Iraq's Kurdistan Regional Government (KRG) is facing strong opposition from regional states and the international community over  its controversial independence referendum, held on September 25, for fear it might very well encourage separatist tendencies in Middle East states and spark a wider regional conflict thus exacerbating security tension across the whole region. The development came amid a simmering dispute between the autonomous region and the Iraqi central government in Baghdad over the oil-rich and multi-ethnic province of Kirkuk, now seen as shaping up as possible flash-point of a conflict. 

In a bid to preempt the Kurdish region's attempt to gain political and economic independence after the referendum, Iraq has called upon the international community to stop buying crude oil from the KRG for international markets. The call can receive a positive response from world powers that to date support Iraq's policy towards Kurdistan's independence, which means the Region's oil exports to the outside world are likely to be suspended. 

Iran decided to close its airspace  to flights originating in Kurdistan at the request of the Iraqi central government. Moreover, Turkey took punitive measures involving trade through border crossings with Kurdistan, with President Recep Tayyib Erdogan threatening to sever all economic relations with the Kurdish region. 

In light of these developments, Kurdistan's economy is likely to receive a blow, the severity of which hinges on other escalatory measures that neighboring states might take against its bid to gain independence from Iraq. The measures can be escalated from an economic siege into security measures. This would be the most dangerous scenario for all involved parties because repercussions that will hit Kurdistan's security and economy will spill over to all neighboring states. 

Multiple Obstacles

The independence referendum cannot be carried out without causing security and economic hardships for Kurdistan. The following indications rapidly surfaced over the past few days. 

1- Logistical Problems. Neighboring countries imposed restrictions on Kurdistan's land and air traffic halting the Region's interaction with the outside world. One day before the referendum, Iran closed its airspace  to all flights originating in the Kurdish region. In Iran, the  Supreme National Security Council announced that the decision to block all flights to and from Kurdistan was made at the request of Baghdad. Similarly, Turkey imposed severe restrictions on commercial traffic with Kurdistan, primarily through the Khabour border crossing. Although these restrictions were imposed by Kurdistan's neighbors as  precautionary security measures, they clearly signal that these states can threaten the autonomous region and even cut it of from the outside world anytime.

2- Halting Oil Exports. To emphasize its sovereignty over Kurdistan's resources, Iraq appealed again to the international community to unilaterally halt oil imports from the KRG. Similar calls surfaced in recent months over the same issues, but Kurdistan's region has always managed to use Turkish territory to export its oil via a pipeline to the Turkish Cihan port wresting control of its oil away from the government control.

But a successful referendum billed as a first step towards independence would cause a dilemma for the Kurdistan Region’s oil exports estimated at 650,000 barrels per day. Countries including Turkey are likely to tighten their control on the Region’s oil flows, practically putting a freeze on oil exports.

3- Potential Sanctions. As part of their bid to pile pressure on the KRG, neighboring countries threatened to impose additional punitive measures. On September 20, Turkish President Tayyip Erdogan said that the Turkish cabinet and security council would discuss Ankara’s options and will “put forward their own stance on what kind of sanctions we can impose, or if we will.” Most probably, Turkish sanctions would include, in addition to blocking trade with Kurdistan, suspension of credit lines and facilities offered to Kurdistan’s investments, an escalation that would certainly create an economic and financial crisis in Kurdistan.

Likely Scenarios

Regardless of whether these threats would serve as a leverage to force Kurdistan to back down from its bid to achieve the long-cherished goal of independence, they will undoubtedly impact the economy of the Region already facing unprecedented levels of geopolitical risks due to escalating security tensions on its border with Iran, Turkey as well as Iraq’s Kirkuk province. 

At least, these threats will impact some of the achievements made recently by Kurdistan’s oil industry while the Peshmerga forces succeeded in making crucial victory against ISIS near the border. For instance, the KRG was able to clear its outstanding debt owed to foreign oil companies, and strike strategic deals with Russian oil companies. Most recently, on September 18, 2017, Russian oil major Rosneft sealed a deal with the KRG to build a natural gas pipeline in the Region helping it to become a major exporter of gas to Turkey and Europe.

However, Kurdistan’s neighbors’ determination on carrying out their economic and military threats against the KRG will undoubtedly deliver a strong blow to Kurdistan’s economy. The severity of the shock will hinge on whatever options the neighboring countries would adopt to face the KRG’s bid to achieve independence from Iraq, where any military or security measures will be certainly costly for Kurdistan. 

If neighboring countries decide to sever economic relations with Kurdistan, with Turkey cutting off the Cihan pipeline, Kurdistan’s economy will collapse triggering a severe humanitarian crisis that will eventually force the KRG to back away from its bid to gain independence. Nevertheless, the damage caused by this scenario will certainly spill over into Kurdistan’s neighbors that have wide trade and investment interests with the Region. Moreover, these countries will have to face the problem of a Kurdish refugee inflow to their territory. 

Similarly, taking security measures against Kurdistan would be no less dangerous than economic sanctions. The most dangerous of scenarios will impact all involved parties where security repercussions will not only traumatize Kurdistan. That is, according to a likely profit-and loss-account for all parties, Kurdistan’s neighbors are likely to adopt a mix of limited economic and security and other punitive measures that in the short-term can force Kurdistan from taking further steps towards independence. This would be an alternative to radical options that can cause severe loss for all parties. 

Simultaneously, countries opposing Kurdistan’s independence recognize that the KRG capitalized on its partnership with Russia in the oil sector in a positive way at a crucial time. Kurdistan-Russia cooperation now includes oil marketing, field development as well as a new pipeline that will give Kurdistan leverage and room to make economic maneuvers and maintain the vitality of its oil industry. At the same time, Russia will not give up a bid to preserve its significant gains in Kurdistan, as it does in Syria. 

Within this context, Rosneft spokesman Mikhail Leontev said “holding the referendum will not affect our work. We are doing business in an autonomous region in Iraq that has been recognized by law. This place is run by Iraqi Kurdistan’s nation and it is the people of Iraqi Kurdistan who live there. That is why we don’t think we are embarking on an adventure.”

It can possibly be concluded that, overall, Iraq’s Kurdistan’s bid to gain independence will be economically risky in the coming period, while the scenario of complete economic isolation appears to be unlikely due, in particular, to the wide negative impact on all involved parties.