On May 19, 2020, Iraqi Finance Minister Ali Alawi sent a letter to the Kurdistan Regional Government (KRG) in which he pledged that the Finance Ministry would provide it with the equivalent of 400 billion Iraqi dinars ($338 million) to cover its public-sector salary payments for the month of April. He demanded full accountability for how these funds transferred from the Iraqi central government budget were used, as well as full transparency regarding the Kurds' use of their revenues from oil production in Iraqi Kurdistan. This, he stated, was a condition for the central government's future allocations of such funds, in exchange for finalizing a longer-term oil and budget deal within a 30-day window.
The Kurds responded, in a May 20 letter, that the regional government of Kurdistan had approved Allawi's demands. However, on June 20, Iraqi Prime Minister Mustafa Al-Kadhimi met in Baghdad with President of the Kurdistan Region Nechirvan Barzani to discuss a range of issues in dispute. The meeting ended with no agreement on any of the issues discussed.
On June 22, another Kurdish delegation, headed by Kurdistan Region Prime Minister Masrour Barzani, met with Al-Kadhimi in Baghdad. This meeting also addressed the seemingly intractable problems facing Al-Kadhimi's central government in the wake of its disputes with the Kurdistan Region, some of which have lingered since Iraq's inception a hundred years ago.
Another meeting took place on June 23, when a high-level KRG delegation, headed by Deputy Prime Minister Qubad Talabani, arrived in Baghdad for a third round of discussions on resolving "outstanding issues." A few days later, a KRG spokesman claimed that the delegation had submitted to the central government all the necessary documents and data regarding these issues, particularly those relating to oil and gas, budget, and salaries. However, illustrating the complexities facing Al-Kadhimi, the Kurds are claiming that the central government is prepared to pay them the current price for the oil – but without compensating them for the sums the KRG owes the foreign, producing oil companies as a result of their own contracts with outside firms.
The frequency of these meetings reflects the importance that the Iraqi prime minister attaches to the problematic relations between the central Iraqi government and the Kurdistan Region, and his attempt to mitigate at least some of the tensions between them. These difficult relations are rooted in history, grounded both in tragic events in Iraq going back decades if not centuries, and in the fraught nature of contemporary Iraqi politics immediately before and since the fall of the dictator Saddam Hussein in 2003.
Iraqi Prime Minister Al-Kadhimi meets with Kurdish leaders in Baghdad, June 20, 2020
A New Reformist Government
Since Al-Kadhimi's nomination as prime minister-designate in April, he has repeatedly emphasized his plan to create an effective central government. He expressed his desire to bring all military apparatuses in Iraq, particularly the pro-Iran Popular Mobilization Units (PMU) and the Kurdish Peshmerga military units, under the full authority of the state-run Iraqi Security Forces. On June 26, Al-Kadhimi attempted to demonstrate his resolve, having security forces raid the headquarters of the pro-Iran Kataib Hizbullah, briefly detaining several individuals and seizing weapons. While at first this seemed like a successful show of strength, it appears to have backfired by strengthening the militias at the expense of the state. But in addition to this and other challenging missions, such as curbing Iran's influence in Iraq and fighting corruption, he also faces the pervasive problem of the relations between the Kurdistan Region and Iraq's central government.
The issues disputed by the Iraqi government and the Kurdistan Region go deep. The key historical conflict arises from two conflicting forces in Iran: the Kurdish desire for independence, or at least autonomy, and the equally powerful Baghdad desire for a unified country.
The Iraqi Constitution: Background
Under the Ottoman Empire, Iraq was administered through three districts: Mosul in the north, Baghdad, and Basra in the south. These districts were artificially united in 1922 during the British Mandate. Thus, since its inception, Iraq has suffered from deep tensions, especially between the Kurds in northern Iraq and the central government in Baghdad. Following the 2003 U.S. invasion of Iraq, and the end of the Ba'ath regime under Saddam Hussein, the relationship between the Kurds and the central Iraqi government was roughly set out in a new constitution, that was approved by an all-Iraqi referendum in 2005.
The constitution defines Iraq as a "democratic, federal, representative republic" and a "multi-ethnic, multi-religious, and multi-sect country." Its Article 117 promises that the constitution "shall recognize the region of Kurdistan, along with its existing authorities, as a federal region." Article 114 further asserts that "legislation enacted in the region of Kurdistan since 1992 shall remain in force," and Article 121 stipulates that "the regional powers shall have the right to exercise executive, legislative, and judicial powers in accordance with this Constitution."
But other articles in that constitution have been nagging sources of disputes. According to Article 111, "oil and gas are owned by all the people of Iraq in all the regions and governorates," and Article 112 stipulates that "the federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country." This is related to Article 121: "Regions and governorates shall be allocated an equitable share of the national revenues sufficient to discharge their responsibilities and duties, but having regard to their resources, needs, and the percentage of their population." How much is an "equitable share" has been a bone of contention ever since.
How Should The Rules Be Interpreted?
