Energy and Economic News

Iraq's economic crisis is becoming a threat to OPEC-plus. That's the conclusion reached by Paul Wallace and Khalid al-Ansary in an article for Bloomberg. The picture they paint is familiar to readers of Iraq Oil Report: the country isn't generating enough revenue to pay public-sector salaries; the Parliament is not moving quickly to pass additional emergency financing; and the Oil Ministry is therefore under pressure to pump more oil. The Bloomberg report also suggests that Iraq is shouldering a disproportionate burden from the OPEC-plus cuts. Even though all member countries are expected to make roughly the same percentage reductions compared to their former crude output, Iraq's economy is especially dependent on oil. As a result, GDP in Iraq is projected to fall by 12.1 percent in 2020, according to the IMF — a much bigger drop than for any other OPEC member. (Saudi Arabia's is expected to fall by 5.4 percent.) The crisis also promises to make it extra expensive for Iraq to access international financing: yields on its dollar-denominated bonds have risen to more than 10 percent, the highest in the region. In combination, these factors mean that Iraq has increasingly urgent reasons to push back against OPEC-plus allies who are calling for full compliance with quotas. The brewing conflict comes as global crude prices are weakening due to renewed pandemic-related lockdowns. If OPEC-plus tries to take further action to limit supply, Iraq could complicate those plans.

Iraq's troubles with OPEC highlight the importance of its refining sector. While countries are judged for quota compliance based on overall production, OPEC members are especially sensitive to exports. The more oil that hits international markets, the bigger the impact on prices. With more refining capacity, Iraq — a net importer of fuel — could be absorbing more production domestically while saving big money. Hossam Hussein Wali, the director general of the state-run South Refineries Company, spoke with Iraq Oil Report's Ali al-Aqily this week about efforts to build out refineries in southern Iraq. Even though there are no promising greenfield projects in the works, existing facilities are expanding. Read the full interview on Iraq Oil Report.

There are few simple answers to Iraq's crisis. One of the biggest problems is the government's public-sector wage bill, which has grown by 400 percent in 15 years. Reporting for the Associated Press, Samya Kullab shows why cutting that spending won't be easy: people need their salaries, and there isn't much of a private sector to employ anyone who loses a government job or gets a pay cut. “We’ve ended up with a low productivity, high-cost public sector that doesn’t really earn its keep,” said Finance Minister Ali Allawi, according to Kullab. “In one way or another this issue has to be tackled by either reducing numbers, which is politically difficult, reducing salaries... or increasing productivity.” That kind of reform is exceedingly hard to achieve because the problems are a direct product of the patronage system that supports the political class. "One official recalled a remark made by the finance minister at a meeting of a high-level committee tasked with managing the crisis," Kullab writes. "He looked at the room... and said, 'I can’t believe this was done for 10 years and none of you did anything to stop it.' There was silence."

Iran is especially exposed to Iraq's economic duress. In mid-October, the governor of Iran's central bank, Abdolnaser Hemmati, visited Baghdad on a quest for cash, according to Mustafa Saadoun, writing for Al-Monitor. Iran has historically depended on Iraq to access the U.S. dollars required to pay for many imports; Hemmati's trip came three days after the U.S. imposed new sanctions on 18 Iranian banks. One source of potential liquidity for Iran is an account into which Iraq has been making payments for imports of gas and electricity, which has apparently swelled to over $5 billion. Those funds have essentially been frozen in escrow while Baghdad negotiates with Washington over how Tehran might access that money without violating U.S. sanctions. As one key U.S. condition, the payments cannot be made in dollars — so, the account is denominated in Iraqi dinars. Saadoun quotes a person who was present at an Oct. 12 meeting between Hemmati and Central Bank of Iraq Governor Mustafa Ghaleb: "Hemmati asked for the settlement of these debts in dollars. But his Iraqi counterpart assured him that his country is committed to the decisions of the U.S. federal bank." Hemmati also apparently pressed his case directly with Prime Minister Mustafa al-Kadhimi. Saadoun notes that Iran is desperate for hard currency, but the urgency of the visit might also stem from Iranian worries about the likliehood that Iraq will be forced to devalue the dinar. If that happens, Iran's dinar-denominated assets would also be diluted by hundreds of millions — if not billions — of dollars.

The Kurdistan region is planning to privatize electricity distribution and tariff collection. The moves come as part of an economic reform initiative by the semi-autonomous Kurdistan Regional Government (KRG), which is suffering from an acute financial crisis of its own. Past efforts to make customers pay for electricity in other parts of Iraq have hit strong resistance from citizens who have grown accustomed to subsidies and resentful of government that has failed to provide the kinds of economic opportunities and incomes that would enable them to afford new bills. The KRG seems determined to move ahead, though — however unpopular, there isn't enough money to continue with the status quo. Read the full story on Iraq Oil Report.

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National News

The Kurdistan Region Security Council said Monday it had foiled "two specific sets of planned attacks." The council blamed one set of planned attacks on the PKK, which it said was planning to attack a foreign diplomatic mission in Erbil and assassinate members of that mission, as well as an attack on "a major western brand in Kurdistan." Although the KRSC did not name the diplomats or company that was allegedly being targeted, the threats come in the context of wider assaults by Turkey on the PKK, which Ankara and the U.S. government deem a terrorist organization. Following the statement by the KRSC, which is largely controlled by members of the ruling Kurdistan Democratic Party (KDP), leading members of the rival Patriotic Union of Kurdistan (PUK) party said they had no information about the alleged operations, highlighting the factionalized nature of the KRG's security apparatus.

Large-scale protests returned to Baghdad and southern Iraq to mark one year since the start of a popular uprising in October 2019, writes Louisa Loveluck in The Washington Post. Sunday’s demonstrations began peacefully, but some protesters tried to approach government buildings with molotov cocktails, prompting riot police to respond with rounds of tear gas. Many of the grievances that pushed people to the streets last year have only worsened in the interim because of both the economic crisis and militia violence. Loveluck points out that not all Iraqis support the protest movement. The owner of an electronics store near Tahrir Square blamed the demonstrations for decimating his business. “I had another shop, but I had to sell it to keep this one afloat,” said Mohamed Dawoud. “We support four families with these salaries, and look around you, who would come here? We’re caught in the middle. The government doesn’t help us, the protesters don’t understand what they’ve done to us.”

Many former residents of Mosul are reluctant to return. ISIS was ousted more than three years ago, but many people — especially Sunni Muslims — fear the presence of Iran-backed armed groups, writes Martin Chulov in the Guardian. The problems of their displacement are manifold, but the misery of living in underserved camps, and children lacking schooling for years on end, increase the likelihood of longer-term social unease. Authorities in the KRG blame the federal government for not contributing financially to serving the displaced people, while Chulov notes that Baghdad “seems unwilling to confront what to do about Iraq’s huge numbers of displaced people, and the implications of nearly all of them hailing from the same vanquished sect. 'Let that wait for another time,' one senior minister said. 'The country needs to be put back together slowly. ISIS caused much chaos.'"

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