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Dr. Gunter is a professor of political science at Tennessee Technological University.
As its sectarian civil war winds down and the United States continues to reduce its military role, what are the Kurdistan Regional Government's (KRG) immediate and long-term economic opportunities and prospects?1 Ninety-five percent of the Iraqi budget — 13 percent of which goes to the KRG — literally flows from oil, thus making Iraq and the KRG classical rentier states. Thus, the main economic question for the KRG involves the still-unanswered question of the disposition of Iraq's oil resources. Ashti A. Hawrami, the KRG Minister for Natural Resources and a well-known former international oil executive, addressed this issue in a wide-ranging interview in the KRG capital of Arbil on June 14, 2006.2 His arguments remain pertinent today. Dr. Hawrami strongly maintained that Article 115 of the new Iraqi constitution "states the supremacy of regional laws over federal laws, and can be invoked if no agreement is reached on the management of oil and gas resources and the distribution of proceeds." He also argued that Article 112 only permits the Iraqi government "an administrative role confined to the handling, i.e. exporting and marketing, of the extracted oil and gas from existing producing fields.... The elected authorities of the regions and producing governorates are now entitled to administer and supervise the extraction process; in other words local oilfield managers are answerable to the local authorities." Hawrami went on to argue that, since the new constitution was silent on undeveloped fields or any new fields, "the regions and governorates will have all the controls." Although he stated that the KRG and the government in Baghdad would be able to cooperate, heated verbal conflict over the issue of natural resources continues.
Since the Hawrami interview, several apparent compromises on a hydrocarbons law have fallen through. In June 2009, for example, the KRG actually signed several contracts with foreign companies to extract oil from the Taq Taq and Tawke fields in the KRG region, including one with Norway's DNO as well as Canada's Addax Petroleum (acquired by China Petrochemical) and Turkey's Genel Enerji International.3 At the time, this development was hailed as an important breakthrough for KRG-Iraq relations, as the Kurds said they could produce 200,000 barrels per day (b/d) by the end of 2010, about 10 percent of Iraq's current output and up from a maximum of 100,000 b/d the previous year. However, the deals fell through over who should pay the foreign oil firms that were developing fields in the KRG region. Nouri al-Maliki's government in Baghdad labeled them illicit and declared that the KRG would pay the firms from its percentage of the annual national budget. The KRG declined to go along with this interpretation. In October 2009, the Kurds suspended exports, and the KRG's output subsequently slumped to 20,000 b/d.
In February 2010, however, the KRG and Baghdad finally agreed to resume production and exports, but without an agreement on production-sharing contracts. Crude production from oilfields in Iraqi Kurdistan was announced at 80,000 b/d, with 50,000 b/d being exported and the rest used for domestic purposes. Production was expected to ramp up quickly to 100,000 b/d.4 However, the fate of the earlier disputed deals between the KRG and foreign companies remained unclear. Hussain al-Shahristani, the former Iraqi oil minister and the Kurds' nemesis in this situation, claimed that the resumption of oil exports had no connection with finding a solution to the problem of the earlier KRG contracts.5 In other words, the larger impasse remained.
The new al-Maliki government, finally cobbled together in December 2010, appointed al-Shahristani deputy prime minister with overall responsibilities in the energy sector. His increased prominence might bode ill for the Kurds. On the other hand, Abdul-Karim Luaibi, the new Iraqi oil minister, has had less antagonistic relations with Arbil in the past, while acting as the main intermediary in talks between the KRG and Baghdad.
The new al-Maliki government will ambitiously seek to boost its oil-output capacity from 2.5 million b/d to 12 million in the next six or seven years.6 If successful, this would bring Iraq's production up to that of Saudi Arabia, the global leader. Iraq's output was only 1.9 million b/d as of November 2010, while the KRG was producing only 100,000 b/d in 2009, when the flow was halted over acrimonious debate with Baghdad concerning the legality of the KRG contracts with foreign oil companies and the mechanism for paying their production costs. Early in December 2010, the Kurdish members of the Iraqi parliament staged a brief walkout when they learned Baghdad planned to reduce the KRG's share of federal revenues if the KRG failed to produce oil for export in 2011.7
Apropos of this situation, however, Ali Hussein, a senior advisor to the KRG's minister of natural resources, Ashti Hawrami, announced early in 2011 that the KRG region had an estimated 45 billion barrels of oil reserves.8 If true, this meant that, if the KRG region were independent, it would possess the world's sixth-largest oil reserves.