In practical terms, the Kurdistan Region enjoys quite a high degree of self-rule. The Kurds have their own president, prime minister, parliament, army in the form of the Peshmerga, and flag. Kurdish, which is the primary language in the Kurdish region (many young Kurds don't speak Arabic), is an official language in Iraq, together with Arabic. Kurds comprise about 15% of the Iraqi population of some 40 million, but even that number, used to calculate some revenue, is in dispute. Baghdad considers Iraqi Kurdistan to comprise 12.67% of the population, while the Kurds claim 17%. From the perspective of Baghdad, the Kurdistan Region has received more than its fair share of the federal budget as the price for unity. Allotted 12.5% of the federal budget for salaries, Iraqi Kurdistan has received 21.7% of this budget item.
Iraq has not announced yet its Federal Budget for 2020, and therefore KRG allocations are not yet fully set. MP Ahmad Al-Safar, member of the Iraqi parliament's financial committee, noted on June 14: "If the two sides (federal and regional government) reached a settlement, the agreement will find its way to the interim budget. There are efforts to complete the 2020 budget within two months, and this issue is subject to the negotiation between Parliament and the government. Whenever an agreement is reached, the salaries of Kurdistan Region employees will be released."
Not surprisingly, in a country struggling with heavy burdens of governance, war, corruption, foreign influence and a fragile and factious political system, interpreting the rules is a challenge. And making sure that a consensus agreement on what the terms of those rules are is an additional challenge. Much depends on the nature of the leadership in Baghdad, the political and military state of play, and the price of oil. There is no eternally fixed Kurdish share in the country’s budget.
The Oil Budget
The most pressing and divisive issue today is the so-called budget for oil. The control of oil revenues has long been a thorny issue between the Kurdistan Region capital, Erbil, and Baghdad. Since 2006, the Kurdistan Region has operated an independent oil and gas sector, and later began exporting its oil directly to international markets via a pipeline through Turkey from the port of Ceyhan on the Mediterranean coast.
In December 2019, Baghdad reportedly agreed to send Erbil 12.67% of the federal budget in exchange for 250,000 barrels per day (bpd) of oil. However, Erbil has failed to uphold its end of the deal. With Erbil claiming that the Kurdistan Region has an outstanding debt of $26 billion, the question is: where do their oil revenues go? Their budget is opaque, and in fact, the last regional budget was approved in 2013.
On April 16, 2020 Iraq's caretaker Prime Minister Adil Abdul-Mahdi called on Iraq's finance ministry to halt budget transfers to the KRG and to take back all transfers made since January 1, 2020. Baghdad said that the KRG had failed to deliver its quota of 250,000 bpd to SOMO, the state marketing firm, in exchange for its share of the budget. Despite the fact that Erbil has not delivered a single barrel of oil since the agreement was reached in December, KRG president Masrour Barzani called the move "politically motivated against the people of the Kurdistan Region."
While some of the anger and confusion in recent months can be placed squarely on the shoulders of the disastrous government of former prime minister Adel Abdel Mahdi, the situation is not yet resolved. On June 22, the KRG denied that it had received 400 billion dinars ($338 million) from the federal government in Baghdad. The ministry said in a statement that "despite the approval of the Iraqi Prime Minister to send a sum of 400 billion dinars as part of the expenses of the salaries of the employees of the Kurdistan region, which were scheduled to reach the Ministry of Finance and Economy before the Eid [Al-Fitr holiday], we all know that this money has not yet arrived." The statement added: "Despite the difficult financial situation and the decline in the region's revenues by noticeable proportions, the Kurdistan Regional Government, through the available resources from selling oil, local revenues, and borrowing, distributed the salaries of all employees before Eid Al-Fitr."
The KRG claims that this sum covers only one month of what the central government was obliged to provide the region on a regular basis. It maintains that it used the money to reimburse private individuals as much as $138 million for loans provided before Eid Al-Fitr to ensure that salaries are paid to employees. As to what they did with the rest of the money, it is not clear. Like the central government of Iraq, the Kurdistan government is also burdened with employees with no clear roles. As is well known, this phenomenon of thousands of phantom or politically connected employees being paid a salary they should not receive plagues Iraq all across its civil service.
The "Disputed Areas"
A belt some 50 miles wide stretches along the boundary between the Kurdistan Region and the rest of Iraq south of it, and control of it is bitterly disputed between Kurdistan and the central government, and especially the oil-rich area near Kirkuk. Article 140 in the Iraqi constitution promised that "the executive authority shall undertake the necessary steps" to execute "a referendum in Kirkuk and other disputed territories to determine the will of their citizens, by a date not to exceed the 31st of December 2007." That commitment was never fulfilled and has been considered politically explosive since then. The Kurds sought to move towards independence through their own controversial referendum in 2017, which was approved by the overwhelming majority of the Kurdish population, but was bitterly opposed by all other stakeholders, including the U.S., ostensibly the best political ally of the Kurds.
Although Masood Barazani, then president of the Kurdistan Region who initiated the referendum, decided to resign following its rejection, he retains the supreme power there. His nephew, Nejervan Barazani is the president of the region, and his son, Masrour, is its prime minister. But the cost of the referendum was high, as Baghdad used the controversy to move on Kirkuk, reclaiming it from the Kurds in October 2017. Thousands of Iraqi Kurds felt compelled to flee Kirkuk and the city of Tuz Khurmatu. The conflict over these areas (and in the case of Kirkuk, over the wealth they contain) has frayed relations between Erbil and Baghdad, among the rival Kurdish parties, and between the Kurds and their counterparts in the U.S. and Turkey.
