How Erbil and Baghdad could fuel Iraqs recovery

After Daesh’s defeat and expulsion from Iraq, an emergent crop of post-civil war leaders became well positioned to reap a political, diplomatic and security windfall. However, what came after was a repeated string of failures.

The biggest casualty was the lamentable lack of initiative to strengthen Iraq’s post-war economy when global energy prices were still sufficiently high, with fiscal room taken up by a bloated public sector wage bill. Meanwhile, average Iraqis fatigued by years of war and internal turmoil continue to lack basic public services and utilities. Corruption still swallows hundreds of billions of dollars, not helped by a rudderless government more invested in its survival than providing leadership.

In turn, some Iraqis have simply armed themselves in response to increasing societal divisions and the re-emergence of insurgency groups who see unpassable opportunities in a land of seemingly endless chaos and despair. Iran stalks the periphery, leaning heavily on its influence networks in Baghdad to dictate Iraq's affairs, emboldened by Washington’s ambivalence.

Nevertheless, there is still some hope, beyond the country's vast fossil fuel endowments and likelihood of an abrupt US policy U-turn under the Biden administration. That hope lies in the unlikeliest of places. However, considering the crises Iraq faces, any sort of reprieve is welcome, even if it means achieving what many considered impossible — the mending of ties between semi-autonomous Iraqi Kurdistan and greater Iraq.

Relations between Erbil and Baghdad have always been complex, marred by disputes over budget allocations, fossil fuel resources, control of the oil-rich Kirkuk province and the security and administration of disputed territories. At the core of these divisions is a bitter dispute about the authority to administer and transact the estimated 450,000 barrels per day of oil produced in Kurdistan. No adequate legal or constitutional remedies are available for either side to address the key issue of who, between Erbil and Baghdad, has sole ownership and export rights of fossil fuel resources in the Kurdistan region. It is unlikely there will be a resolution for the foreseeable future.

Nonetheless, Kurdistan can play an important role in achieving Iraq’s recovery and stabilization. A recent US Department of Energy study found that a mature fossil fuel sector in Iraqi Kurdistan would have sufficient capacity to do more than just transfer oil south. There would be more than enough for exports, generating additional revenues and jobs, and attracting desperately needed liquidity into local communities. Failure to tap into this potential will only ensure the pandemic and oil price drop will continue to have a devastating impact on Iraq's finances, leaving both Erbil and Baghdad unable to afford their budgets, let alone invest in infrastructure or modernize public services.

A decades-long dependence on oil has left Iraq at the mercy of global energy prices, which may not recover before the end of this year. The International Monetary Fund expects Iraq's economy to shrink by more than 12 percent, which rules out the usual temporary solution of seeking liquidity from international capital markets. Should Baghdad resort to borrowing, the cost of the debt would probably be too high for an already stretched budget..

So there is less fiscal room to maneuver with each day that Baghdad and Erbil delay reconciliation. Kurdistan’s fossil fuel sector has fared better than its southern counterpart, with its 45 billion barrels of oil and 25 trillion cubic feet of natural gas reserves under production-sharing contracts with oil companies. In fact, the Kurdistan region's lucrative fossil fuel endowments have even attracted Russia to wade into the northern Iraq via its proxies, Rosneft and Stroytransgaz, in a bid to complete an “energy corridor” comprising Iran, Iraq and Syria.

Granted, without Washington’s involvement, there are few, if any, expertise, resources and capacities available to Iraq to fully capitalize on its energy producing potential, while simultaneously exorcising Iranian influence and fending off Moscow’s deepening encroachments. And if the Biden administration insists on leaving Arab affairs on the back burner to focus on curbing Iran’s nuclear ambitions, it could further endanger Iraq’s stability.

There is also a good chance Iraq, and by extension Kurdistan, would sooner ally with Washington’s adversaries who are already laying the groundwork and investing in Iraq's recovery. The US has maintained positive relations both north and south, which means the State Department could easily facilitate constructive and reconciliatory dialogue between Erbil and Baghdad, empowering them to engineer Iraq's recovery. Otherwise, the alternative is relying on others who may not be interested in respecting Iraqi sovereignty and self-determination as they pursue geopolitical ambitions.

• Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies.