Iraq Situation Report, Part III: Kurdistan

Editors’ Note: Brookings senior fellow Kenneth M. Pollack traveled to Iraq from March 9 to March 19 with Michael Knights of the Washington Institute for Near East Policy. The trip was sponsored in part by the Atlantic Council’s Task Force on the Future of Iraq. They had extensive meetings in Baghdad, Sulaymaniyyah, and Irbil with Iraqi, Kurdish, American, and British officials. This is the third and final installment of a survey on the situation in Iraq. (Read
the first post here
the second here

Kurdish military fortunes improving

Developments within the Kurdistan Regional Government (KRG) are every bit as complicated as those in Baghdad. In the military realm, the Peshmerga are enjoying a similar improvement to the Iraqis in their fortunes. Da’esh attacks are now regularly beaten back with heavy losses and the Kurds are very comfortable holding their positions as long as they have American fire support. Limited Kurdish offensives have also been increasingly successful, again as long as they have American air and Special Operations Forces (SOF) support, command and control, and other assistance. As with the Iraqis, the Peshmerga cannot match first-world military capabilities, but their effectiveness is improving. 

The Peshmerga have not availed themselves of training from the U.S.-led coalition to counter Da’esh to the same extent that the Iraqis have, but the Kurds can boast that at least their party-specific formations have shown higher levels of morale and unit cohesion than Iraqi formations. (The coalition has made clear that it will only train integrated formations of Peshmerga so as not be training one party’s militia to potentially fight the other.) The Kurds continue to complain that Baghdad is blocking weapons from reaching them, but U.S. officials insist that no such diversions are taking place and the Kurds are getting everything they have been promised, even if it is not what the Kurds want (and, I would argue, justifiably need).

Indeed, the Kurds still have too few Milan anti-tank guided missile launchers, too few Mine-Resistant Ambush Protected vehicles, too little artillery or other armored vehicles, given the size of the front they are defending and the ability of Da’esh to employ large, armored suicide-bomb vehicles. This leaves the Peshmerga heavily dependent on coalition air power, which is fine as long as that is available. So far, it consistently has been, but the looming Mosul offensive will be highly complex and demanding, and there is some chance that the situation could get out of hand. Providing the Kurds with additional heavy weapons would help to mitigate this risk, even if it is slight.

Political paralysis, Kurdish style 

As in the south, the problems lie overwhelmingly in the political and economic realms. Kurdish politics is fragmenting in a mirror image of Iraq’s splintering polity. The strong, working relationship forged by the Kurdistan Democratic Party (KDP) and Patriotic Union of Kurdistan (PUK) in the aftermath of their 1996 civil war seems in danger of breaking down again. Many PUK members openly delight in the KDP’s misfortunes and side with the Gorran (or Movement for Change) party in opposition to the KDP on many critical issues. The KDP and the Gorran party are locked in an acrimonious death grip, with Gorran accusing the KDP of ruling illegally and dictatorially, and the KDP accusing Gorran of being nothing but spoilers with no practical plan of action. 

Kurdish politics is fragmenting in a mirror image of Iraq’s splintering polity.

The rupture that occurred last fall (when Gorran party members attacked several KDP party facilities and the KDP blocked the Gorran speaker of parliament from entering Irbil) still has not been healed. Pragmatic elements on all sides are looking for ways forward, and some reasonable plans have emerged, but it has been distressingly difficult to see them enacted. That is especially true because Gorran chief Nawshirwan Mustafa is said to be in self-imposed exile in London (“pouting” was the word one senior Kurdish official used), refusing to see anyone or do anything. In his absence, Gorran party officials cannot unite around one course of action and accept the overtures from the KDP, including President Masoud Barzani. 

In addition, the splits within each party are also becoming acute. Within the KDP, two rival camps continue to battle for the soul of the party. On the one hand are those who favor a rapid move toward independence. They believe that Turkey will support it and that it will resolve most or all of Kurdistan’s problems by enabling the new Kurdish state to sell oil at the international rate, issue debt, buy weapons directly, and control its own monetary policy. This group is opposed by a rival that worries that independence will make the KRG too dependent on Turkey and that while a Kurdish state will have the legal authority to do all of those things, it won’t be able to do so as a practical matter. Instead, they favor a more deliberate process of moving toward independence in 5 to 10 years, during which time bilateral negotiations could work out thorny issues like the status of Kirkuk and the border between Iraq and a new Kurdish state. In the interim, this group believes it important for the Kurds to reconcile with Baghdad, if only to alleviate their financial circumstances.

