Iraqi Kurdistan gambles on oil and Baghdad's benevolence

Iraqi Kurdistan is demanding control of its oil, and officials say they're willing to risk losing their share of the federal budget to get that. Problem is they can't afford it.

Iraqi Kurdistan is risking the loss of its share of Iraq's national budget to secure greater independence and the right to manage its own oil.

Although oil exports could net the Kurdistan Regional Government a healthy revenue stream, for now it cannot plug the gap if Baghdad continues to withhold the 17 percent of the national budget that it provides to Kurdistan every year. That revenue makes up the largest chunk of the Kurdish region's budget, even though the Kurds say they regularly receive much less than promised. 

Baghdad began withholding that money in January, and the KRG has already had to delay paying public sector workers' wages – April's paychecks still haven't arrived, and some workers have gone on strike. Officials say they will have to dip into savings.

The Kurds, spread across Turkey, Iran, Iraq, and Syria, have long faced persecution and clamored for greater independence in each country. They have been most successful in Iraq, where they achieved semi-autonomous status. Now KRG officials are demanding the right to sell oil without the central government's permission. 

But Baghdad insists that oil must still be funneled through the State Oil Marketing Organization and has vowed legal action against any buyers. For now, Kurdistan's oil exports are sitting in the southern Turkey port of Ceyhan, waiting for buyers. 

Their financial dependency on Baghdad has left the Kurds stuck. But Baghdad has to be careful about how it uses that power, says Richard Mallinson, a geopolitical analyst at Energy Aspects. If it punishes the Kurds too harshly, it risks triggering a surge of support for independence, regardless of the financial ramifications. 

“The Kurdish Regional Government (KRG) position has strengthened in the last year, but they still depend on budget transfers from the federal government, and oil export revenue would not be enough to replace this entirely in the first couple of years," he says. “So Baghdad has an important financial lever, but the more heavily this is used the more incentive the KRG will have to push for greater autonomy.”

Nationalism burns

In the run up to Iraqi national elections on April 30, Iraqi and Kurdish nationalism ran high. Massoud Barzani, president of the Iraqi Kurdish region, compared Baghdad's budget withholding to the 1988 gassing of the Kurdish town of Halabja by Saddam Hussein. Five thousand Kurds were killed in a single day, and the trauma still resonates strongly.

“I consider the suspension of Kurdistan Region [financial] dues as a declaration of war, and maybe even a crime greater than the chemical bombing of Halabja,” he said in an interview with Al-Hayat newspaper.

After a Kurdish guard reportedly killed a prominent journalist in Baghdad, Prime Minister Nouri al-Maliki said that “blood can only be expiated by blood.”

In the sleepy polling stations throughout Kurdistan, pro-independence sentiment among Kurds was firm. The region does not want to get dragged into the violence that has engulfed the rest of Iraq, and younger Kurds have grown up learning Kurdish instead of Arabic, further weakening ties.

“I’m not happy with Maliki because I’m Kurdish. If we let Maliki go on in this style he will be a dictator like Saddam Hussein,” says Sam Amini, an English student originally from a small town near Halabja. His father was part of the peshmerga Kurdish armed forces who fought a guerrilla war against Hussein.

His family is feeling the pinch because his parents' salaries have been delayed, but he still backs separation from Baghdad. “Kurdistan should be independent," he says. "If you look at democracy in Kurdistan, step by step it’s going towards a new future.”

Shorsh Haji, a lawmaker in Baghdad for the Kurdish anti-corruption Change party, believes on working with Iraq for now. But, “when we reach a stage that our rights are not recognized, and we don’t have a say in decision making in Iraq, then we must think about other options," he says.  

Maintaining leverage

Kurds might find themselves with some leverage if, as some predict, Mr. Maliki's party doesn't win enough votes on its own to secure a third term. In 2010 the Kurdish coalition backed Maliki’s second term, and could be asked to do the same again this time.

Fuad Hussein, chief of staff to Mr. Barzani, says that post-election negotiations to form a new government will force a resolution of the budget issue.

"You can’t negotiate and not pay workers – this issue will be solved," he says. “We must not have links between what we are doing on [the] oil issue and the payment of the employees of Iraqi Kurdistan. What the Iraqi government has done was illegal. The federal government is not allowed to cut budget. These are two different issues.”

Kurdistan Region Prime Minister Nechirvan Barzani recently stated that Kurdistan would be able to pay future salaries without Baghdad, and that it would go ahead with oil exports. But many experts are skeptical it can survive financially on its own.

If the dispute is not solved, “there will be very serious economic problems in Kurdistan,” says Kamal Chomani, a Kurdish journalist and political observer. “If the KRG goes ahead with [selling oil] via Turkey without Baghdad's permission, but cannot provide enough money for the region from oil sales, then this is a serious problem.”