ISIL in Iraq Series: What does ISIL mean for Iraqi Kurdistan?

ISIL in Iraq Series: What does ISIL mean for Iraqi Kurdistan?

The Islamic State of Iraq and the Levant (ISIL) has moved onto the Kurdistan Regional Governorate’s doorstep, killing and plundering its way from Mosul to near Baghdad. Some champions of Kurdistan see opportunity, all the while Iraq faces an existential threat. This article is part of a GRI series on ISIL, Iraq, and the Middle East.

As ISIL moved into Mosul and Kirkuk last week, the Iraq army fled en masse. The Peshmerga, armed Kurdish fighters, quickly filled their void. In long-contested, oil-rich Kirkuk, Kurdish forces have moved in, securing the city and asserting control over its surrounding resources.

In Mosul, where ISIL still rules, Peshmerga have secured its northern and eastern frontiers, blocking ISIL from reaching the KRG. Peshmerga have also taken decisive control of many other disputed territories in Ninewa and Diyala provinces.

Disputed territories have led in past decades to simmering tensions, with occasional stand-offs between the Iraqi army and the Peshmerga. The withdrawal of Iraqi troops and unchallenged entrance of the Kurds last week brings clarity to the dispute over who controls these territories.

Oil, Gas and Salaries

Tension between the KRG and Baghdad has been running high for the past several months, and ISIL’s entrance came at a convenient time for Kurdistan. While Mosul was falling to ISIL, two oil tankers filled with Kurdish oil were aimlessly bobbing in the Mediterranean. Marketers of the oil were unable to find buyers, even after sharply dropping prices.

Kurdish authorities had exported the oil independently of Baghdad’s regulators; Baghdad responded by threatening potential buyers with the possibility of being blacklisted from purchasing southern Iraq’s much larger and more productive supply of oil.

And since early 2014, Baghdad has been punishing the KRG for attempting independent oil exports by withholding federal revenues which largely fund the KRG’s budget. This has translated into stalled public projects and an inability to pay public sector salaries in Kurdistan

With Baghdad facing an existential threat in the form of ISIL, Kurdish forces in Kirkuk, and the Peshmerga as the only fighting force in the country able to scare ISIL, power dynamics have shifted markedly in the past week.

How the KRG uses its newfound influence vis-a-vis Baghdad remains to be seen, but there have been a few hints: the oil on the two original tankers has allegedly been sold, and two new tankers are loading more Kurdish oil for export at Turkey’s Cehan terminal. It seems that the market has discounted Baghdad’s threats, given the current circumstances.

Independence? Not yet.

Kurdish leaders have been quick to declare the end of centralized control in Iraq. Deputy Prime Minister Qubad Talabani refers to qualitatively different pre-Mosul and post-Mosul Iraqs. This has led to speculation that the KRG may be planning an imminent push for independence.

For many reasons, this is not the case. First, the KRG still depends heavily on Baghdad for its operating costs. Oil production in Kurdistan, at roughly 200,000 barrels per day, would have to double to 400,000 bpd before the KRG budget could break even—something that will not happen over night.

Kurdistan’s neighbors to the north and east, Turkey and Iran, with their own restive Kurdish populations, are unlikely to support an independent Kurdish state next door. The practical challenges of state formation, from currency issuance to infrastructure development and tax collection, would also challenge Kurdistan’s nascent bureaucratic and political institutions.

Feelings of Iraqi nationalism are still very present. As Kurdish leadership has repeated for years, federalism with transparent revenue sharing is their goal for the time being – not secession.

Regarding Kirkuk, once ISIL has been scaled back, a revenue sharing agreement with Baghdad for Kirkuk’s oil will could be more sustainable than trying to hold it under the KRG’s control. Baghdad, though, is unlikely toaccept such conditions.

What about the investors?

Attracting FDI has been central to the KRG’s growth and development strategy. Should ISIL repel foreign investors, growth in the Region would slow. But that is unlikely to happen.

In the energy sector, instability in the south could lead to easier exports through the KRG pipeline to Cehan (also, higher oil prices). This will make oil production easier to export and monetize than trucking oil into Iran and Turkey, currently the most common export method.

Developers in the Region have much to gain if the KRG can bargain back its share of federal revenues or generate equivalent revenues through oil sales. Heavy industry, already well established in the Region, is likely to continue growing in the KRG if instability in the south creates security challenges for factories there.

When ISIL overtook Baiji, home of Iraq’s largest oil refinery, Kurds began worrying about gasoline shortages. Such worries play well for downstream energy companies in the KRG, which will likely see increased vigor to develop independence in oil refining and power generation.

Kurdistan has long been known to investors as a ‘gateway to Iraq’—a way to access the huge Iraqi market from the safety and stability of the KRG. As much of Iraq loses even more of its appeal to investors, this may no longer be such an effective epithet. However, the logic behind it remains: as instability threatens Iraq, all is still business as usual in Kurdistan.

About Author

Brady Jewett

Brady has spent the past two years in the Kurdistan Region of Iraq, analyzing investment and business in the region, and is currently based in Washington, DC. Brady holds a BA from UC Santa Barbara and an MSc from the London School of Economics.