Hawrami himself recently commented on the overall economic situation for the KRG from his point of view:9 (1) Eight new oil discoveries have been made in the KRG region over the past two to three years. (2) The KRG has signed 37 contracts with 40 companies leading to $10 billion of investment in exploration and production in the oil sector. Among the most notable were the U.S. companies Marathon Oil and Murphy Oil, the Spanish company Repsol and the Chinese company Sinopec. (3) Three refineries have been commissioned with a total capacity of 200,000 b/d. (4) Three power plants have been built, providing 80 percent of the KRG's energy needs. (5) Kurdish production can reach 1 million b/d by 2014. (6) The KRG also has a potential of some 100-200 trillion standard cubic feet of natural gas. (7) The KRG is ready to start exporting 100,000 b/d and to increase that to 150,000 b/d by 2012. (8) At the same time, however, Baghdad's oil production target of 12 million b/d in the next decade will ruin the international oil market by flooding it with too much oil. (9) The KRG crude will be exported from two Kurdish fields, Taq Taq by truck and Tawke through the already existing pipeline to Turkey's Mediterranean seaport of Ceyhan. Indeed, oil was already shipped from these two fields for four months in 2009 until suspended when Baghdad refused to reimburse the foreign contractors.
Further data indicate that the RWE Group AG, Germany's second-largest utility, has signed a cooperation agreement with the KRG to help develop the Kurdish region's gas-distribution network.10 Barham Salih, the KRG prime minister, declared, "This is a major step forward in our planning. RWE will bring the know-how and insights of one of Europe's most important gas-distribution companies to Kurdistan." In addition, the German-based company Essen will also provide assistance with the Kurdish region's gas network as well as training local citizens. In the future, the proposed Nabucco Line to Europe that will bypass Russia will be used.
Not mentioned, however, were the continuing allegations of lack of transparency, conflicts of interest, and sheer corruption involving Hawrami as well as others making fortunes on the oil. Indeed, one report claimed that Hawrami had "earned millions in secretly trading shares and owned a mansion in the UK."11 Another reported that "Hawrami is accused of buying stocks worth $35 million in [Norway's] DNO International"12 oil firm. Yet another report claimed that he had "acted as middleman for the deal" between DNO and Turkey's General Energy.13 He has denied any wrongdoing and continues to maintain his position in the KRG.
During the summer of 2010, still another news article told how "hundreds of millions of dollars in crude oil and refined products are smuggled over the scenic mountains of Iraqi Kurdistan every year [to Iran],"14 thus blunting U.S. sanctions against that state. Abdulla Malla-Nuri, a Gorran opposition member of the KRG parliament in Arbil, explained, "Kurdistan is like an island with no rule of law when it comes to oil." Hawrami declared that the "revenue from the Iran business" was helping to "cover costs for foreign oil companies" doing business in the KRG region and hurt when Baghdad closed down the pipeline to Turkey in October 2009. He claimed that the money made from these transactions was being kept separate from the KRG's finances and would be reconciled with Baghdad in the future, when "the two sides resolved their differences." After another report by the opposition Gorran outlet Rozhnama claimed the KRG's ruling Kurdistan Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK) "take more than $250 million a month from the benefits of the oil being exported to Iran via tankers," the KDP sued for $1 billion.15
Given the KRG region's progressive investment law, free-market practices and excellent security situation relative to the rest of Iraq, foreign investment in the region has exploded. In March 2011, FDI Magazine, a subsidiary of the British publication Financial Times, ranked Arbil fifth among the top Middle East cities in terms of the potential for foreign direct investment (FDI).16 The rating was based on the cities' economic potential, infrastructure, business friendliness and FDI promotion strategy. The Kurdistan Board of Investment estimated that $17 billion had already been invested in projects ranging from cement factories to shopping malls in the past five years.
