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Geopolitics, oil take centre stage in Kurdistan independence referendum

Geopolitics, oil take centre stage in Kurdistan independence referendum

On 25 September 2017, residents of the Kurdistan Region of Iraq will take to the polls to vote on independence from Iraq. If the referendum goes ahead as scheduled, there is no doubt that a large majority will vote ‘yes’. However, Iraqi Kurdistan will not emerge as an independent state in 2017. 

Iraqi Kurdistan already has many of the trappings of an independent state, but numerous obstacles still lie in its way on the journey towards full independence. First among these will be the lack of international support, followed by the economic realities dictated by the current oil price environment. 

Low oil prices and severe fiscal pressures in both Erbil and Baghdad explain why Iraq entered the OPEC agreement as a reluctant participant. Unsurprisingly, the misgivings expressed by Iraq prior to the deal’s conclusion in late 2016 have translated into low levels of compliance. 

Although Iraq reiterated its commitment to the OPEC agreement in August, the upcoming independence referendum in the Kurdish region is one of many challenges which eclipse compliance as a priority for Prime Minister al-Abadi. Undoubtedly, the Kurdistan Regional Government (KRG) will give even less consideration to OPEC production targets. While Iraq is likely to at least nominally participate in the agreement, disagreement between OPEC and Iraq over the baseline figure for the country’s production cuts gives Baghdad enough leeway to avoid making real cuts. 

New referendum, same challenges 

Few doubt the KRG’s long-term aspiration and ambition to establish full independence from Iraq. The referendum will not serve as a quick fix, however, as the obstacles facing the KRG remain the same as in 2005, when a 98.8% majority voted for independence in a non-binding referendum. 

Although the new referendum will bring the issue of Kurdish independence back on Erbil’s agenda, the biggest obstacle will be securing international recognition. Without this, independence will carry little weight.
The US has been consistent and clear about its commitment to a unified Iraq. Although not unsympathetic to long-term Kurdish aspirations for independence, the current position of the US means that working towards a solution with Baghdad will be unavoidable for Erbil.

Opposition in both Ankara and Tehran to an independent Iraqi Kurdistan makes Erbil’s task even harder. Alongside the US, Turkey and Iran stand out as the principal external actors that can influence the course of events. For independence to be viable, the KRG would need at least tacit support from both the US and Turkey. 

Turkey continues to view the announced referendum negatively although Ankara’s pragmatic relationship with Erbil leaves room for manoeuver. In contrast, Iran will be much more vociferous in its opposition. In the case of Iran, the main concern for the KRG is not recognition per se, but the ability of the country’s political leaders to influence the Iraqi government. 

International recognition aside, one of the most difficult questions facing the KRG is whether to work toward economic independence before pushing for full political independence. Independent Kurdish oil exports are still a long way off covering what is a very large and expensive public sector. In the current oil price environment, the economic foundations for independence look shaky. 

It would be wrong to assume, however, that the issue of independence will be governed by economics alone, or that the economic challenges are insurmountable. Advocates of full independence point in particular to the economic possibilities that independence could bring. Legal challenges from Iraqi courts against independent KRG crude exports for instance are still a significant restraint under the Kurdistan Region’s current semi-autonomous status. 

Can the referendum pave way for a better oil and revenue sharing agreement? 

Erbil has been clear that the referendum will not lead to any unilateral action and that it intends to proceed through direct negotiations with Baghdad. While talks will be lengthy and complex, an immediate benefit of the referendum for the KRG will be a strengthened hand that can be used to extract concessions from Baghdad. 

This is precisely the effect that the 2005 referendum had by consolidating the Kurdistan region’s semi-autonomous status. There is still significant space between the status quo and full independence, leaving ample scope for the KRG to gain greater autonomy and power within Iraq’s constitutional framework. Nowhere is this more apparent than in the oil and gas sector, where vague language in the constitution has contributed to the ongoing dispute over natural resources in the Kurdish region. 

The complexity of the current pragmatic, but unstable, revenue sharing arrangement between Erbil and Baghdad makes it more difficult to incorporate exports from northern Iraq into a renewed OPEC agreement. While the referendum adds to the uncertainty over exports from northern Iraq, it could ultimately pave the way for a more stable, formalised and predictable export and revenue sharing agreement. Oil from Kurdish and KRG-controlled territory currently account for around 500,000 bpd of Iraq’s 4.45 million bpd total.

Al-Abadi’s preferred solution will be to again kick the can down the road. This is not surprising as oil continues to flow from northern Iraq despite the absence of a solution to the ongoing dispute with the KRG. The KRG’s intentions with the referendum are still unclear, however, and without a decisive trump card to dissuade Erbil from moving ahead with the referendum, Baghdad risks eventually running out of road.

By Torbjorn Soltvedt, Principal MENA Analyst

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