ERBIL, Kurdistan Region- The US has threatened to sanction Iraq if Baghdad forces US troops to withdraw from the country. Even if this does not materialize, Iraq has a lot to lose if the US minimizes or cuts banking ties with Iraq.
US and Iran tensions have played out in Iraq, and these tensions have injected uncertainty into the economic future of the country, besides the geopolitical ramifications that have rattled world markets.
The US assassination of Iranian General Qasem Soleimani on January 3 at Baghdad International Airport, and the subsequent Iranian response ballistic missile response fired on bases housing US troops in Iraq on January 8 destabilised global markets.
For the first time in the past seven years, an ounce of gold price jumped to well above $1,600, and oil prices jumped to above $70 for the first time in months. Later, however, a speech by US President Donald Trump relieved fears of a possible war between Iran and the US.
That may have given the world the space to breathe, but the domestic issues that Iraq has accumulated haven’t been resolved, and the future of US troops in Iraq is uncertain.
The future of US troops, which also puts a question mark on US-Iraq relations, have caused uncertainty and lack of clarity for Iraq’s economy. On January 5, Shiite blocs in Iraqi parliament, amid a Kurdish and Sunni boycott, passed a non-binding resolution to ask the Iraqi government to expel foreign troops.
In response, US President Donald Trump threatened never-seen-before sanctions against Iraq . US officials believe they have invested much fortune and lives in Iraq, and that US troops being forcefully expelled will reverse what has been done.
One has to ask certain questions, as to whether Iraq can stand on its feet without the US, and what is to be expected in case US forces are expelled.
Even if the US does stop itself from sanctioning Iraq, Baghdad faces dangerous financial impediments. Following 2003’s invasion, the US and Coalition forces backed normalization of Iraq’s financial and economic conditions via the establishment of the Development Fund for Iraq (DFI) in Federal Bank’s New York branch.
This fund helped Iraq retrieve the blocked funds of the previous Baath regime and safeguarded Iraq’s oil sales revenue. Due to the lawsuits filed internationally against the previous regime and Iraq owing $120 billion in debt, there were fears that oil revenues could be confiscated had it not been for the US Treasury Department.
The US also played an instrumental role in having countries forgive their loans to Iraq, thus helping to decrease Iraq’s debts from $120 billion to $40 billion. Besides the protection of oil sales revenues, Iraq’s trade is conducted through the Trade Bank of Iraq (TBI), with has connections with US investment giant J.P. Morgan.
If the US decides to sever its financial ties to Iraq, then TBI cannot operate in international trade.
Another important side of US-Iraq financial ties is that it has helped Iraq secure loans with very little interest. Iraq has sold many bonds in the past years to obtain loans in financial markets. The US Treasury Department gives guarantees for Iraqi financial bonds, and thus the interest incurred from such loans are very minimal.
For example, Iraq’s debts currently have a 1.5% interest rate, but had it not been for US Treasury guarantees, those rates would have stood at 10%.
Besides assistance in terms of Iraqi bonds, Iraq has taken out tens of billions of dollars of loans from the International Monetary Fund (IMF) and the World Bank, and all those loans have been secured with very minimal interest rates.This will not continue without the support and assistance of the US Treasury Department and White House financial advisers.
Despite its attempts to remain neutral and mediate between Washington and Tehran, the Kurdistan Region cannot insulate itself from the negative impacts of a Baghdad-Washington financial fallout.
The Kurdistan Region remains dependent on Baghdad for providing a large part of the salaries of public servants, and if Iraqi oil sales are hampered, then this poses a direct threat to the funds the Region receives from Baghdad on monthly basis.
Moreover, the US-Iraq fallout has made foreign investors and oil companies worried, and the Kurdistan Region is also impacted.
It is expected that 2020 will be one of the best years for the oil sector of the Kurdistan Region as oil companies plan considerable investments in the oil fields to increase output. Such an increase in oil output also helps the Region’s market. However, if Iraq’s condition continues to deteriorate, oil sector development will also be hampered.
Omer Muradi is head of Rudaw’s Economy desk.
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