Monday, July 23, 2012

Iraq’s Government Increases Pressure Upon Kurdistan For Its Oil Policy By Threatening To Cut Its Share Of The Budget

The dispute between Baghdad and the Kurdistan Regional Government (KRG) over their independent energy policies continues to escalate. In April 2012, the Kurds ended their oil exports over a payment dispute with the central government. Immediately, officials condemned the move, and claimed that it was threatening Iraq’s revenues. That led to a number of statements by Prime Minister Nouri al-Maliki and his deputy Hussein Shahristani that they would deduct the amount of money they claimed the KRG owed from its share of the national budget. This was a major threat since almost all of Kurdistan’s funds come from Baghdad.

Prime Minister Nouri al-Maliki made the Kurds’ oil policy the topic of discussion at a recent cabinet meeting in July 2012. According to Trade Minister Khayrulla Hassan Babakir Mohammed of the Kurdistan Democratic Party (KDP), the premier arrived at the meeting and proclaimed that Kurdish oil smuggling would be at the top of the agenda without informing anyone before hand. He allegedly brought files on the Kurds’ energy deals with him. Oil Minister Abdul Karim Luaibi said that petroleum had to be controlled by the central government, and claimed that Kurdistan was smuggling oil to Iran and Turkey. Maliki stated that the KRG had earned $8 billion from this illegal activity, which was not sent to the government’s coffers. He demanded that money be deducted from the Kurds’ share of the national budget. The Kurdish ministers and Deputy Premier Rowsch Nouri Shaways of the KDP along with Finance Minister Rafi Issawi of the Iraqi National Movement all objected. The Kurds claimed that trucking oil to Turkey was legal, and blamed the lack of an oil law as the real problem in Iraq. Maliki ignored those complaints, and called for two auditing committees to be formed to go through the KRG’s Natural Resource Ministry’s finances. Despite the Kurds no votes, the proposal was passed by the parliament. This was mostly for show since Maliki and his allies have been talking about reducing the Kurds’ budget since April. The fact that it came up in a cabinet meeting however, gave the threat more weight. Before, the subject was only brought up in conversations with the press. Now the prime minister was requesting official action on the matter with the investigating committees. That doesn’t mean it will actually happen, but it raises the pressure on the Kurds, which was the premier’s goals.
Deputy Premier Shahristani first brought up cutting the Kurds' portion of the budget for its oil smuggling and failure to meet its export quota (AK News)
The origins of this latest argument started when the Kurds stopped exporting oil. On April 1, the KRG announced that it would no longer be shipping its petroleum abroad due to a payment dispute with Baghdad. It claimed that it was owed $1.5 billion. Finance Minister Issawi responded that his ministry was in the process of distributing $558 million to them, but the Kurds said that it was too late. The next day, Deputy Premier Hussein Shahristani who is in charge of energy policy held a press conference where he accused the KRG of smuggling oil to Iran and Turkey. He stated this Kurdistan had earned $3.5 billion from these illegal activities in 2011. He went on to say that this would lead to a deficit, because not only was it not turning over its petroleum revenues, but was not meeting its 175,000 barrel a day export quota set for it in the 2012 budget. Even before the Kurds ended their exports, it was not meeting this amount. Shahristani told the press that in total the KRG owed Baghdad $5.6 billion, and that should be deducted from their share of the budget. This was the first time that this idea was brought up publicly. In July, Shahristani officially requested that the Finance Ministry cut $5 billion from Kurdistan’s budget, but they refused, and sent the issue to the cabinet for review. The deputy premier has been the staunches topponent of the Kurds’ independent oil policy. He has consistently claimed that all of the KRG’s oil deals are illegal, that the central government should control all the nation’s natural resources, and that it is the only body with the authority to export as well. It was no surprise then that he was the first to make a comment about punishing Kurdistan financially for ending its exports, and smuggling. The KRG has been sending oil to neighboring countries since the 1990s, but Baghdad has said little about it unless the press brought it up. Maliki’s government is feeling like it has the upper hand over energy policy now, because production is taking off in southern Iraq. That has given it the confidence to mention things like smuggling, which it would not have done otherwise, because it felt like it needed Kurdish oil to raise more money. That’s not true anymore, which led to Shahristani’s press conference.

The deputy premier’s remarks had added weight when the Kurds officially announced that it would start trucking oil to Turkey in return for fuel in July. When the KRG mentioned that it wanted to build two independent pipelines to Turkey, the central government responded by cutting petrol shipments to Kurdistan. The Kurds started talking about shipping oil to Turkey in May as a result to make up for this loss, which gained Ankara’s official approval in July. Turkey’s Energy Minister said it would take petroleum trucked in as border trade, but would not agree to the use of any Iraqi pipelines by the Kurds without Baghdad’s approval. This of course enraged Maliki, Shahristani, and company even more. They had just accused the Kurds of smuggling oil, and now they were officially stating that they were doing it. Not only that, but Turkey agreed, and even said that it was hoping that the trade would increase. That was probably a driving force for the prime minister to bring up financially punishing Kurdistan in his July cabinet session.

There’s no telling whether the threat to reduce the Kurds’ budget is real or not yet. Prime Minister Maliki is definitely upping the ante by going from statements to the press to officially asking the cabinet to look into the matter. This is just the latest test of wills between the central and regional governments. Maliki is felling more emboldened since southern oil production is taking off. That leads him to believe that the Kurds are no longer necessary to develop the industry or to earn money. In turn, the pressure is building upon the KRG. While its share of the national budget is 17% after some expenses are deducted, that money makes up 95% of the KRG budget. That makes it largely dependent upon the central government, and specifically the southern oil fields, which provides 90% of the country’s revenue if not more. Kurdistan, just like the rest of Iraq has a state-run economy, so any reduction in funds would have wide ranging affects upon society from wages to pensions to paying companies for their work. The Kurds cannot afford to let this happen, but has little leverage in the situation. A best-case scenario would be that this confrontation would lead to some sort of compromise between the two sides. Unfortunately, neither is willing to back down, so it’s likely that more conflict is on the horizon.


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Rudaw, “Maliki Angers Kurdish Leaders by Accusing Them of “Smuggling Oil,”” 7/17/12

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Al-Wannan, Jaafar, “Deputy PM: Kurdistan didn’t fulfill its oil export obligations,” AK News, 4/2/12
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Yeranian, Edward, “Iraq’s Kurdistan Region Halts Oil Exports to Baghdad,” Voice of America, 4/2/12


Seerwan said...

Do we know why Rafi Issawi stands by the KRG on this issue?

Joel Wing said...

Probably because Issawi knows this is a political move by Maliki and Shahristani against the Kurds rather than just a financial matter, and will need a political resolution.

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