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Update No: 097 - (26/04/11)

No longer welcome
President Obama okayed the stay of US troops in Iraq beyond 2011, as long as the Iraqi government requests so, but it is no longer clear that Iraqi Prime Minister Maliki actually wants to make a formal request for them to stay. Within the Iraqi armed forces many would like to see the Americans stay, at least with a massive training effort, but politically for Maliki making such a request would be too costly. Indeed Maliki has already responded to American emissaries that Iraqi troops are ready to defend the country on their own, without external help. The Obama Administration talks of 15-20,000 troops plus some Special Operations Forces who may stay in Iraq, perhaps because after the loss of important allies in the Middle East (Mubarak of Egypt) left the US position in the region significantly weaker, Maliki is increasingly under pressure and dependent on the support of the Sadrists for political survival; Muqtada as-Sadr has discouraged his supporters from joining the street demonstrations of the last few months, decisively helping Maliki stay in the driving seat. The deployment of Saudi troops to Bahrain to repress the local Shiite majority has made Maliki’s predicament even more difficult: the Bahraini Shiites enjoy widespread sympathy among their co-religionaries in Iraq and the failure of the US to condemn the repression has angered many (the Americans have an important military base in Bahrain). The Iraqi Shiites feel increasingly threatened by the Saudis, whom the Iraqi intelligence accuses of supporting the Sunni insurgents.

US military influence in Iraq is also diminished by the uncertainty surrounding the purchase of US weapons. The decision of the Arab Gulf states not to hold the next Arab League summit in Baghdad as planned has contributed to further anger the Iraqis, who see it as motivated by sectarian motives. The F-16 deal has been cut in size and in the quality of the weapons to be supplied, to a value that could be a quarter of the original US$4.2 billion; even the downsized contract is not certain as Maliki to appease the population seem intentioned to build a new national power grid and needs to fund it.

The life of Maliki’s new cabinet remains very troubled, as disputes among factions and lack of trust are making it difficult to reach any kind of consensus. In April the elections of the three vice-presidents by the parliament failed because the candidate of Maliki’s party faced strong opposition and the party feared that he would fail in the ballot; according to the law those who fail cannot be nominated again for the same post. The positions of the ministers of defence, interior and national security have not been filled yet, again for the same reason that the parties cannot agree on the names of the ministers.

Oil production increase
The International Energy Agency has confirmed that Iraq increased its oil output by 350,000 barrels per day over the last 6 months, to reach 2.68m b/d. Progress is also being made on the formulation of a new oil-sharing legislation, mutually acceptable to Baghdad and the Kurdish autonomous region. While few continue to believe that the official target of 11 million litres is realistic (if nothing else because Iraq does not have the water required to pump the oil out), but the Iraqi oil industry is performing better than many had expected a year or two ago. The IEA now forecasts that oil production could rise by 1 million bpd by 2015, reaching 3.7 million bpd. If Iraq keeps doing well, however, it will come under pressure to re-join the OPEC quota system and the constraints that it entails.

Forecast 2011
During 2011 Iraq’s new oil export infrastructure will start coming on line, allowing for Iraq’s oil exports to rise significantly now that investment in oil production has started. In total projects to raise the oil export capacity by 6.2 million bpd are underway, with 0.9 million bpd expected to be added in 2011. Many observers, having been sceptical this far, are beginning to think that oil exports will actually start rising seriously in 2011. Rising oil prices should also contribute to raise the Iraqi GDP growth to 11.5% in 2011 (IMF estimate). Inflation is expected to remain roughly stable at 5%.

The Iraqi foreign exchange market has been experiencing some foreign interest in 2010, with foreign buyers getting a net US$53 million of shares: a modest amount by any standard considering the total value of floated shares of US$3 billion, but after all, this is still a country affected by extreme violence and high levels of political uncertainty. In general the foreign exchange has started 2011 in a very dynamic way, with volumes of trade having gone up by over 50% compared to the 2010 average. A few relatively large companies seem intentioned to float shares on the stock exchange in 2011, a fact which will contribute to attract interest.

