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Update No: 117 - (26/02/13)

Summary: Tension between the Iraqi government and the Kurdish regional government continues to slowly escalate; as a number of oil majors is lining up behind the Kurds, Prime Minister Maliki will have to decide soon whether to ‘teach a lesson’ to the Kurds or abandon the confrontation. But Maliki is also embattled with his own Arabs and not just the Sunnis and does not seem able to summon the strength to make a decisive push for power.

Tension with Kurdistan region rising all the time
Maliki and his party, but also some other Arab group in parliament now want to reduce the Kurdish share of the state budget from 17% to 12%, a very significant reduction which is unacceptable to the Kurdish regional government, whose revenue would be reduced by almost a third. The 17% share had been agreed with the American occupation authorities, a fact that contributes to encourage many in the parliament to renegotiate it.

In particular, many Arabs object to the existence of autonomous Kurdish militias, which are paid through that 17%. In addition, there is a dispute over payments owed by Baghdad to Irbil over oil exports, with the Kurds claiming a figure five times higher (US$3.5 billion). All this is seen as a provocation by the Kurds, at a time when the Kurdish militias and the Iraqi army are still facing off against each other in the disputed areas of the north. The Kurds at the same time remain defiant, encouraged by the Turkish government which seem intentioned to develop a gas and oil partnership with the Kurdish regional government and says openly that the Kurds should be free to export these resources wherever they see fit. Ankara’s energy needs are growing fast due to fast economic growth and neighbouring Iraqi Kurdistan would be a very convenient source of energy.

Inevitably Baghdad fumes at these ideas and diplomatic relations between the two countries are reaching the lowest level in many years. In fact there might already be a deal signed between Ankara and Erbil over the annual export of 10 billion cubic metres of gas, which would cover 20% of Turkey’s consumption. Already in November Baghdad barred a Turkish oil company from bidding for oil field tenders in Iraq, in retaliation against Turkey supporting the Sunni opposition to Maliki.

To make matters worse, even Exxon seems to have made its final choice to invest in Kurdistan, rather than in southern Iraq, because the conditions offered by the Kurds are more generous. Chevron, Total of France and Gazprom Neft also appear to be shifting towards Erbil. Only BP among the majors seems to be betting on Maliki and is offering to work in disputed Kirkuk without going through the Kurdish regional government. If Maliki allows that to happen, it might then be too late to redress the situation and Erbil will be able to mobilise diplomatic support on its side. Overall oil exports from Iraq reached 2.35 million bpd in January, even if production declined slightly from 3.3 million bpd to 3.2 million, due to bad weather, sabotage and some technical problems.

Maliki isolated, but is he really weak?
Maliki is still trying to shore up his position internally. The parliament voted at the end of January to bar him from running for a new term as Prime Minister, but Maliki and his party argue this vote is illegal and are challenging it in the federal courts. The fact that President Talebani remains sick and incapacitated after a stroke is making it even more difficult than usual to mediate among factions in Iraq. Talebani was seen as one of the few Iraqi politicians with sufficient credibility to mediate. Maliki is increasingly being accused of asserting his direct control over the armed forces, thanks to the failure of the parliament to approve the necessary regulations which would at least in part insulate the armed forces from political interference. The country is still being shaken by constant demonstration of antagonists and supporters of Maliki, who has been trying to remove from his post the speaker of the parliament, Nujaifi.


Forecast 2013
What is in store for Iraq in 2013 is extremely uncertain, given Maliki’s brinkmanship, the interference of regional powers and the complex Iraqi political scene. Plunging back into civil war is a possibility, even if right now nobody really wants that. Many want to see Maliki gone, but if Maliki does not graciously concede, then the worst could happen. The sectarian divide is still strong, despite some Shiites supporting politically the Sunni opposition for opportunistic reasons (in order to get rid of Maliki). The fact that interest in the oil and gas sector is not diminishing suggests that most business observers do not think the worst will happen, somehow.

Should the flow of investment be maintained (it has in fact so far been relatively modest considering the size of Iraq’s oil reserves), the economic prospects of Iraq are inevitably upbeat, despite the inefficiency of the government and the tendency to waste resources in patronage. The world needs Iraqi oil to keep international prices down, so one should expect American, European and Chinese powers to do their best to maintain a degree of stability. But the game in Iraq is not being played by world powers: it is a regional game for supremacy, over which the rest of the world has little say.

Undaunted by the growing political mess, oil companies continue their labours to identify lucrative agreements which would justify their investment. Iraq just announced the first discovery of a new oil field in many years, the first result of resumed prospecting. BP seems interested in investing in the contested area of Kirkuk, which both Baghdad and Erbil claim as their own. Here oil fields are badly in need of some overhaul to boost productivity. A Chinese company seems interested in replacing Exxon in West Qurna, partnering with Lukoil. In the background, the Kurdish regional government has now suspended exports through the government pipeline and is instead beginning to use tankers to move oil by road, as the dispute over payments with Baghdad has not yet been resolved.

The Iranians appear increasingly worried by Maliki’s brinkmanship, which risks causing the disintegration of Iraq and civil chaos, something that Iran has no interest in. Maliki has benefited from extensive Iranian support in the past, but has by now managed to create his own power base, and is no longer so easily manageable by Teheran, whose attempt to defuse tension among Iraqi factions are not achieving much. In particular, the Iranians have sought to mediate between Maliki and the Kurdish regional government in the north of Iraq, with which they also have good relations. Their failure means that the Kurds are tempted to join an anti-Maliki coalition which is led by Arab Sunnis and is supported by Saudi Arabia, Turkey and Qatar. The Iranians seems to be undecided about what to do in the face of Maliki’s stubbornness. They see that their other main ally in the region, after Bashir Al Assad in Syria, is at risk. Their influence risks being drastically reduced. Should they back Maliki up with all means, risking another Syrian situation, or engineer the replacement of Maliki with a more pliable Shiite politician?

Maliki has been facing civil unrest for weeks in the Sunni heartlands of the north, where the influence of the Syrian insurgents is beginning to be felt. In fact the Al Qaida element in the Syrian insurgency originates from the Iraqi branch of Al Qaida, so a connection was always there. Recently, however, the border tribes have shifted their support towards the Syrian insurgents, facilitating a spill- over in Iraq. At the same time the Kurdish militias and the Iraqi army are facing-off each other, on the borders of the Kurdish region. Now one of the Shiite factions most uneasy about Maliki, Muqtada As-Sadr’s movement, is also joining the opposition. Maliki now faces the risk of being impeached by the Parliament. His pressure on Sunni Arab politicians hostile to him has gone too far with the targeting of Al Issawi, the finance minister, and instead of splitting the Sunni opposition, co-opting part of it, the result has been tribal mobilisation in Anbar province, whose militias maintain considerable military power, enough to start a new civil war in Iraq.

The tactic of arresting women, to put pressure on the protest leaders also backfired as the tribes are taking that as a major breach of their honour.

Maliki first closed down the border with Jordan, in order to put economic pressure on the protesters, but then had to reopen it and has already made further significant concessions to the demonstrators, accepting to water down the de-Baathification law, which he was previously pushing very aggressively. He also allowed the release of numerous political prisoners from jail. For now, however, the concession seems to have emboldened the protesters rather than appeasing them.

Even if Maliki were to go, forging a new, functional coalition will not be easy. After all, Maliki’s rivals already tried to do so after the last elections, but failed after months of efforts. Perhaps now, educated by the experience of Maliki’s faltering effort to establish authoritarian rule, they will be wiser and readier to make compromises. One would be ill advised to bet on this, however
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