Iraq Business Report

Last updated at 21/12/2017

Is the Kurdish Spring here?

By Michael Rubin

Seldom has there been such a discrepancy between public perception and reality as with the case of Iraqi Kurdistan. Over the past decade, the region has spent tens of millions of dollars in the United States officially — and much more than that unofficially — to cultivate an image both of a pro-American secular democracy in a region of intolerant, anti-American Islamist dictatorships and of an effective American ally that was essential to the defeat of the Islamic State. Both narratives are simplistic, however, and not entirely accurate.

First, the Kurdish peshmerga played a role against the Islamic State, but they mostly engaged in perimeter defense (after some initially fled the fight, and others warehoused weaponry or sold their weapons to make a quick buck). Public relations aside, it was the Iraqi army and the predominantly Shi‌ite (but not entirely so) Hashd al-Shaabi which did the bulk of the fighting against the Islamic State, liberating Fallujah, Ramadi, Tikrit, Beiji, Mosul, and Rabia. The peshmerga, for its part, participated in the Mosul campaign, coordinated with US Special Forces, and helped prevent any Islamic State push into Kirkuk. For Iraqi Kurds and those whose fortunes have become attached to them to argue that the peshmerga were the most effective fighting force against the Islamic State is just nonsense.

Kurdistan‌s democracy deficit

Much more important, however, is the democracy deficit. At its formation, Iraqi Kurdistan had real promise. Its leaders appeared democratically inclined for two years at least. The two main political parties — Masoud Barzani‌s Kurdistan Democratic Party (KDP) and Jalal Talabani‌s Patriotic Union of Kurdistan — initially agreed to share power but, in 1994, the Kurdish civil war erupted over revenue sharing disputes. Three thousands Kurds died or disappeared in fighting, and many times more were displaced as the KDP and PUK divided the region into fiefdoms. While the Kurds maintained the trappings of unity and democracy, subsequent elections were pro forma. Personnel might rotate, but Barzani and Talabani ensured they and their families controlled the levers of power and the disbursement of patronage. While the PUK once depicted itself as a party of ideals in contrast to the nepotism and tribalism at the heart of the KDP, that pretense dissolved as Talabani and his wife Hero Ibrahim Ahmed maneuvered to place their sons in power and pushed aside reformers and technocrats like PUK Prime Minister Barham Salih, effectively signaling that non-family members could never aspire to be more than a consigliere in practice.

The democracy charade lost what little credibility it retained after Barzani refused to step down at the end of his presidential term. Like many autocrats, he clamped down on the free press. Iraqi Kurdistan became a dangerous place for independent reporters as the intelligence service run by Barzani‌s eldest son reportedly murdered several who criticized the de facto president‌s nepotism and corruption. As so often happens among dictatorships, he unleashed a cycle in which nepotism bred mismanagement, mismanagement encouraged corruption, and corruption which directed the region to economic ruin. Today, Iraqi Kurdistan is more than $20 billion in debt, investors are fleeing, and the situation is getting worse.

Barzani called the referendum not only for nationalist reasons, but as a distraction from the ruin which has resulted from a quarter century of his rule. Many Kurds saw through his cynicism. While the Kurdistan Regional Government (KRG) bragged about 92% of voters pledging support for independence, the KRG refused to release a full breakdown of turnout by district. In Sulaymani, for example, 200,000 fewer people participated than in the previous independence referendum a decade ago. In disputed areas, the turnout was miniscule as many minorities preferred their own local autonomy or even Baghdad to KRG rule.

Iraqi Kurdistan is bankrupt

Actions have consequences. In the wake of the disputed referendum, Iraqi forces moved back into disputed areas. Before the Kirkuk crisis, the KRG was producing an average of 630,000 barrels per day (bpd) of oil, and exporting 550,000 bpd through Turkey. After the Kirkuk crisis, that amount has been halved. A back-of-the-napkin calculation of export at $45/barrel suggests the KRG now receives $375 million monthly from oil exports. But, because of KRG prepayment and financing deals, many claimants can deduct from that. Glencore, for example, reportedly has a contract with the KRG that allows it to collect on average 100,000 bpd from Kurdish oil exported through the Turkish port of Ceyhan in exchange for advances totaling $800 million.

Other buyers have paid the KRG anything between $3 billion and $7 billion in total; KRG opacity precludes an exact figure. The Russian firm Rosneft, for example, has provided the KRG with a cash advance said to be between $1.3 and $2.7 billion. Litasco, another Russian company, has taken a pre-payment deal worth $800 million.  The KRG reportedly owes Vitol just short of $1 billion. Add the Swiss oil trader Trafigura into the mix and the KRG owes another $500 million. Throw in $2 billion or so to Turkey for cash advances, another $1.4 billion in transit fees to Turkey, and an interest rate of no less than 15% on the cash advance and the situation is clear. Simply put, there may not be enough KRG oil to pay off its obligations. The KRG has no income stream since October when Kirkuk oil exports stopped. In short, the KRG needs around $700 million just to pay salaries each month. At present, the KRG is burning through its reserves which analysts place at no more than $2 billion.