Economic growth in 2011 is not expected to have a major impact on the very high unemployment level. In January the new Iraqi government announced that state employment is planned to increase by 171,000 in 2011, a modest amount when it is considered that the armed forces alone will go up by 100,000. That a relatively modest 71,000 jobs will be added to the various ministries is in a sense, good news, given that Iraq’s public sector is one of the most bloated and inefficient of the world. The problem of unemployment however remains, as growth in the oil sector will not necessarily spread wealth around the population, oil not being a labour intensive industry. Yet such is the political and ‘clan’ structure, ‘Jobs for the boys’ must be found.

What could still spoil the situation, of course, is the precarious political situation. The persistent violence, if not as widespread, is not likely to succeed in igniting a new civil war, because the Shias and the Sunnis are now largely separated. However, the possibility of a revival of the insurgency in the Sunni Arab lands north of Baghdad, cannot be discounted. Inter-factional rivalry within the government adds another factor of uncertainty and instability that could discourage investment, even if as of early 2011 many investors seemed inclined to consider it political theatre, more than a serious threat.

Maliki finally managed to form his government before the constitutional deadline of 90 days. Allawi’s group took the post of parliamentary speaker, the deputy premiership and the finance ministry, among other positions. The predominant character of the new coalition is centralist and Arabophile; the Kurds are part of it, but their federalist views have few allies now, as the other federalist groups have been weakened in the elections and have modest representation within the cabinet. The new Sunni Arab parliamentary speaker, is a vehement enemy of the Kurds and a strong centralist. The powers of the new National Council of Strategic Policies, supposed to be presided over by Allawi, have not been defined yet. Another possible point of contention is the power of Deputy Premier Shahristani, formerly oil minister: the Kurds were glad to see him going, as he had opposed their demands for autonomy, but now are being told that he will have an oil industry supervisory role in his new job. The followers of Muqtada As-Sadr, who are part of the coalition, are resolutely opposed to any American presence in the country and even opposed Vice-president Biden’s visit to Baghdad in January. Sadr has just returned from Iran and has already begun agitating against the Americans and other demons; Maliki has been pretending not to see and not to hear and probably thinks that Sadr’s sermons add to the Prime Minister’s leverage when negotiating with Washington, but the game cannot go on forever without causing some damage. Perhaps the greatest danger we can foresee for the new government, is not disintegration, however, but a permanent deadlock where no serious decision on key issues can be taken.

The Iraqi political establishment was clearly impressed by the Egyptian and Tunisian developments and has been taking measures to highlight how it is more responsive to the need of the men in the streets. Demonstrations in Iraq started in February and on some occasions turned violent, even if they did not attract anything like the crowds seen in Egypt. The cities of Kut, Diwaniya, Basra, Anbar have been affected. In some cases the demonstrators raised issues of ‘freedom of expression’ and civil liberties, as well as of corruption, but the poor quality of public services was the dominant concern. One of the key grievances was the lack of electricity and the fact that government officials are privileged in its distribution. The Shiite clergy has been demanding that the political class listen to the demands of the crowds. For the time being, the measures taken have been mostly symbolic: the salaries of government officials have been reduced by up to 50%, as in the case of Maliki himself. In reality, everybody knows that Iraqi politicians have sources of income beyond their salaries. The estimated savings coming with these measures are a paltry US$19 million; it is unlikely that they will either contribute to reduce the level of corruption, or improve the efficiency of the government.

