Has the Crisis Made Baghdad Even Richer?

ERBIL, Kurdistan Region - Increases in oil production and budget savings lend Baghdad a mighty financial advantage in the fight against Sunni insurgents and disputes with Kurds, according to experts. 

The Islamic State (IS) has wrested away large sections of Iraq, and the Kurdistan Regional Government (KRG) has expanded its territory by 40 percent. This leaves Baghdad with control over a predominantly Shiite rump state in the south.

While there is plenty of bad news for Iraq’s Federal Government these days, leaders may find some comfort in the fact that they are incredibly rich next to the autonomous Kurdish provinces -- whose budget they are no longer paying -- and the other provinces under IS control.

“If there is going to be a long war of attrition between the rump Iraqi state and those seven provinces, the rump state has all sorts of advantages,” says Nat Kern, a leading Iraq oil expert who heads Foreign Reports Inc., an energy advisory firm.

“It has $70 billion in foreign reserves, control over its own currency, no debt, near universal international recognition, full-hearted support from Iran and a flabby, ineffectual, but large armed forces -- plus export revenues from 2.5 million barrels per day (bdp),” he tells Rudaw.

Because over 90 percent of Iraq’s economy is dependent on energy exports, the government is incredibly sensitive to changes in oil prices and its domestic production levels.  Swelling price levels in the early days of the crisis increased Baghdad’s earnings, although they have since settled. The more lasting difference is made by increased production: major offshore works were undertaken to expand export capacity from the Basra area.

“Before that work began last September, southern exports were averaging 2.22 million bpd,” says Kern. “During the work (September to January) they were averaging 2.1 million bpd.  Since then, they have been averaging 2.478. So they’re up 12 percent, but then they’ve been without Kirkuk exports since mid-March.”

The government has lost some revenue from the North Oil crude that was refined at Baiji before militants disabled the refinery. But the sale of products from the 300,000 bpd facility was always less profitable than simply exporting crude.

The government is affected much less by the refinery’s fall than the residents of northern Iraq -- many of whom live in insurgent or Kurdish controlled areas. They have lost access to crucial energy products like gasoline. 

Since February, Baghdad has saved a billion dollars a month from its gross expenditures by refusing to send the KRG its portion of the budget. Now that Anbar, Nineveh, and Salahaddin provinces have fallen, Baghdad will be able to hold on to even more of the national finances.

“If you take the provinces’ seats in parliament as a rough proxy for revenue sharing, the three have 58 seats -- or 17.6 percent of the total,” Kern calculates. “The original KRG had 44, and Kirkuk had 12. Altogether, these seven provinces have 35 percent of the seats, so figure roughly 35 percent of the population.”

Since Baghdad takes 30 percent of revenues for sovereign expenses, Kern calculates that cutting the occupied provinces off altogether would reduce its spending by a quarter.

In reality, the government hasn’t been dividing the budget for quite some time -- one of the major complaints of many Sunnis leading up to the insurgency. So its savings would likely be a lesser, but still significant, amount. 

While it can’t legally use all of this money to buy more weapons, Baghdad has a substantial defense budget to sustain a protracted war against insurgents.  In 2013, the government had a defense budget of $17 billion.

“It’s not a large number for the United States, but for a Middle Eastern country this is a fair amount,” says Kirk Sowell, a lawyer who runs Uticensis Risk, a political risk and research consultancy. 

Furthermore, funding that would have gone to military divisions that have now collapsed can be reallocated to forces in the south of the country.

“Salaries that weren’t paid to the divisions that disintegrated like the 2^nd and 3^rd divisions in Nineveh, the 12^th, the 4^th; I think they should be able to shift that around because it’s all in one budget,” Sowell figures. 

A prolonged conflict would be catastrophic to the non-oil economy and the costs of buying new weapons and ammunition would mount over time. But the Shiite regions could get by for a couple of years, whereas the IS areas are bound to spiral into depression fast. 

IS’ reported earnings of $30 million a month ($360 million a year) are impressive for a terrorist organization, but not for a government.  They may control half of Iraq’s wheat supply, but they aren’t going to be able to harvest it, according to Sowell. Nor will they be able to fulfill many of the other basic responsibilities of government. 

“They’re not going to be able to build a lot of infrastructure, other than checkpoints,” he laughs.    

The question arises of whether Maliki would be perfectly happy to rule over a financially stable rump state, abandoning the other provinces to their fate.   

“If he says, in effect, ‘to hell with the Sunnis and to hell with the Kurds,’ then Maliki’s chances of staying in power for the foreseeable future look better,” says Kern.

“If that’s the case, you have to wonder if there might be in the end a marriage of convenience between the Sunni Arabs and the Kurds,” he continues. “It would be strange, but we’ll see if the Kurds reach some kind of truce with ISIS that would permit Baiji to resume refining Kirkuk crude,” he adds. “Lord knows, they both need the products.”

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