The claim by the Kurdistan Regional Government's natural resources minister, Ashti Hawrami, in March that economic self-sufficiency could be achieved "in months" appears unrealistic.
The Kurdistan Regional Government (KRG)'s statements on economic self-sufficiency are designed to reinforce its ongoing plan to achieve full independence from Iraq.
The KRG's firm focus on independence underlines the fragility of the December 2014 oil agreement with Baghdad, particularly given the KRG's ongoing independent export of oil.
Economic self-sufficiency from Baghdad largely depends on increased oil production and the ability to export oil unhindered by threat of legal action from Baghdad. It would also require diversification away from oil, increased foreign investment, and the creation of independent financial institutions through which the KRG could secure international loans.
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Hawrami's claim that the Kurdistan Regional Government (KRG) is closing in on economic independence appears overly optimistic. The region's finances are strained by the current low oil price environment, and the reduction in government revenues hampers its ability to implement necessary development to improve its fiscal position.
The KRG depends on oil and gas for more than 95% of its annual budget, and so the sharp recent drop in oil prices is slowing momentum for independence. This price fall also helped undermine the credibility of hardliners in both Baghdad and the Kurdistan Region (KR) who had opposed a compromise, opening the diplomatic space for the December 2014 oil deal with Baghdad. Under the agreement, the KRG should export 550,000 barrels per day (bpd) of crude oil for Iraq through its pipeline into Turkey, in return for payments of about USD1 billion per month, equivalent to its 17% annual share of the Iraqi national budget. The agreement also stipulates that the KRG can export 250,000 bpd of Kurdish oil via Iraq's State Oil Marketing Organisation (SOMO). However, there is no clarity on whether they can export additional volumes.
The KRG aims to export 750,000 bpd by the end of 2015, according to Hawrami, and 1 million bpd by early 2016, according to the Ministry of Natural Resources' website. A KRG official quoted by Reuters in March claimed that the KRG could be self-sufficient after April, when the official estimated that it would be able to export 825,000 bpd via an independent pipeline to Turkey.
However, the KR depends on overseas operators to meet these ambitious production targets. Baghdad's failure to pay the KR the USD1 billion per month has left it unable to fully pay these firms for past oil exports. The KRG's payment delinquency has damaged investor confidence in the region and Norwegian operator DNO has warned that the lack of payment threatens planned production increases at its Tawke field. This illustrates the hurdles the KRG must overcome to achieve its raised production goals.
Even should the KRG successfully expand oil production, there remain ongoing obstacles to its sale, particularly a legal campaign by Baghdad targeting oil tankers, oil traders, and other parts of the purchasing chain for Kurdish oil. This was exemplified recently by an out-of-court settlement reached with Greek tanker company Marine Management Services in April, which agreed to cease oil trade with the KRG after its current contract expires, following a lawsuit launched in Greece by the Iraqi government in September 2014.
On 10 April 2015, The Andelou Agency quoted a KR parliamentary committee member stating that the KRG's debt stood at USD17 billion and that the government was unable to pay civil servants' salaries. The principal cause of this financial crisis is the Iraqi government's January 2014 decision to withhold the KRG's share of the national budget, underlining just how financially dependent the KRG remains on Iraq. Fighting the Islamic State is placing a further strain on the KRG's economy; a February 2015 report by the World Bank estimated that the regional government would need USD1.4 billion in extra spending in 2015 as a result of the inflow of internally displaced persons (IDPs) and refugees to the KR.
Of the agreed USD1 billion per month the KRG should receive from Baghdad, just two tranches have been paid so far: USD208.3 million in February and USD408.3 million in March. Baghdad has justified the irregular payments by claiming that the KRG has not fulfilled its commitments to supply the 550,000 bpd of oil stipulated in the agreement. Baghdad's non-payment increases the likelihood of the KRG walking away from the agreement. However, the KRG has few alternatives to adhering to the deal given the need to alleviate its payment difficulties, which IHS assesses cannot be remedied at present by independent oil exports at current volumes.
Outlook and implications
Although Hawrami's statement appears overly optimistic, in the unlikely event that the KRG becomes financially self-sufficient, the imperative to remain within Iraq would be much reduced. The de-facto integration of oil-rich Kirkuk, which the Iraqi Army is no position to seize militarily in the three-year outlook, further bolsters the KRG's plans to secede. However, declaring independence would alienate Baghdad, leaving the KRG entirely dependent on Turkey as an export route for its oil in the coming year. Nevertheless, should Iran finalise an agreement with the P5+1 countries over its nuclear programme, the KRG could construct a pipeline to connect to the Iranian pipeline network to provide an alternative export route within the three-year outlook. Another key consideration is that the KRG is overly dependent on Turkey and, to a lesser extent Iran, for financing. Both countries are at best ambivalent to Kurdish independence, if not actively opposed, and will apply considerable pressure on the KR's leaders to remain within Iraq for the foreseeable future.