Economic relations between the Iraqi central government and the Iraqi Kurdistan region appear to be gradually returning to normal. This marks a positive shift in economic exchange between the two sides that was negatively impacted in the wake of a landmark September 2017 referendum on independence of the region.

This development is set to ultimately serve the interests of both sides, and for Baghdad it represents a significant step towards containing Kurdistan’s ambition for independence  as well as enhancing military coordination with the regional government to counter remnants of ISIS cells in eastern Kirkuk. Moreover, for the KG, the development is of special significance because it would support its oil industry and mitigate financial pressure it has come under. 

Nonetheless, there remain several pending issues between the two sides, especially regarding rights to run Kirkuk oil fields, and the need to reach understanding about handing over Kurdistan’s oil production to the government in return for releasing the officially allotted annual budget allocations to Erbil. 

Multiple Moves

In a surprising development, the Iraqi parliament, on January 29, 2018, voted to lift sanctions imposed on banks and financial institutions in Kurdistan over the independence referendum. As part of the sanctions, the Iraqi Central Bank in Baghdad imposed restrictions on dollar transfers and sales to four Kurdish-owned banks, a ban on direct international flights to and from Kurdistan using Iraq’s air space was imposed, and land borders between Iraq and the region were closed. Additionally, Baghdad also seized control of most oil fields in Kirkuk and Mosul which the Kurdish Peshmerga forces seized in 2014. 

In a bid to overcome the problem of poor confidence in the Kurdistan region, the Iraqi government intensified talks with KRG's officials to reach understandings about major issues including the transfer of annual budget allocations to Kurdistan which accounts for 17 per cent of the federal budget as per the Iraqi constitution, in addition to reopening land borders and air space for traffic to and from Kurdistan.

In a positive development, Iraqi Prime Minister Haidar al-Abadi, on January 2, 2018, stressed that his government is committed to paying salaries of the Kurdistan public servants who are on the Kurdistan Regional Government (KRG) payroll, saying it started to audit payrolls in essential services like healthcare and education whose employees would be the first to receive salaries. Moreover, on February 1, al-Abadi met with MPs representing Kurdish blocs at the Iraqi parliament to discuss their proposals on the 2018 federal budget, and speed up the process of auditing required for paying salaries. 

The moves coincide with plans by the Iraqi Ministry of Oil to increase crude flow from Kirkuk to refineries in Kurdistan despite the parliament’s opposition. The plans aim to meet the region’s demand for derivatives such as gasoline and diesel and send another sign of promoting cooperation between the two sides. 

Various Reasons

The governments of Iraq and Kurdistan both understand that their strained relations will impose negative repercussions. According to several views, it is necessary for both sides to restore minimal relations between them. The KRG undoubtedly needs financial support through the annual budget allocations to Kurdistan to pay off salaries of employees in the public sector. 

Earlier this month, some 2000 teachers took to streets in Sulaymaniyah in protest over unpaid salaries for four months. The city witnessed similar protests in last December. 

Kurdistan’s oil exports fell more than 50 percent due to tensions with Baghdad triggered by the independence on referendum, which put more financial pressure on the region’s government. 

Moreover, the KRG needs support from Baghdad to enhance the possibility of foreign companies maintaining their business in Kurdistan after some of them halted operations after the referendum was held. Foreign companies seem to be unable to resume operations in the region without approval from the Iraqi central government, which can explain why several foreign oil companies postpone resumption of oil and gas exploration operations.

The Iraqi central government seems to be seeking to contain Kurdistan leaders’ ambition for independence. Standing out in this context are indications that the United States is exerting efforts to increase the chances of both sides to reach solutions for their issues. This was reflected by Deputy Secretary of State John Sullivan who, during a visit to Baghdad and Erbil in January, stressed the need for the two sides to reach agreement on their issues, including payment of salaries and reopening airports in Kurdistan for international flights. 

But at the same time, the Iraqi government understands that cooperation with the Peshmerga to counter some ISIS cells reportedly holed up in certain areas in Kirkuk has gained special importance. This was expressed by the Iraqi staff Lt. General Abdulamir Rasheed Yar Allah, the head of the army’s operations center in Nineveh Province, who, earlier this month, signaled that the armed forces are prepared to conduct joint operations with the Peshmerga militia to crack down on ISIS and the White Banners group in eastern Kirkuk. 

Unsolved Issues

But despite these positive developments, restoring mutual confidence will take more time, especially because the two sides have failed so far to reach understandings about key issues resulting from weak confidence. The most important issue revolves around the right to run Kirkuk oil fields, now under the control of the Iraqi forces, where the Iraqi parliament banned Kurdish companies such as Kurdish engineering firm Kar Group from operating Kirkuk's oilfields, and demanded the firm hand back the fields to Iraq’s state-run North Oil Co. (NOC).

The Iraqi government appears to be seeking to undermine the KRG’s authority by signing contract directly with foreign partners in the oil industry, and stressed this, on several occasions, by warning foreign firms against operating in Kurdistan before receiving its approval. Moreover, projects run by Russian companies and the role of the Iraqi government in them will be a key topic of talks to be held by Oil Minister Jabar al-Luaibi in Russia during an upcoming visit to Moscow.

Additionally, the two sides have not reached an agreement about handing over Kurdistan oil production to the government in Baghdad. This was reflected in a statement delivered by Kurdistan’s Prime Minister Nechirvan Barzani on January 28, in which he denied that any agreement was reached with al-Abadi about this particular issue.

At the same time, the Iraqi federal authorities are working on strengthening their control of Kurdistan’s oil resources. The Iraqi parliament demanded a specialized committee be created to audit Kurdistan’s oil production and exports in the period from 2014 and 2018. The committee, along with the Central Bank will also take part in tracking funds generated from Kurdistan’s oil exports and deposited in banks outside Iraq. 

What coincides with this is that, according to several views, Baghdad failed to fulfill its promise of transferring funds to pay salaries to Kurdistan’s public servants, although some reports noted that the central government transferred some US$250 million in temporary funding to the KRG to enable it to pay a one month salary to employees in the healthcare and education sectors. It is also expected that Kurdistan’s share of the federal budget would be reduced from 17 to 12 percent, according to recent statements from Kurdish MPs. 

Hence, it can possibly be argued that although economic relations are gradually improving and would yield positive results for both sides, outstanding issues can pose a hurdle blocking this improvement. This is particularly so because some parties consider that the Iraqi government has succeeded in reaping bigger gains, the most important of which is to reduce the KRG’s control of Kurdistan’s oil and financial resources.