- - Sunday, August 16, 2015

IRBIL, Iraq — Strapped for cash and increasingly frustrated with Baghdad’s stingy disbursement of the federal budget, Iraq’s autonomous Kurdish government has turned its back on a deal struck last year to patch over a long-standing oil feud between the Kurds and the federal government.

Since June, the Kurdistan Regional Government, which governs the Kurdish region in northern Iraq, has been ramping up independent oil sales. The KRG says it needs the oil revenue because it is weighed down by the costs of fighting Islamic State militants.

The move is hard for the central government to ignore, analysts say.

“It’s quite a provocative step,” said Jordan Perry, lead Iraq analyst at Verisk Maplecroft, a risk consultancy based in the United Kingdom. “Baghdad will not look kindly on that, and it’s entirely possible that it could return to the kind of legal challenges that we have seen in the past year.”

Last year, Baghdad froze all transfer payments to the KRC after the Kurds first sold oil themselves. Also, legal action by the central government, which deterred buyers from KRG crude, disrupted independent Kurdish exports via the pipeline to Ceyhan in southern Turkey.

Because of the legal wrangle, the Marshall Islands-flagged oil tanker United Kalavryta was moored off Galveston, Texas, for months last summer, unable to offload its cargo of Kurdish crude. The tanker slinked away after a U.S. court upheld Baghdad’s claim.

Still, the Islamic State’s blitz last summer across Iraq right up to the gates of Baghdad and the Kurdish capital of Irbil prompted the central government and the KRG to put aside their differences. In a December deal, the Kurds agreed to export oil via Turkey under the auspices of the government in return for a slice of the federal budget.

In exchange for sending 550,000 barrels a day through a pipeline connecting northern Iraq to the Mediterranean port of Ceyhan starting in January, the KRG expected to receive $1 billion a month from Baghdad.

But the precipitous fall in global oil prices has strained Baghdad’s finances. Oil has been hovering around $50 a barrel after more than halving over the past 12 months.

At the same time, the fight against the Islamic State group has become an immense drain on resources in spite of billions of dollars in U.S. military aid.

As a result, payouts from Baghdad remained far short, with monthly transfers never exceeding $450 million, according to the Kurds.

“We do understand that Baghdad faces some financial difficulties,” said KRG spokesman Safeen Dizayee. “But salaries in all provinces in Iraq, including areas under Daesh control, have been paid, while those in the KRG were not.”

Daesh is a term the Kurds and others use for the Islamic State and could be considered derogatory.

Analysts say the Iraqi government has been opaque and inconsistent with its disbursements to the Kurds, adding to the irritation in Irbil.

“If Baghdad has problems, then it has to be transparent and open with the KRG,” said Falah Mustafa Bakir, the KRG’s minister of foreign relations. “What hurts the region is if Baghdad unilaterally decides to cut [payments] without any consultation.”

Yet Irbil does not always act in accord with Baghdad. In June, its forces occupied the northern Iraqi city of Kirkuk, which Kurds historically have considered their territory despite their minority in the town’s ethnic mix.

Oil and money

Kirkuk’s oil is produced by Iraq’s state-owned North Oil Co. Like KRG oil, it should be sold abroad by the State Organization for Marketing Oil.

In June, average exports from the state organization dropped sharply while Kurdish exports outside the state marketer’s jurisdiction increased. Last month, the Kurds independently sold about 2 million barrels of the North Oil Co.’s Kirkuk oil.

The KRG said it failed to compensate the State Organization for Marketing Oil because of an attack on the pipeline within Turkey, which interrupted oil flows for several days late last month.

The central government sees Kurdish oil sales as infringements on state sovereignty. It is also wary of Kurdish ambitions to break away from Iraq and wants to keep Irbil financially dependent. Baghdad fears that Kurdish independence would encourage separatism in the southern city of Basra, Iraq’s major oil hub and the site of the country’s largest fields.

Baghdad has not responded to Irbil’s renewed independent exports. Oil Minister Adil Abd al-Mahdi met with KRG leaders in May, and the central government is making a payment for June exports, suggesting a will to compromise. Preoccupied with battling the Islamic State in Fallujah and Ramadi, Iraqi Prime Minister Haider al-Abadi may feel his priorities lie elsewhere.

Baghdad also has tacitly acknowledged that the Kurds are major contributors to the fight against the Salafist Sunni militant group.

Kurdish armed forces, known as the peshmerga, are fending off a large number of militants along a 600-mile front in the north, where daily coalition airstrikes are pounding Islamic State positions. The Kurds have agreed to play a part in the liberation of Mosul, Iraq’s second-largest city, which fell to the Islamic State in June. The Kurdish region also hosts more than 1 million Iraqis displaced by the conflict.

A need for unity

Delays in paying its troops could undermine the KRG’s ability to fight. Since December’s oil deal, the arrearage for salaries to the peshmerga has grown from one month to three, said Mr. Dizayee, the KRG spokesman.

Government salaries total around $700 million a month, a huge amount for a region with 5 million inhabitants. By selling its oil, the KRG is able to raise at least $850 million a month, Mr. Dizayee said.

The central government could pressure the Kurds by restricting the flow of military aid to the KRG. Under present arrangements, weapons deliveries from the U.S. and Europe are routed via Baghdad International Airport, giving the government an opportunity to intervene.

Such a move would alienate foreign military donors, who already are pressuring Baghdad to maintain security cooperation. Congress in June only narrowly voted down a bill to send weapons straight to Irbil, and Baghdad’s denial of military aid to the Kurds could strengthen U.S.-KRG ties and the Kurdish case for independence.

“Baghdad is aware that the U.S. willingness to directly arm the Kurds will increase if it retaliates by cutting arms supplies to the KRG in response to the collapse of the oil deal,” said Mr. Perry, the Iraq analyst.

The KRG insists it remains open to negotiations to salvage the deal and that it will not allow squabbling over oil exports to interfere with the war effort.

“The priority for all of us is to fight ISIS and to eradicate this organization,” said Mr. Dizayee, who notes that the Islamic State, also known as ISIS, controls more than a third of the country and already has fractured Iraq.

In the struggle to rid itself of the Islamic State menace, Baghdad has little choice but to keep the Kurds on its side. With its options limited, it has tacitly acquiesced to renewed independent Kurdish oil exports by taking no action. The central government’s best hope of keeping Iraq intact is to seek compromise with its regions.

“[This] is a further loosening of central government authority in Iraq, though KRG economic divorce from Baghdad is only the recognition of something that has existed for many months, if not years,” said Michael Knights, an analyst at the Washington Institute for Near East Policy.

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