Some of this growth can be measured by the many companies that participated in a four-day international fair in Arbil at the end of November 2010.17 Chief among them were 76 from Turkey, 53 from Iran, 44 from Jordan, 41 from Germany, 41 from France, 19 from the United Arab Emirates, 16 from Austria, 13 from the Czech Republic, 11 from the UK, and five from China, but only two from the United States. In addition, representatives from all 17 diplomatic contingents present in Arbil attended, along with a broadly based array of senior regional and international personalities. It was the sixth consecutive year that the KRG had hosted the fair, whose organizers praised the Kurdish region's relative nearness to Europe and newly opened airline connections,18 as well its business-friendly laws and capable workforce. They also claimed that investment opportunities not only abounded in oil, but also in agriculture, tourism and manufacturing.
The ironic paucity of U.S. investment was largely explained by the relative proximity of Europe and the U.S. State Department's hesitancy to even mention the word Kurdistan, out of deference to Turkey's Kurdish sensitivities. However, U.S. deference would seem misplaced. On March 29, 2011, Recep Tayyip Erdogan became the first Turkish prime minister to visit the KRG, where he energetically promoted increased business initiatives between the two sides.19 In addition, approximately 55 percent of the foreign firms in the Kurdish region — 640 out of 1,170 — are Turkish and that bilateral trade between Turkey and the Kurdish region is projected to grow from $6 billion last year to $20 billion in the next four years. A fact to keep in mind in this context is that Iran is Turkey's main economic and political rival throughout Iraq, including the Kurdish region.20
Another recent assessment noted that "Turkey's influence is greater in northern Iraq and broader, though not deeper, than Iran's in the rest of the country."21 Some 15,000 Turks are working in Arbil and other parts of the Kurdish region, and Turkish companies make up two-thirds of all foreign firms there. Key to Turkish success has been its projection of soft power through culture, education and business. "On the road from Erbil to Baghdad, its pop culture is everywhere." Ibrahim Tatlises, the famous ethnic-Kurdish singer born in Turkey, has lent his portrait to advertisements promoting Turkish-constructed villas. At the Ibrahim Khalil border post between Turkey and the Kurdish region, 1,500 trucks pass daily, carrying Turkish building materials, clothes, furniture and food for the markets of the Kurdish region.
Full-service banking has been one of the Kurdish region's main problems. Money transfers, for example, are still carried on via primitive methods, and many walk around with their pockets stuffed with currency. Vakifbank, a Turkish state-run bank, is scheduled to open a branch in Arbil early in 2011. Suleyman Kalkan, the director general of Vakifbank, declared: "There is a great individual banking potential in the region . . . especially in housing and automobile loans."22 He added that his bank would also provide commercial and corporate products to meet the finance needs of the Turkish companies operating in the region.
Majidi Mall, Iraq's most luxurious shopping mall, opened in Arbil in November 2009.23 Its outlets include Mango, Ecco, Chopard, Diesel and Levi's. Kuwait City Centre has also opened an anchor store, which immediately became Arbil's most popular hypermarket. A dozen more shopping malls with many international brands have also appeared, largely replacing the famous Qaysaria Bazaar near Arbil's ancient twelfth-century citadel. International investments have exceeded more than $16 billion. BTWShiells, with more than 30 years of retail experience in London, Dubai and Belfast, is one of the developers of Mane Mall. This shopping complex will offer over 150 brands, a hypermarket, multiplex cinema, bowling lanes and fine-dining experiences. Directly linked to it is a 250-room hotel. Family Fun Mall will also open soon as part of an already popular theme park. It will have space for about 350 renowned brands, and will also host Carrefour, the world's second-largest hypermarket chain in terms of size and revenues. The entire complex will be managed by GLL, which operates 75 shopping centers around the world, including the largest in Turkey. Some quarter of a million expatriates working in the Kurdish region already have such choice housing areas as the American Village and Italian Village in which to reside. Given all these positive factors and its natural geographical attractions, Iraqi Kurdistan was recently ranked by The New York Times as one of the top 34 places to visit in the world; 24 the National Geographic website listed it as number 20.25
Another positive is the fact that Iraq was able to weather more than nine months of governmental impasse following the inconclusive elections of March 7, 2010, without any major security degradation. Iyad Allawi's eventual decision to accept the new al-Maliki government that was finally cobbled together in December 2010 may also be seen in a positive light. His electoral bloc had actually won two more seats in parliament than al-Maliki's; thus, his backing for the new government gives it further legitimacy.