Iraqi Prime Minister Maliki survived the protests of 4 March (Day of rage), when thousands gathered together to protest the corruption of the regime. This followed another large demonstration on 25 February and many more sporadic demonstrations throughout February and March. Maliki’s reaction to the protests was a nervous one, sometime panicky. An indication that the demonstration unnerved many within Maliki’s State of Law coalition is the resignation of the governor of Basra, in whose council the State of Law coalition has 20 of 35 seats. State of Law has then struggled to find a replacement because of internal divisions. Even if the demonstrators were not asking for regime change, the police reacted often heavy-handedly over the last couple of months, when demonstration after demonstration the protests seemed to be gaining momentum; tens of demonstrators have been killed. Maliki tried to contain the protest by discouraging them with a series of intimidating television interventions, alleging infiltration by Al Qaida and Baathists, but to little effect. Maliki also tried to intimidate some of the small parties which have tried to ride the revolt, like the Communists, whose headquarters have been taken over by the government. Finally Maliki has continued to soothe the revolt by promising subsidies for the price of sugar and electricity. The government is also moving to improve food distribution, by decentralising it to the provinces, which will now be authorised to import, store and distribute the food items they consider to be necessary. Food rations for the poorest will also be improved, with the funds allocated for food distribution going from US$3 billion to US$5 billion. The poor quality of the rations was one of the complaints of the demonstrators.

The real danger to Maliki, however, does not seem to come from the streets, but from his uneasy allies in the new coalition government. Allawi has once again announced that he will not join the government, accusing Maliki of manipulation; the position of President of the National Strategic Policies Council, which he was promised, seems to be ending up as a largely ceremonial post, which clearly is neither what Allawi wanted nor thought had been agreed. How many in Allawi’s Iraqiya party will follow him is not yet clear, however. On his part Muqtada As-sadr, the radical Shiite leader, in the early weeks of the turmoil had appeared supportive of Maliki, giving him 6 months to show what the government can do to address the concerns of the demonstrators. Now he seems to be flirting with the idea of joining the opposition; his supporters have been threatening to join Allawi. With both Allawi and Sadr gone, the government would likely collapse. Even the Kurdish coalition, which so far has been loyal to Maliki, is in trouble as it is being challenged in the streets of Kurdistan by its own opposition.

A substantial measure taken in response to the Egyptian events and the riots in Iraq was in February the decision to postpone the acquisition of F-16 fighter jets and increase instead the amount spent on ‘food subsidies for the needy,’ from US$3 billion to US$4 billion. The budget deficit remains at US$13.3 billion; 6 million Iraqis are on the take. Another concession is the decision to grant 1,000 Kwh of free electricity to every Iraqi family, (that is if they have access to electricity at all). Finally, Maliki has reassured those who see him as an aspiring Mubarak if not as an aspiring Saddam Hussein, that he will not seek a third term.

The American presence seems now almost certain to draw down to nil in 2011, as far as troops are concerned; now it seems that the State department will maintain a presence through thousands of security contractors, in charge of training the Iraqi security forces. A few hundreds from the military might also stay as part of a NATO mission. More and more the competition for influence in Iraq will be between the Saudis and the Iranians.

A new round of oil and gas field auctions is now announced for the end of 2011. It appears that the contracts signed by the Kurdish regional government will be honoured by Maliki, probably the price to pay for Kurdish support in the new coalition. The government is preparing to establish serious barriers to imports, by increasing the custom rates on all goods and in particular on some goods that Iraq is supposed to be able to produce itself. Many fear an inflationary impact, compounding the situation for the poorest strata of the population. The move would also be a slap in the face to Washington, but this seems to be a fashion now in Baghdad: the city council recently demanded that the US pay US$1 billion in compensation for the damage inflicted to the roads by the American occupation forces.

If Maliki survives the current turmoil, he will benefit from an oil boom, both because oil prices are up and because exports are finally starting to increase. Exports for March are forecast to reach 2.2 million bpd, which if confirmed would represent the highest level since 1998; production stands at 2.6 million bpd. The recovery has been slowed in February by a reprise of attacks on northern pipeline, which took 150,000 bpd out of the market. Now the Oil Ministry has decided to create reserves, which will help keep exports steady even in the presence of attacks on the pipelines. Gulf Keystone has also reported a likely discovery of a new big field in Kurdistan, which would add to the potential for future production.

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