For its part, the PUK has not yet settled on a stable, effective answer to the problem of the loss of party founder (and President of Iraq) Jalal Talabani to illness. Talabani’s wife, Hero Ibrahim Ahmed (or Hero Khan), former KRG Prime Minister Barham Salih, KRG Vice President Khosrat Rasul Ali, and other senior PUK leaders are all jockeying for power—either to succeed Talabani as undisputed leader of the PUK, or else to gain ascendancy in a power-sharing arrangement among them. At present, Hero Khan appears to be slowly gaining the upper hand, but it is a tedious process and she is not yet able (or willing, her critics claim) to exercise decisive leadership. That leaves the PUK able to cause problems for the KDP, but unable to advance a coherent agenda of its own, which is frustrating to both parties. 

I found it striking how stuck the Kurds are, and how even the best and brightest among them do not have a clear—or clearly plausible—plan for extricating themselves from the political deadlock. It is going to take a lot of hard bargaining, a considerable willingness to overlook past grievances, and a certain amount of luck to do so.

Oil and independence

Between the internal divisions and the economic crisis, many senior Kurdish officials indicated that they think it unlikely that the Kurds would declare independence this year. In fact, a considerable number averred that it was unlikely that they could even hold a proposed referendum on independence, which the KRG had hoped to conduct this fall, around the time of the U.S. elections. Those who doubt that the KRG will be able to do so uniformly argue that a referendum would be too costly for the cash-strapped KRG. Some also suggested that given the extent of the divisions and feuds among the Kurds, a putative referendum on independence could turn into an actual referendum on the KDP’s leadership, which could prove both disastrous for the cause of Kurdish independence and dangerous to the stability of Kurdistan.

Consequently, the Kurds may opt for a new oil deal with Baghdad instead. If independence is pushed further out on the horizon, the Kurds will need to find some other way to deal with their own financial circumstances, which are far more precarious than Baghdad’s because the Kurds cannot control their monetary policy, issue debt, or take other steps available to a sovereign nation. The Kurds have not paid salaries to their own bloated public sector for months, and even the police have gone on strike to protest. A new deal with Baghdad would allow the Kurds to sell oil at the market rate (they currently must sell at a discount to convince buyers to accept the legal risk that Iraq might take them to court). It would also allow the Kurds to get their share of the anticipated International Monetary Fund and foreign aid packages, which Irbil needs even more badly than Baghdad. Indeed, the Kurds are so desirous of a new deal that their more pragmatic leaders are now talking about accepting 17 percent of Iraq’s actual, total oil revenues (i.e. Kurdish and Iraqi oil sales combined) rather than demanding 17 percent of the federal budget as in their prior agreement. 

[F]inancial circumstances…are far more precarious than Baghdad’s because the Kurds cannot control their monetary policy, issue debt, or take other steps available to a sovereign nation.

Inevitably, the newfound Kurdish interest in a deal has been matched by a sudden Iraqi reluctance. Baghdad seems to understand that it now holds the whip hand in the negotiations and is not in any rush. The Kurds are hurting worse than the Iraqis, and Baghdad has the prospect of getting much bigger infusions of cash than the Kurds. Both the United States and the IMF have stated that their assistance assumes that about 17 percent would go to the Kurds, but without a new oil-sharing agreement it is not clear that Baghdad will legally have to comply, or that those donors could circumvent Baghdad and deliver the money directly to the KRG. There is widespread agreement that signing a new deal would avoid the need to arbitrate all of this and therefore that it would be best to strike one before the money starts to flow. But many in Baghdad seem quite willing to let the Kurds twist in the wind, either out of spite or to secure an even better deal. 