As noted above, the new al-Maliki government and the KRG continue to struggle with a lack of transparency, conflicts of interest and sheer corruption. Crony capitalism and nepotism are rampant, and the public payroll gobbles up approximately three-quarters of the KRG budget. Banking services remain primitive, and there is no effective taxation, insurance or postal system. Phone service is very expensive. Baghdad's and Arbil's ambitious plans to expand oil production face many problems. The current infrastructure is barely adequate to move the modest amount of crude currently being produced. Pipelines are old, and their capacity is too low. Storage terminals are needed. Ports must be upgraded after years of neglect. Iraq's infrastructure has been degraded by decades of war, international sanctions, underinvestment and dictatorial rule. It is crippled by a badly run centrally planned economy that suffers from endemic shortages of electricity and a population weary of all these problems and demanding solutions. What is more, a weakened but enduring security challenge plagues the Arab section of Iraq. Al-Maliki's new broadly based power-sharing government may prove too cumbersome to be effective and collapse. Samuel Ciszuk, Middle East analyst for IHS Global Insight, has warned that "foreign investors will struggle to find enough skilled workers, equipment and material while controlling project costs . . . [and] enough financial resources to resolve the infrastructure bottlenecks for which it is responsible."26 In addition, legal uncertainty remains regarding the oil contracts signed by the KRG. What is more, will all the investment projects detailed above in the Kurdish region continue to prosper, or will they prove an illusory bubble and collapse from over-ambitious expansion?
On February 17, 2011, a potentially ominous new factor emerged when the popular uprisings that had already toppled unpopular governments in Tunisia and Egypt reached the KRG.27 Previously, such demonstrations were virtually unheard of in Iraqi Kurdistan. The protesters were demanding better living conditions and anti-corruption efforts. They were attacked by KRG armed forces; at least three people were killed and another 121 wounded. The government defended its violent reaction as self-defense. Hundreds of students in Sulaymaniya University demonstrated, seeking the release of those previously arrested and against the prosecution of a local party official they claimed had ordered security forces to open fire. Subsequently, masked gunmen attacked and burned Naliya Radio and Television (NRT), an independent TV station located in a gated community called German Village. NRT had aired footage of shots fired at demonstrators during an earlier protest. Twana Osman, the director-general of NRT, declared that the KRG and PUK were clearly to blame for the attack.28 In addition, Radio Gorran was prevented from broadcasting, and the Arbil headquarters of KNN TV and radio station were set ablaze. Criticisms were specifically leveled against KRG president Massoud Barzani, who responded that the protests were the work of a "very small group of people determined to undermine the stability of the region."29 Subsequently, however, Barzani called for a "raft of reforms"30 and the creation of an integrity commission to check on corruption and nepotism, in addition to urging early provincial elections for the 111-seat KRG parliament in Arbil. Only time will tell how these events develop and what influence they might have on economic opportunities in the Kurdistan region of Iraq.
1 For background, see Kurdistan Regional Government, The Kurdistan Region: Invest in the Future (Washington, DC: Newsdesk Media Inc., 2007); and Samuel Ciszuk, a Mideast energy analyst with IHS Global Insight in London at www.globalinsight.com. For additional background, see Denise Natali, The Kurdish Quasi-State: Development and Dependency in Post-Gulf War Iraq (Syracuse University Press, 2010).
2 The following data and citations were taken from "Iraq: Oil and Gas Rights of Regions and Governorates," KurdishMedia.com, June 14, 2006. With an estimated 1.1 million inhabitants, Arbil is the largest city in the KRG.
3 The following data were taken from Ben Holland, "An Oil Boomtown in Iraqi Kurdistan: Erbil Is Prospering, But Tensions with Baghdad Are Increasing," BusinessWeek, January 21, 2010.
