world. Only when you reach the Euphrates, after 10 hours of driving, does green begin to spatter the dirty, blasted monotony of sand and rock. But, though long, it is a surprisingly easy drive. The road from the Jordanian capital of Amman may be crowded, bumpy and narrow, but once across the border, and past a recent statue of a sword-wielding Saddam on a rearing horse flanked by four flaring Scuds, you hurtle along a new six-lane motorway complete with laybys and picnic spots.

On the old road that still runs parallel, a stream of trucks and tankers rumbles west. They are carrying oil, dates, grain and dozens of other products out of Iraq and out of the United Nations- imposed embargo. Soon the sanctions-busters will not even need a road. Two or three times a week flights take off from Amman for Baghdad - again a contravention of the UN resolutions. Similar flights, all supposedly banned under the sanctions, are planned from Egypt and, it is reported, from Moscow.

There have already been flights into the newly re-opened Baghdad airport from almost every Gulf state. There have been planes from France, Italy and, indirectly, America and the UK.

The marbled lobbies of the five-star hotels in the capital are now packed with businessmen fighting over lucrative contracts. Two months ago 1,450 firms from 30 countries laid out their wares at a trade fair. Ironically, the US company SmithKline Beecham was selling its drugs at an exhibition last week to combat 'depression/anxiety, panic and obsessive compulsive disorder'.

At a government level, Iraq has signed new commercial agreements with Turkey, Russia and Libya. There have been secret negotiations with the Syrians, themselves suspected of receiving huge quantities of smuggled oil by rail in recent months. Last week the details of a huge, new trade treaty were being thrashed out with Cairo.

Even British companies have been negotiating with the regime. One consortium recently opened an office in Jordan - as close as they can get without breaking the embargo - so they are well-placed when the nation with the second biggest oil reserves in the world officially opens for business once more.

'The sanctions are crumbling,' said Professor Humam al-Shamaa, a key government economic consultant. 'They are becoming a joke.' Few, even in Whitehall and Washington, can honestly disagree with him. For four years after the Gulf War the Iraqi people suffered terribly. Many across Iraq, particularly in the south, are suffering still. UN reports suggest hundreds of thousands, particularly the young and old, died as a result of the embargo. Five years ago Saddam agreed to a deal that allowed him to sell oil as long as the earnings, placed in a UN-administered account in New York, were used to buy food and medicine. Much of the cash is soaked up by payments to the UN and war reparations to Kuwait. Red tape, and alleged wilful hindrance, have meant that shortages, particularly of drugs, are common.

The result has been serious damage to the country's health. And though the dying children in Iraq's hospitals are cynically exploited by a wealthy regime to impress visiting journalists, in many cases the UN supervisory system has failed. Permission to import equipment used to treat cancers - for fear of use in weapons programmes - is denied. But it is those weapons - and Saddam's unwillingness to reveal their details - that are at the root of the problem. If, the British and American governments say, Saddam allows international inspectors to check he is no longer able to make nuclear, chemical and biological weapons of mass destruction, then the sanctions will be lifted. They have hinted that the 'no fly zones' in the south and north will be ended too. But while the rest of the world is aiding the collapse of sanctions, Saddam has little incentive to make concessions.

One Western diplomat told The Observer : 'The British and the Americans have painted themselves into a corner. They can't lift the sanctions, because it will hand Saddam a major victory. But the system is collapsing anyway. Either way they'll end up looking like fools - and stupid, vindictive [fools] at that.'

Before Khalil al-Suhail invested in his restaurant he did some market research. 'Soon I knew I'd be fine,' he said. 'I knew I could rely on "embargo gold".'

The harsh truth is that the sanctions, in addition to inflicting suffering on millions, made many very rich. Uday, Saddam's psychotic eldest son, has run the bulk of the regime's oil-smuggling operation and made his father one of the richest men in the world. Sources estimate the dictator's wealth at more than £3 billion.

Through contracts and franchises handed out to associates, a wider circle of loyalists has made a fortune. Thousands of young Iraqi entrepreneurs have taken advantage of the distortions in demand and distribution caused by the sanctions - almost always with a nudge and a wink and a pay-off to the regime. The rationing system maintained under the 'Food for Oil' programme has allowed big farmers to make huge sums selling grain and other commodities. And the huge reconstruction projects - such as the motorways - have made many more rich.

Support for Saddam among the majority of Iraqis - despite his well-known brutality - is in no way diminished.

The al-Hashemi family are the sort of people Western planners hoped would oppose Saddam. Intellectual, politi cised, educated (and even with vital military connections), they remember 'the good days' before the wars and the sanctions.

'We have suffered a lot in the last 20 years,' says Mohammed, now a government servant whose $25 monthly salary, added to the government food rations, just about keeps a decent standard of living for his five-strong family.

He is scathing about the 'profiteers' and 'merchants of war' who now comprise Baghdad's elite. But he says - and given that he only agreed to meet in secrecy (his name has been changed) he is probably telling the truth - he is now a supporter of the President. 'As the grip has tightened on our country more and more, we have got closer and closer to our leader. He is now the embodiment of the spirit of our nation and we are proud of him.'

Such support is unlikely to erode soon. For a decade Iraqi schoolchildren have learnt about the great victory of Saddam over the vicious, Muslim-hating, neo-colonialist West. In recent months Saddam's prestige has been boosted by his outspoken support for the four-month-old Palestinian uprising.

At Friday prayers last week at the 700-year-old shrine of Sheikh Abdul Qadeer al-Gilani in old Baghdad a packed congregation heard a sermon condemning to hell those who stood by and allowed their fellow Muslims to be harmed. It was a sideswipe both at those who ignored the Palestinians and those who have failed to support Iraq. Afterwards the imam, Sheikh Afif, told The Observer that the Iraqi people had showed 'the patience of Job' in their suffering.

He recited an Iraqi proverb. 'A journey of a thousand miles starts with just one step,' he said. 'We started directly after the American and British aggression. Now our thousand miles are nearly travelled. Our victory is nearly complete.'