One very positive development is that the United States has agreed to provide military funds to pay many of the Peshmerga’s most important costs—including food, medical supplies, and other basic needs—to the tune of several tens of millions of dollars per month. This is a big boost for the Kurds, and by itself will reduce the Kurdish budget deficit to a considerable extent. It will also provide the United States with greater leverage over Kurdish military operations, which grows in importance as the battle for Mosul looms ever nearer. Mosul north of the Tigris is a Kurdish city—and not just a Kurdish city, but a KDP city. Kirkuk, on the other hand, is an overwhelmingly PUK city. Many in the KDP fear that when Kirkuk is finally assimilated into the KRG, it will tip the political-demographic balance in favor of the PUK. Thus, there is widespread speculation that the KRG may move to claim the Kurdish half of Mosul as part of the liberation of the city to preserve the current balance between the Kurdish parties. The United States understands that prospect, and the embassy and American military leadership accordingly want to maximize their ability to influence Kurdish actions during the liberation of Mosul. 

KRG economics

To a much greater extent than in Baghdad, the financial crisis is promoting and enabling real economic reforms in the KRG. To their great credit, Prime Minister Nechirvan Barzani and Deputy Prime Minister Qubad Talabani have enacted real reforms and are pushing to implement others. They have slashed government salaries across the board (ranging from a 15 percent cut for the lowest-paid to a 75 percent cut for the highest). They have used low oil prices to begin removing subsidies on gasoline. They have secured World Bank funding to enable them to recapitalize the electrical grid (which could save them as much as 40 percent on their domestic power production costs) and are looking to install meters and begin charging their citizens for electricity usage in the near future. They plan to begin privatizing the electrical providers and to convert the power plants to natural gas (to be supplied by the nascent Kurdish gas industry). 

They also brought in a former Lebanese minister of finance to overhaul the finance ministry—believing that no Kurd would trust any other Kurd to do so. In a similar, and even more far-reaching move, they have secured assistance from the British government to bring in Deloitte Accounting to perform a comprehensive audit of the KRG Ministry of Natural Resources (the oil ministry) to identify and eliminate corruption. (The Kurdish Prime Minister told us with admirable candor: “look, I know that none of my people will believe that we are being transparent with the oil ministry no matter what we do, if we do it ourselves.” Hence his decision to bring in Deloitte and the Brits to do it instead.) 

Moreover, Prime Minister Barzani and Deputy Prime Minister Talabani are pushing forward other important reforms, like eliminating expensive and corrupt “allowances” for public sector workers, requiring every government employee to register in a biometric database to eliminate “ghost soldiers” and payroll padding, and building new government websites to enable “e-government” transactions that would remove both the need for many current government employees and the payoffs currently required to get anything done in the existing, corrupt, person-to-person system. If coupled with proposed new initiatives in education, worker retraining, investment laws, and other areas, such moves could have a huge impact on Kurdish economic fortunes.

Even if Kurdistan does not turn out to be the hydrocarbon juggernaut it was once thought to be, it will still have significant production.

However, the down side of Kurdish economic fortunes is that the Kurdish oil industry is facing grim prospects and Irbil’s leadership does not yet seem willing to acknowledge that reality.* Simply put, the major international oil companies aren’t finding the hydrocarbon deposits they’d hoped for in Kurdistan. The number of wells sunk that have yielded real returns is far less than expected. That by itself has cooled the ardor that the international oil companies once felt for Kurdistan. Combine that with the inability of the KRG to repay them for the loans that many extended to Irbil because of the financial crisis, and you get a major shift in oil companies’ interest away from Kurdistan. Yet Kurdish leaders still focus largely on their financial problems and many do not seem to have come to grips with the widespread perception that the region is not yielding new hydrocarbon deposits as expected. 

All of this further emphasizes the importance of Kurdish reform plans. Even if Kurdistan does not turn out to be the hydrocarbon juggernaut it was once thought to be, it will still have significant production, just not as much as the Kurds dreamt of. They probably will never be “Abu Dhabi in the mountains,” and so must shift their political and economic sights in a different, more practical direction. Their reform agenda creates a real prospect that they can do so, and in so doing lay a firm economic foundation for independence at some point in the next decade. As always in the Middle East, the question is whether the reforms are continued after the immediate crisis has passed.

*My thanks to Michael Knights for the points in this paragraph. They are drawn entirely from his research and analysis.