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Desperate Financial Measures:
As Iraqi Kurdistan Runs Out of Oil Money, Kurdish Turn Backs On Baghdad

Honar Hama Rasheed
The oil-for-money agreement between Baghdad and Iraqi Kurdistan gets closer to failing every day, with the Kurdish talking about selling oil independently once again. But this time, they say, it's legal.
23.06.2015  |  Sulaymaniyah
An oil well near Kirkuk, a city that the Iraqi Kurdish currently control.
An oil well near Kirkuk, a city that the Iraqi Kurdish currently control.

Yet again authorities in Iraq's semi-autonomous northern region of Kurdistan are expressing dissatisfaction with the way that Baghdad is treating them. Late last year, one of the biggest achievements of the new Iraqi government, headed by Prime Minister Haider al-Abadi, was to reach an agreement with Iraqi Kurdistan over money and oil after literally months of tension and disagreement. But now it seems that much vaunted deal is also falling apart.

Step by step, authorities in the region, which has its own borders, military and parliament, are moving toward further financial independence. The most recent moves see the region taking a step into international bond markets.

In December 2014, the two parties agreed that if the Kurds sent 550,000 barrels of oil per day to Iraq, then Baghdad would send them the 17 percent share of the federal budget in return. These payments had been on hold for months already, due to the ongoing dispute between the Iraqi Kurdish authorities and Baghdad.

However ever since then the Iraqi Kurdish have complained that, although Baghdad has sent funds, they have not sent enough. In early June, the Minister of Natural Resources in Iraqi Kurdistan, Ashti Hawrami, told the Wall Street Journal that only about a third of what Baghdad owed had been paid to the Kurdish. Countering criticisms, senior officials in the Iraqi government replied that the calculations are not being done correctly, that lower oil prices and lower Iraqi oil exports were having an impact and that the December 2014 deal was being misinterpreted.

At a cabinet meeting in April, things came to a head between Hoshyar Zebari, a Kurdish politician who has also become Iraq's Minister of Finance, and Prime Minister al-Abadi. When Zebari questioned al-Abadi on the missing money, al-Abadi replied that Iraq was losing 40 precent on sales of oil due to external factors, like the lower oil price, and that this loss should also be deducted from Iraqi Kurdistan's share of the budget.

Zebari then asked senior Kurdish leaders for permission to resign as he felt his position was untenable. However he was told to be patient and wait and see if Baghdad paid the Kurds the missing money.

But while the two sets of officials traded insults and accusations, Iraqi Kurdistan has been slowly running out of money – and for some fairly basic tasks, such as paying civil servants and the salaries of Iraqi Kurdish military engaged in the fight against the extremist group known as the Islamic State. Development projects have long since stalled.

As a result, senior Kurdish politicians are discussing selling their own oil once again. “The government of the Kurdish region wants to solve all problems related to oil through dialogue and understanding,” the region's Prime Minister, Nechirvan Barzani, told those assembled at a meeting of the Dohuk provincial council in early June. “But if Iraq doesn't abide by the agreement … then the Kurdish government will be forced to use other means [of financing]. There are many legal options and one of those is selling Kurdish oil directly in order to pay salaries and cover the government's expenses.”

“Erbil gave the Iraqi government a deadline - the end of May - to transfer the region's allocated funds for that month,” Sven Dzia, the spokesperson for the Iraqi Kurdish government, confirmed to NIQASH. “If the funds come through, the agreement remains in force. If they do not, then Erbil will stop selling oil through SOMO [Iraq's central State Organization for Marketing of Oil] and begin selling oil independently.”

The funds didn't come through by the end of May; Iraqi Kurdistan can start selling oil independently, Dzia said, but he refused to elaborate any further.

The Iraqi Kurdish government believe they can now do this thanks to Paragraph 3, Article 11, of Iraq's Budget Law of 2015. This states that: “If any party fails to fulfil their oil or financial obligations agreed to in this budget, the other party shall not be bound to fulfilling their oil or financial obligations.”

An anonymous source close to the Iraqi Kurdish cabinet told NIQASH that preparations were underway to sell oil independently of Baghdad to international oil companies. Some of those companies, the source said, were apparently also willing and able to cover the region's costs for a set time as a prelude to buying its oil.

“According to our information, the Ministry of Natural Resources is now holding talks with a number of companies who expressed their willingness to buy Kurdish oil and to secure the region's budget several months in advance,” Iraqi Kurdish politician, Ali Hama Salih, a member of the anti-corruption Change movement and vice president of the Iraqi Kurdish parliamentary committee on Energy and Natural Resources, told NIQASH. Some of the companies were apparently even willing to secure the regions budget for a year in advance.

Recently both the Iraqi government and the Iraqi Kurdish authorities released the latest figures for oil exports, with Iraqi Kurdish statements insisting that they had broken exporting records and that most of the oil was going to SOMO.

However, as Mohammed Raouf, a professor of economics at the University of Sulaymaniyah, says, Iraqi Kurdistan's financial policy is far from transparent. “The region is apparently exporting 950,000 barrels per day. Baghdad is getting 550,000 of those. But what of the remainder? Nobody knows where that is going,” Raouf points out. The remainder is also a source of conflict between Baghdad and Erbil, he noted, giving each side excuses for doing what they want.

“Exporting Kurdish oil independently and without Baghdad's approval is a very dangerous thing,” Raouf argues, adding that economic independence cannot be attained simply through selling oil. “Iraqi Kurdistan tried this before and it wasn't successful. The chance of this plan failing are far higher than the chance of it working.”

Other politicians in Iraqi Kurdistan agree. MP Ahmed al-Haj Rashid, the rapporteur for the Iraqi Parliament's Finance Committee in Baghdad, told NIQASH that at a series of meetings on this subject, MPs asked Prime Minister Barzani a number of questions. After all, they are right to be wary. Iraqi Kurdistan has tried selling its oil independently before, in 2013, and the ensuing conflict with Baghdad simply made matters worse for the region.

Based on past experience, the five major questions were: Will selling oil independently create legal problems for Iraqi Kurdistan? Will it create political problems for Iraqi Kurdistan on a regional and international level? Will it be easy to get revenues from the oil sold into banks and is Iraqi Kurdistan capable of the administration required? Will the revenues cover salaries as needed? Are there international companies willing and able to buy the Kurdish oil?

According to al-Haj Rashid, Barzani was able to respond positively to all of these major questions.

“If these problems don't arise, then the way is clear for Iraqi Kurdistan to sell its own oil,” al-Haj Rashid continued. “It is very important that Iraqi Kurdistan finds a solution to its current financial problems,” he continued. “The region wants to come to some agreement with Baghdad. But if the financial criss remains unsolved then the region's authorities will have to find some other means of funding. And no doubt, Kurdish MPs will support them.”

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