Not long ago, oil exports from Kurdistan were central to Kurdish hopes of full independence in this semi-autonomous region of northern Iraq. Yet seven years after a 2017 referendum backed moves to fully break from Baghdad, the national government has a stranglehold on Iraqi oil revenue. What happened around the time of this landmark vote reveals how it became the peak of the independence movement rather than the beginning of a new era.
Geopolitical change on different levels meant that oil revenue via the Kurdish city of Kirkuk was cut off from Kurdish leaders in Erbil (the capital of Iraqi Kurdistan) by their rivals in Baghdad. This stifled their means of funding any new breakaway nation. Without this income, companies that had backed Kurdish moves to run the oil industry in Iraq’s north lost out financially. With rising costs and debt, pressure grew on politicians in Erbil.
Reverse in fortunes
Today, the region has been unable to export oil since 2022, and Kurdistan’s debts have grown to around $25bn, according to local leaders. This is in stark contrast to the immediate aftermath of the 2017 vote when hopes were high.
Back then, many saw Iraqi Kurdistan as more secure and prosperous than the rest of the country, with local leaders more adept at decision-making and governance. In Baghdad, corruption and sectarian conflict were rife, opportunistic moves from the federal government to grab revenue from Kurdistan looked easy to overcome, and oil companies were ready to do business with Erbil, with deals being struck.
Kurdistan faced opposition from the government of Prime Minister Nouri al-Maliki, and when Islamic State (IS) re-emerged in the area, Erbil grew more determined to use oil revenue as an alternative to income sources that were reliant on political bargaining with Baghdad, with its coalitions and sectarian groups.
Yet with Iraq's army facing collapse in northern, western, and central Iraq, Kurdistan was unable sustain its independent course for long, and it faltered as the internal economic situation deteriorated.
Salaries were being cut, the budget weakened due to exploitation by oil companies, and local and regional sanctions were imposed on Kurdistan after its referendum, as political forces intervened to reshape Kurds' future away from independence.
Escalating internal political problems in Erbil also became a factor, helping to shatter the dreams of full, oil-funded autonomy. Meanwhile, Baghdad was beginning to get its political house in order.
On the one hand, Iraqi Kurdistan faced a decline in productivity and more infighting, while at the same time, Iraq's national government was overcoming many of the challenges that had bedevilled past governments, including the task of defeating IS. Importantly, the chronic dispute between Shiites and Sunnis finally seemed to have stabilised, and relations with Iraq's neighbours had begun improving.
Crucially, Baghdad's control over the wider national oil industry enabled it to address its own economic shortcomings as it set out to cut off Kurdistan's revenue. Baghdad and its allies were to succeed in regaining control of Kirkuk and its oil, limiting Erbil's access to export markets via Turkey and, with it, any hopes of economic independence.
Row over revenue
The precise roots of the disagreement between Erbil and Baghdad over revenue go back to 2007 when Iraq's draft Oil and Gas Law was issued. A dispute arose over the law's interpretation of provisions, regional sovereignty, and resources. This row peaked in 2014, when al-Maliki's government cut off Kurdistan's share of the budget, demanding that it hand over all oil revenues and market the oil through Iraq's national oil company, SOMO.
Iraq also sued Turkey at the International Court of Arbitration for allowing Kurdistan to sell oil through the port of Ceyhan. The disputes intensified under subsequent Iraqi governments led by Haider al-Abadi and even Mustafa al-Kadhimi, who many in Baghdad saw as sympathetic to the Kurds.
Despite financial allocations from the central budget during al-Kadhimi's tenure, the dispute was not solved, and Kurdistan faced rising internal and external debts.
Dashed hopes
There was initial relief when Mohammed Shia' al-Sudani became prime minister, with the Kurdistan Democratic Party a part of the alliance that brought him to power. But setbacks soon followed. The International Court of Arbitration ruled in favour of Baghdad, while Iraq's Supreme Court also backed the federal government over moves to set up an independent oil policy in the Kurdistan region.
Al-Sudani's promises to solve the region's problems soon appeared to lack substance. In essence, he merely continued al-Maliki's policy of weakening Kurdistan economically. This meant convincing Erbil to surrender control to the federal government in exchange for its share of Iraq's national budget, which is itself 90% funded by oil exports.
Today, Iraqi Kurdistan has no oil exports of its own at all. In a state of crisis, it has found itself increasingly isolated, lacking external support. This has prompted its leaders to strategically "bend with the wind". For the first time in its history, this has included handing over non-oil revenues to Baghdad, pursuing a policy of negotiation, visiting Tehran and Ankara, and meeting political leaders in Baghdad, yet all these efforts have so far proved futile.