Others too have suffered collateral damage in the border struggle between Baghdad and Erbil, as ethnic and religious minorities are forced to choose sides. The Chaldean Christian town of Alqosh has two rival Christian mayors, one imposed by the Kurds and one supported by Baghdad. The often-oppressed Yazidi minority in Jebel Sinjar (Shingal) has pro-Kurdish and pro-PMU militias, and this community's efforts to recover from ISIS genocide is stymied by the conflict between the Kurds and Baghdad.
Borders and Customs
Another economic issue which serves as a source of conflict is the customs duties that the Kurdistan Region collects on imports from Turkey and Iran, with quite a large part of it eventually reaching south to the other provinces of Iraq. The Iraqi government wants to reach a unified mechanism with KRG that regulates the operation of border crossings. Also, contrary to government policy, the Kurdistan Region has kept open four border crossings with Iran, which encourage both smuggling and corruption, as well as, lately, the spread of the coronavirus which is rampant in Iran. The Kurdistan Region, much to the annoyance of Baghdad authorities, allows access to Americans and other foreigners without Iraqi visas, and is also the main outlet for Syrian Kurds, who control their own zone in Northeastern Syria to the outside world.
There is also the issue of water. In its middle and southern parts, Iraq depends for its water supply on the Kurdistan Region north of it, which is closer to the sources of water of the Tigris and Euphrates rivers in Turkey and in Iran. However, the Kurdistan Region has pursued its water security independently, by building dams on both these rivers. Iraqis in the south complain that they suffer from overuse of increasingly scarce water resources in Kurdistan, although the Iraqi Kurds themselves are also downstream from Turkish and Iranian plans to use the watershed to their own benefit. The bitter reality is that Iraq, despite the presence of two ancient and famous rivers that spawned early civilizations, is increasingly water scarce, and future prospects look dire. What water the Turks and Iranians don't take, after more is siphoned off in Iraqi Kurdistan, arrives in increasingly smaller quantities for Iraq's hot and thirsty south.
The outstanding issues between Al-Kadhimi's central government and the Kurdistan Region are deeply rooted and difficult to resolve, even temporarily. This problem may be considered chronic, with different degrees of severity, given objectives that are widely divergent between Baghdad and Erbil. According to Al-Kadhimi's statements, unifying the armed militias under the central government discipline figures high on his agenda, but this proves to be a formidable task, especially with the splintering within the PMU and within the Peshmerga. The latter is basically divided between units loyal to the two rival Kurdish parties, the PUK and KDP. Hence, it can be expected that the Peshmerga will wait for the PMU to merge with the Iraqi army first, before they consider such a merger seriously. Kadhmi is surely aware that the major problem he faces when it comes to armed militias is not so much the Peshmerga but PMU units completely loyal to Iran, who are a power unto themselves. For Al-Kadhimi, the Iraqi Kurds having their own army may be a problem and an irritant, but Iran having its own Praetorian Guard in Baghdad is an existential threat.
The recent decline in oil prices is a severe blow to Iraq as a whole, and to the Kurdistan Region in particular. According to Iraq's Finance Minister, "if oil prices stay at this level for a year, and our expenses stay the same, without a doubt we're going to hit a wall." It may be assumed that in the coming months the Kurds will hold their cards even closer to their chests, with even less interest in sharing their locally produced oil with the central government. Hence, budget transparency, as demanded by Finance Minister Alawi, will be more difficult to obtain, or even to expect. Borders and customs are an irritant in the absence of forward progress on key oil wealth issues. Water will be an existential crisis in Iraq very soon, but while water issues fray tensions between Iraq's north and south, the biggest problem is foreign control upstream of this precious liquid needed by Iraq's rapidly growing population.
These and other strains pose major challenges for the new Iraqi government, and may plague relations between the Kurdistan Region and the Iraqi central government for months to come. On the other hand, the war against a newly resurgent ISIS threat is a unifying element that may help the rivals to come to terms with each other. There is also a potential positive rule for the U.S. to play in reconciling the two sides, as much as possible, and easing tensions that threaten to unravel an already fragile system in Iraq. The question remains whether American diplomacy is willing or able to take on this task, as many in Washington focus on an Iraqi exit strategy or, at least, a much-reduced American role. The easing of some of the tension and bad blood between the two sides will only improve Al-Kadhimi's chances of stabilizing Iraq in the rough water it faces. The situation is fraught with risk and danger, but Iraq's new prime minister, and the Iraqi Kurdish leadership, do have a golden opportunity to achieve something which has rarely happened before – to achieve outcomes that strengthen both federal rule in Baghdad and help Iraqi Kurds. All too often the choice has been to strengthen one at the expense of the other.
* Dr. Nimrod Raphaeli is Senior Analyst (emeritus) at MEMRI; S. Ali , and Ze'ev B. Begin are Research Fellows at MEMRI.
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