It would be wrong to just blame Baghdad. The KRG mismanaged its income even before revenue disputes erupted with Baghdad and before the Iraqi government‌s reclamation of territories it administered prior to 2014. Consider that rather than trim its own expenses — Barzani receives more per month than the US president does in a year — the KRG simply has bypassed all controls. On January 13, 2017, it seems the Kurdish region borrowed $500 million at 12% interest without consulting parliament or the political parties. Curiously, there seems to be a 10% signature bonus on the agreement, which appears to have been signed by an agent answering directly to Qubad Talabani, the region‌s deputy prime minister. Sources with knowledge of the agreement say that $50 million was diverted to a private account.

Ordinary Kurds are right to be furious, given the cost of mismanagement and the amount of money owed to ordinary Kurds. The KRG, for example, employs 126,000 teachers, most of whom are still owed four months‌ salary from 2014. Assuming an average monthly salary of 600,000 Iraqi dinars ($504) and 15% compound interest per annum, then the KRG owes each teacher 3,174,000 Iraqi dinars ($2,666). Add into the mix that the KRG has only paid half of each salary for the past 20 months. While the KRG had the choice to take out bank loans and cash advances, ordinary Kurdish civil servants did not: The Barzanis and Talabanis simply extracted a forced loan. Of course, teachers are not alone. The KRG owes numerous contractors money and, in all likelihood, compound interest.

While some leaders sought to cloak themselves in the image of reform and publicly sought the mantle of anti-corruption crusaders, outcomes of audits were never quite so public as their official announcements. And proposals for financial reforms, even if sincere, always had their implementation reversed somewhere along the road to Sar-i Rash, the Barzani‌s mountaintop palace complex, and Hero Ibrahim Ahmed‌s own domicile in Sulaymani. Increasingly, it looks like even that reformist rhetoric was posturing — a game of good cop, bad cop to keep the public distracted while individuals pocketed the region‌s tremendous potential.

Have Kurds had enough?

The KRG has tried distraction. It has fanned the flames of racism against Shi‌ites in Baghdad and exaggerated — and in some cases fabricated — reports of ethnic and sectarian clashes and militia malfeasance in disputed areas. Blaming Baghdad has been counterproductive not only because Prime Minister Haider Abadi‌s government has recently made the right moves to overcome sectarianism and reform Iraq‌s inefficient economy, but also because the KRG‌s increasing reputation for falsehood and crying wolf has caused even its staunchest Congressional supporters to reconsider their positions.

Nor can the KRG claim that it is following the benevolent autocracy model embraced by the United Arab Emirates and Morocco. Firstly, Barzani remains a tribal leader more than a king and, secondly, his inability to bring corruption down to UAE and Morocco levels means that he has been unable to deliver what oil-rich Dubai or even oil-poor Morocco have provided to their citizenry.

Kurdistan was a tinderbox, and now it has its spark. Iraqi Kurdistan is in an uproar. On December 18, 2017, citizens took to the streets to demand their unpaid wages. Security forces responded with a heavy hand, killing at least five and, according to many journalists in the region, more than a dozen. Kurds have turned their fury on all political parties, burning the offices of several.

Kurds are no longer willing to accept the illusion of reform. Consider Barzani: He announced he would not seek to continue in the presidency, but he remains ensconced in his palace complex and heads a self-declared High Political Council. In other words, he and his family remain in control. The security forces he and the Talabanis control have arrested rival Shaswar Abdulwahid and shut down the television station he controls (removing with it reports of the mystery bank loan and its alleged signing bonus).

Make no mistake: It is long past time for the Kurdish spring. Iraqi Kurdistan is a land of tremendous talent, as anyone who has visited the region knows. Neither the Barzanis nor the Talabanis have a birthright claim to the region‌s leadership. Rather than set Kurdistan down a path to prosperity, they have become the region‌s Mubaraks and Ben Alis. Rather than pull Iraq forward, the Iraqi Kurdish leadership for both cynical and corrupt reasons seeks to push it back.

What does this mean for America? It‌s time to realize that standing with the Kurds and standing with the Kurdish leadership are two different things. The former deserve support; the latter do not. Barzani and Talabani may believe a lack of official attention is a green light to fire on crowds. It is not. Increasingly, it is becoming clear that the real threat to Iraqi Kurds and Kurdistan lies not in Baghdad, Najaf, or Karbala, but with two families in Erbil.

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