Iraq’s Kurdistan Plunged Into Financial Uncertainty

Via FDI, an interesting look at how the failed independence referendum and resignation of president Masoud Barzani have rocked the Kurdistan Region of Iraq and its investment potential:

Seen until recently as the most investor-friendly destination in Iraq, the semi-autonomous Kurdistan Region of Iraq (KRI) is now at its weakest point since pre-2003 following a failed independence referendum that saw federal Iraqi forces recapture 40% of the territory it had gained fighting the Islamic State in 2014. This territory includes the lucrative Kirkuk oil fields, which accounted for about half of the region’s oil production.

“The Kurdistan Regional Government [KRG] is increasingly isolated and has limited options,” said Ryan Turner, analyst at risk consultancy Protection Group International. The loss of Kirkuk has severely weakened the KRG’s bargaining position with Baghdad, which is imposing control over Kurdistan’s international border crossings, potentially impacting supply chains if a solution is not negotiated quickly.

“This will hurt the KRG, which will lose border revenues, further damaging its economy that is already in deep crisis,” said Alison Parteger, consultant at risk consultancy Menas Associates. “Baghdad will try to redefine the relationship between the central authorities and the Kurdish region to curb the latter’s power to make independent decisions.”

“The KRG is a very unattractive proposition at the moment,” said William Wakeham, director at insurance firm Alfagates Brokers. “From a business perspective, lack of certainty and the inability to move freely are big negatives.” Before the crisis, he said: “Federal KRG was the only region with a real appetite to work, and was relatively open to the rest of the world.”

Turkey, formerly a key economic partner of the KRI, has moved swiftly to support Baghdad and isolate the Kurdish region. And Iraq’s government has called on the KRG to halt independent oil exports to international markets. “[Kurdish capital] Erbil continues to lack sufficient resources to maintain all of its financial obligations. Maintaining payments to international oil companies operating in the region is also critical to Kurdistan’s economic prospects,” said Mr Turner.   

Raphaele Auberty, risk analyst at BMI Research, noted that the KRG has failed to reinvest oil proceeds to diversify its economy. “The referendum and the subsequent Iraqi offensive have significantly raised political uncertainty, which will weigh on investor sentiment,” he said. Investors are warier still following the resignation of KRG president Masoud Barzani, as it is unclear in which direction his successor – his nephew, Nejervan Barzani – will take the region.

Yet despite Baghdad’s threats, it currently lacks a coherent strategy to deal with Kurdistan. “This could help Erbil preserve some independence,” said Mr Turner. “A compromise is possible, but it is clear Baghdad has the leverage.”

In the meantime, there is no word indicating that Russia’s proposed investments in the KRG will be diminished. Russian gas company Rosneft agreed in October to take control of the main oil pipeline in Kurdistan and invest $400m in five Kurdish oil blocks, after having previously announced $4bn in investment in the region. Now the KRG’s main international investor, Russia was also one of the few countries refraining from criticising the Kurdish referendum in September.

“In line with its military intervention in Syria, Moscow has steadily stepped up its economic and military presence in the wider region,” said Mr Turner. This is evident in Syria, Egypt and Libya as well, as Russia seeks to position itself as an alternative to the US. “Changing geopolitical dynamics in the region could see Russia emerge as a more significant player in Iraq,” added Mr Turner.

This entry was posted on Wednesday, November 8th, 2017 at 6:18 pm and is filed under Iraq.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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