4 Jim Loney, "Iraqi Kurdistan Crude Output about 80,000 b/d," Reuters, February 18, 2011, http://af.reuters.com/articles/energyOilNews/idAFLDE71H1OS20110218 (accessed February 19, 2011).
5 "Iraq to Resume Kurdish Oil Exports Soon," February 9, 2011, http://medyanews.com/english/?p=747 (accessed February 12, 2011).
6 This and the following data are largely taken from Jim Loney, "Snap Analysis: Big Challenges Ahead for New Iraq Government," Reuters, December 21, 2010, http://www.reuters.com/articles/idUSTRE6BK3CZ20101221 (accessed December 23, 2010). Skeptical analysts argue that 6-7 b/d is actually a more realistic target. Rania El Gamal and Barbara Lewis, "Shahristani, Architect of Iraq's Oil Future," Reuters, December 18, 2010, http://www.reuters.com/article/id USTRE6BH0OL20101218?pageNumber=1 (accessed December 23, 2010).
7 "Iraq Oil Revenue Plan Prompts Kurds Parl't Walkout," Reuters, December 18, 2010, http://af.reuters.com/article/energyOilNews/idAFLDE6BH06Y20101218 (accessed December 23, 2010). In January 2011, Kawa Mahmud, a spokesman for the KRG, claimed that an agreement between the KRG and the new al-Maliki government had provided for the Kurdish region to begin oil exports again in early February 2011. Kadhim Ajrash and Nayla Razzouk, "Kurdistan to Resume Crude Oil Exports Early February, KRG Spokesman Says," January 18, 2011, http://www.bloomberg.com/news/2011-01-18/kurdistan-to (accessed January 19, 2011). By the end of March 2011, approximately 115,000 b/d were being pumped for export, according to Nayla Rassouk, "Kurdistan PM Expects Iraq to Start Paying Foreign Companies," Bloomberg, April 11, 2011. http://www.bloomberg.com/news/2011-04-11 (accessed April 14, 2011).
8 "Kurdistan's Oil and Iraq's New Government," Rudaw, January 6, 2011, http://rudaw.net/english/science/editorial/3399.html (accessed January 11, 2011).
9 The following discussion is largely based on Hassan Hafidh and Angus McDowall, "Update: Iraqi Kurds: Oil Laws by June 2011 or Won't Join Government," Zawya, November 30, 2010, http://www.zawya.com/Story.cfm/sidZW20101130000084/Iraqi%20Kurds%3A%20Oil%2 (accessed December 3, 2010).
10 The following data and citation were taken from "RWE Signs Regional Gas Agreement with Kurdistan to Help to Develop Network," November 28, 2010, http://www.MESOP@online.de. (accessed November 29, 2010).
11 "Mahmoud Osman: We Have the Right to Investigate Kurdistan Oil Minister," ekurd.net, March 2, 2010, http://www.ekurd.net/mismas/articles/misc2010/3/invest564.htm (accessed January 7, 2011).
12 "In Spite of His Involvement in the Illegal Deal, Iraqi Kurdistan to Reappoint Energy Minister Ashti Hawrami," ekurd.net, October 28, 2009, http://www.ekurd.net/mismas/articles/misc2009/10/investkurdistan525.htm, ekurd.net (accessed January 7, 2011).
13 "Ashti Hawrami Caught in the Middle with DNO," ekurd.net, September 19, 2009, http://www.ekurd.net/mismas/articles/misc2010/7/state4027.htm (accessed January 7, 2011).
14 This and the following citations were taken from Sam Dagher, "Iraqi Smugglers Blunt Sanctions against Tehran," The New York Times, July 9, 2010.
15 "KDP and PUK Illegally Take $250 Million from Oil Being Smuggled to Iran, KDP to Sue Change's Paper," ekurd.net, August 1, 2010, http://www.ekurd.net/mismas/articles/misc2010/8/state4087.htm (accessed January 7, 2011). However, in January 2011, Nechirvan Idris Barzani, the new deputy chairman of the KDP, announced that his party was dropping all defamation law suits in the interest of encouraging a free press in the KRG region. "Nechirvan Barzani Lifts Lawsuits against Ruling Party's Critics," Aliraqi, January 11, 2011, http://www.aliraqi.org/forums/showthread.php?t=101306 (accessed January 14, 2011).
