The budget battle has eroded trust between Baghdad and the Kurdistan region’s capital of Erbil. Initially it was a temporary problem imposed by the war on ISIS. ISIS had threatened Kirkuk and cut off the Kurdish region from Baghdad, leading the region to be increasingly linked economically to Turkey and Iran and export its own oil. Chauvinism and nationalism in Baghdad also led to calls to reduce the Kurdistan region’s budget from the seventeen percent it was supposed to receive since 2005.
Oil sales have helped the Kurdish region make up for the budget shortfall. However, rapidly declining oil prices now threaten to undo the region’s gains and also force Erbil into a weaker position in discussions with Baghdad. The context is that Baghdad stopped paying state employees in the Kurdish region between 2014 and 2018. In 2017 Baghdad sent the federal army, and Iranian-backed sectarian militias, to attack Kurdish forces in Kirkuk after the Kurdish region held a referendum on independence. Baghdad tried to strangle the Kurdish region by stopping flights to its airports and threatening to close its borders with Turkey and Iran. However it was Baghdad’s leader Haider al-Abadi who ended up failing in the 2018 elections and instead the Kurdish region was able to negotiate a new budget with his successor
However Abadi’s successor, Adil Abdul-Mahdi ran into his own problems in the fall of 2019 when massive protests broke out in southern Iran and Iranian-backed militias massacred the protesters. In the midst of the crises Abdul-Mahdi resigned in November 2019 and a new era of chaos was unleashed. Amid US-Iran tensions, drawdowns of US forces, declining oil prices, a coronavirus pandemic and increased ISIS attacks, Iraq has now gone through two failed prime ministerial designates, Mohammed Tawfiq Allawi and the ill-fated Adnan al-Zurfi. Allawi failed in March to form a government and Zurfi was shown the door in April. Mustafa al-Kadhimi appeared to be a consensus choice, backed by both Shi’ite parties and Kurdish parties. But his cabinet was rejected on April 24.
The problems for the KRG and multi-fold. First of all it exports its own oil, and a 2018 budget encouraged it to export more than 250,000 barrels a day and hand over those revenues to Baghdad in exchange for its part of the budget. Under the 2018 deal the Kurdistan region, often called KRG, would get 12.67% of the federal budget. This was supposed to make it so state employees in the region would finally get paychecks on time, rather than months late. The reality is that Baghdad was slow-playing its hand to try to break Erbil’s resolve. It continued to create excuses. Billions of dollars in revenue have also disappeared over the years from Baghdad, perhaps ending up in Iran’s hands. Iran is a close ally of the leading parties in Baghdad and Iran needs funds for sanctions relief. Iran has co-opted the economy of parts off central and southern Iraq, exporting electricity to Iraq and making Iraq dependent on Iran. This is strange because Iraq sits on a sea of oil, and yet its infrastructure in Basra and other places is worse than neighboring Iran. How is it that parts of Iraq that should be among the wealthiest places on earth and look like the Gulf states, are instead a disaster? How is it they have to import electricity when it is Iran that is under sanctions? Iran appears to have used the period after the US withdrawal from Iraq to bleed Iraq economically and sponge up Iraqi assets. The Kurdistan region was isolated from some of that by being autonomous. However now the wave has broken with the low oil prices.
Now the Kurdistan region is challenged by the incredibly low oil prices so that its 250,000 barrels of exports are worth far less than the money it expected to get from Baghdad. But Baghdad is also being bled white by the oil crisis. Around 95% of its federal budget comes from oil, a fact that has not been remedied for decades. Iraq’s federal budget increased from around $72 billion in 2010 to $88 billion in 2018.
The Kurdistan region now realizes its predicament. It has said it is prepared to hand over 250,000 barrels of oil a day now to Baghdad, oil that is now largely worthless because of the global oil price slump. It is not clear what will happen now. Money is not flowing from Baghdad to Erbil. Iraq still does not have a Prime Minister. Despite the relative stability and security of the Kurdistan region, where strict lockdowns reduced the Covid-19 spread, there are concerns about what comes next. Investment in the Kurdistan region, especially by Turkey, the Gulf states and even trade with Iran, has benefited the region over the years. It has been safe from terror and many international companies and groups and members of the anti-ISIS Coalition are based there. But it needs a budget and civil servants need to be paid.