Structural economic instability in the Kurdistan Region of Iraq (KRI) continues to threaten the region’s long-term stability. Multiple flaws subject the region’s economy to fluctuations despite the current political harmony within the KRI and its improving relations with the federal government of Iraq (FOI).
In addition, the KRI’s internal political instability can jeopardize the economy and reduce investors’ optimism. Given the post-referendum disputes between the major ruling parties, the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK), it is hard to believe investors will regain their pre-2014 optimism.
The KDP-PUK Open War
Since October 2017, when the region’s ill-fated referendum created a strained relationship between the KDP and the PUK, the KRI has not been able to make any strategic decisions regarding its issues in Baghdad and with neighboring countries. The serious differences between the parties’ leadership have long hindered government formation talks in both Baghdad and Erbil.
What makes the ruling parties’ fractious relations disastrous for the KRI is their strict control over much of the region’s economy. Businesses need the blessing of at least one of them to function, and for this reason, their conflicts directly impede business more than normal political instability would.
Until 2017, the PUK and the KDP had an agreement to share some sectors of the economy and avoid direct economic confrontation, but with the PUK’s current leaders, who are mostly young, insistent, and unpredictable, there is a great possibility of future conflict.
In the past, both parties took extra steps to obstruck each other’s businesses and targeted their politicaly linked companies; as happened with the establishment of Asia Cell and Korek Telecom. Asia Cell was not allowed to work in areas controlled by the KDP, and Korek Telecom was forbidden in areas controlled by the PUK.
Currently, the PUK seems to be the loser in terms of availability of economic resources in its controlled areas. This can lead the PUK to seek a tighter grip on investments. It may pressure the KDP for concessions regarding some industries — especially oil, the foundation of the region’s economy. This can affect many businesses created and run by people and companies closed to the KDP, such as the Kar Groups.
Likewise, the KDP might take similar measures to pressure business people with close ties to the PUK, and could possibly adversely affect basic services such as electricity. For instance, the majority of gas power plants and power stations are supplied by the gas fields in Sulaimani, where the PUK is the ruling party. Any further conflict between the parties could seriously affect the region’s economy in multiple areas.
Recovering Economy Amid Some Potential Threats
Since the summer of 2018, political changes have helped local investors and produced some economic recovery. The KRG has paid back 100 million USD loans to local contractors, and has plans to pay back 100 million USD more. Improving Baghdad-Erbil relations have resulted in increasing the KRG’s monthly transfer from 317 trillion to almost 522 trillion IQD.
Responding to the partial economic revival, real estate (the KRI’s key sector) has experienced some recovery. According to some business people’s estimations, prices have risen approximately 15 percent. These increases have resulted from optimistic news about the KRG’s agreement with Baghdad and the forming of the new cabinet.
However, in the last 15 years in the KRI, volatile politics between the KDP and the PUK have meant that a complicated crisis could quickly erupt that could negatively affect the whole economy.
Furthermore, another conflict is on the horizon. The KRI’s economy heavily depends on oil revenues either from its independent oil sales or from the Iraqi budget. To receive its full national budget share, the KRG must hand over 250,000 bpd to the Iraqi federal government’s oil marketing company SOMO.
It seems that KRG leaders are not willing to contribute their oil to SOMO, and nothing guarantees the federal leaders’ flexibility and moderation in this regard if the political weather in Baghdad changes. Such an expected crisis could paralyze the region’s economy at any time.
Moreover, the decisions to export oil independently or to accept Baghdad’s offers have been made by KRI’s council of oil and gas, dominated by the KDP. If the PUK wants to assert its position as a valid power in the region, it needs to change this narrative.
Following the KRG’s independent oil exports that resulted in a severe economic downturn, the PUK’s controlled zone faced social and civil unrest. The PUK has had to suffer the consequences of economic policies designed and led by the KDP.
Continuing in this disadvantaged position might push PUK leaders to shift their attention toward Baghdad and away from Erbil as expected and discussed in some local Kurdish media. They may try to change the structure by moving a step closer to Baghdad and away from Erbil. This will not just call into question any KRI economic decisions, but potentially the very legitimacy of the KRG.
Preventing a Zero-Sum Game
The current PUK leadership might be considered adventurous and reckless, but actually they have been pushed to this position in reaction to their gradual marginalization by the KDP.
To balance the KDP’s influence, the PUK might try to revive its leverage as a key political player in the region, despite the fact that the final election results played out in favor of the KDP.
Lack of a solid agreement between the ruling parties creates mistrust in KRI politics. As a result, the market will face significant volatility in the near future; small conflicts can change the relationship of the two parties into a zero-sum game that will affect the future of the entire region.