16 This and the following data were gleaned from "Erbil Ranked 5th for Foreign Direct Investment," http://www.iraq-businessnews.com/2011/03/16/erbil-ranked-5th. Iraq-Business News, March 17, 2011 (accessed March 18, 2011).
17 The following data were largely garnered from Harry Schute Jr., "Missed Business Opportunity in Kurdistan: Turks, Iranians, and Jordanians Invest While We Sit on Sidelines," Washington Times, December 2, 2010, http"//www.washingtontimes.com/news/2010/dec/2/missed-business-opportunity-in-kurdis… (accessed December 4, 2010).
18 Arbil International Airport (ORER) was opened in the fall of 2005 and a new, modern airport began operations in 2010. Constructed by Makyol Cengiz of Turkey, it cost at least $500 million. This new airport has one of the longest runways in the world (4,800 x 75 meters) due to U.S. military needs and has scheduled flights to several airports in the Middle East and Europe. Sulaymaniya, the second largest city in the Kurdish region, also has a new, but smaller, international airport.
19 Shamal Aqraqi, "Turkey's Erdogan in First Visit to Iraq Kurd Region," Reuters, March 29, 2011, http://www.reuters.com/article/2011/03/29 (accessed April 4, 2011).
20 Rania El Gamal, "Turkey, Iran Battle for Clout, Deals in Iraq," Reuters, December 8, 2010, http://af.reuters.com/article/energyOilNews/idAFLDE6B20LL20101208 (accessed December 24, 2010).
21 This and the following data and citation were garnered from Anthony Shadid, "Resurgent Turkey Flexes Its Muscles around Iraq," The New York Times, January 4, 2011.
22 "Turkish Lender Excited to Open Branch in Northern Iraq, Official Says," Hurriyet Daily News & Economic Review, December 4, 2010, http://www.hurriyetdailynews.com/n.php?n=turkish-lender-excited (accessed December 22, 2010).
23 The following discussion is largely based on Mariwan F. Salihi, "Foreign Investment Leads to More Shopping Malls in Arbil [aka Erbil, aka Hewler]," Gulfnews.com, November 30, 2010, http://Kurdistankorea.blogspot.com/2010/12foreign-investments (accessed December 22, 2010). Majidi Mall is named for the prominent Majidi family, which owns it.
24 "The Top 41 Places to Go in 2011," The New York Times, January 9, 2011, p. 11. Michelle Higgins wrote the short vignette on Iraqi Kurdistan.
25 "20 Best Trips of 2011." National Geographic website, http://travel.nationalgeographic.com/travel/best-trips-2011-photos/ (accessed March 25, 2011).
26 Cited in Sinan Salaheddin, "Iraq's Oil Expansion Plans Face Major Challenges," Post-gazette.com, January 15, 2011, http://www.post-gazette.com/pg/11015/1118208-82.stm?cmpid=nationworld.xml (accessed January 19, 2011).
27 The following data are taken from Jason Ditz, "Emergency Parliament Session: Iraqi Kurdistan Scrambles over Protests," http://email@example.com (accessed February 22, 2011); and Mohammed Tawfeeq, "Teenager Dies, 39 Hurt in Fresh Clashes in Iraq's Kurdistan," CNN, February 21, 2011, http://edition.cnn.com/2011/WORLD/meast/02/21/iraq.protests/ (accessed February 22, 2011).
28 "Reporters without Borders Documentation: The KRG Harassment against Journalists," http://www.mesop.de/2011/02/22/ February 21, 2011 (accessed February 22, 2011).
29 Cited in Tawfeeq, "Teenager Dies, 39 Hurt in Fresh Clashes," op. cit.
30 "Massoud Barzani Calls for Iraqi Kurdistan Reforms," http://www.ekurd.net/mismas/articles/misc2011/3/state4879.htm, Kurd Net, March 3, 2011 (accessed March 25, 2011).