- Saman Shali

The Kurdistan Region's aspirations for economic independence through oil production have faced challenges and setbacks in recent years, leading to a dissipation of the dreams of economic self-sufficiency.

The Kurdistan region has large oil reserves and has in the past tried to use its oil wealth to achieve economic independence from Iraq's central government. In the mid-2000s, in the absence of Iraq's gas and oil law, the Kurdistan Regional Government (KRG) pursued an independent oil export policy. The Kurdistan parliament-Iraq has enacted a new gas and oil law (No. 22 in 2007) for the Kurdistan region based on the new law, KRG signed production-sharing agreements with international oil companies and began exporting oil to international markets through its own pipelines.  Then, in 2022, Iraq’s federal court ruled the Kurdish oil and gas law to be unconstitutional, further straining relations between central and local governments. This further squeezed the road to financial independence. 

However, this pursuit of economic independence has faced various obstacles. One of the key challenges has been disputes with the central government of Iraq over oil revenues and resource sharing. The central government has contested the KRG's authority to independently export oil, and there have been disagreements over revenue-sharing arrangements and budget allocations, leading to increase political and economic tensions between Erbil, the capital of the Kurdistan Region, and Baghdad. In addition to these factors, there are other challenges such as:

1. Increased Security and Military Spending: The KRG had to divert significant resources towards countering the threat posed by ISIS, including strengthening its security forces and engaging in military operations against ISIS. This resulted in increased security and military spending, which strained the KRG's budget and reduced the funds available for economic development and investment. Many foreign investors became hesitant to invest in the region due to security concerns and uncertainty caused by the ISIS threat, which hampered the KRG's efforts to attract investment for economic development.

2. Displacement of People and Economic Disarray: The conflict with ISIS caused mass displacement of people in the region, including internally displaced persons (IDPs) and refugees. The KRG had to allocate resources to provide humanitarian assistance and support for the displaced population, which further strained its finances. The economic dislocation caused by the conflict also disrupted local markets, trade, and business activities, leading to economic challenges for the KRG.

3. Falling oil prices: falling oil prices in global markets have adversely impacted the KRG's oil-dependent economy. The Kurdistan Region has faced economic difficulties, including budget deficits, delayed payments to public servants, and reduced investment in infrastructure and services. The decline in oil prices has also affected the profitability and attractiveness of oil investments in the region, leading to a slowdown in oil exploration and production activities.

4. Geopolitical factors: geopolitical factors have played a role in impeding the Kurdistan Region's aspirations for economic independence. Regional tensions, including conflicts with neighboring countries such as Turkey and Iran, have disrupted trade routes and created geopolitical risks for the Kurdistan Region's oil exports.

As a result of these challenges, the dreams of economic independence for the Kurdistan Region have dissipated to some extent. The KRG has faced financial constraints and has had to rely on budgetary support from the central government of Iraq and international assistance also to get extra loans to manage its economic difficulties. The political and economic dynamics in the region have also evolved, with shifting priorities and strategies for the KRG in light of the challenges it has faced.

The latest blow came from the Paris International Arbitration Court's ruling that Turkey was in breach of the 2010 agreement that National Oil Company SOMO is the only party to sell Iraqi oil, resulting in the sale of KRG oil being halted by Turkey and damage estimated to be more than one billion USD, and this puts additional pressure on KRG to lose its economic independence. 

After the cessation of oil sales from the Kurdistan region, the central government will have to guarantee employee salaries and other expenses from the Iraqi budget until oil exports resume again. Since the Federal Court stopped sending the KRG budget due to oil sales, this requirement has been canceled due to the cessation of oil sales. For this, the central government must send a share of the KRG from the general budget to Iraq like other provinces.

In conclusion, while the Kurdistan Region's oil reserves have long been seen as a potential source of economic independence, challenges related to disputes with the central government of Iraq, falling oil prices, and geopolitical risks have dampened those dreams. The path to economic self-sufficiency for the Kurdistan Region remains complex and uncertain, requiring careful management of political, economic, and regional dynamics to overcome the obstacles and achieve sustainable economic development. Both sides are looking forward to the new and fair Gas and Oil law for all of Iraq to put this issue to rest and eliminate another obstacle and this law is based on the Iraqi constitution.

Saman Shali has a Ph.D. in Science (1981) from the University of Sussex. Dr. Shali worked as an Assistant Researcher and Assistant Professor at the University of Sussex, King Saud University, and Pennsylvania State University. He is also a senior fellow at the Mediterranean Institute for Regional Studies.