Nov 14, 2014

Several months ago, the international media and political pundits were predicting imminent Kurdish statehood. Many in the Kurdistan Regional Government (KRG) believed, and perhaps still do, that the KRG could independently export crude oil to Turkey and create a viable, autonomous revenue source. These expectations were fueled by "energy agreements" between Erbil and Ankara, a cold war between former Turkish Prime Minister Recep Tayyip Erdogan and former Iraqi Prime Minister Nouri al-Maliki and international oil company interests in the Kurdistan region.

Instead of statehood or enhanced autonomy, however, the KRG has become more dependent on Turkey while remaining tied to Iraq. This dependency has deepened with the Islamic State (IS) threatening the region, territorial and resource disputes in Iraq remaining unresolved and Ankara and Baghdad pursuing a rapprochement. It leaves the KRG more deeply lodged between regional powers and enhances Turkey’s control over Erbil’s energy and political agendas.

The Ankara-Erbil alliance initially presupposed "mutual interdependence." Turkey could access KRG hydrocarbons, reduce its dependency on Russian and Iranian gas imports and become a regional energy hub. The KRG also represented a security partner against the Kurdistan Workers Party (PKK) and a Sunni Muslim ally where Turkish "soft power" could be extended. For the KRG, Turkey was a direct energy export route, commercial partner and alternative to Baghdad. To enhance this partnership and leverage Kurdish nationalist interests, KRG officials strategically permitted Turkish companies into the Kurdistan region’s commercial, banking and energy sectors.

Ankara-Erbil commercial ties may have helped develop the Kurdistan region and benefited certain elites, but they have not enhanced the KRG’s economic autonomy. Although Turkey remains the KRG’s largest external trading partner, about 85% of the "trade" between Ankara and Erbil, estimated at $7 billion in 2013, comprises KRG imports of food and luxury items, paid for with revenues from Baghdad. Most imported goods from Turkey are consumed in the Kurdistan region and are not re-exported as value-added products. In addition, exports from Iraqi Kurdistan represent only about 5% of the KRG’s trade activities, most of which involve the re-export of alcohol and tobacco from Turkey to other countries, including Iran.

Indeed, the KRG-Ankara oil export gamble was supposed to change this scenario by giving the Kurdistan region a self-sustaining revenue base. Yet, after six months of "independent" oil exports through the Iraqi-Turkish pipeline, the KRG has further exposed its economic vulnerability and deepened its financial crisis. Despite the 30 million barrels of oil the KRG has reportedly sold through Turkey, the opaque nature of the sales — cargoes roaming the high seas with radars off, boat-to-boat transfers, undisclosed pricing mechanisms and legal disputes — has done little to de-risk large-scale oil exports. The KRG has thus far only received about $2 billion from oil sales, a small fraction of its annual budgetary needs and nowhere near the revenues required to pay civil servant salaries or international oil company costs. Plummeting world oil prices have further disadvantaged contentious and highly discounted Kurdish crude while benefiting energy importers, like Ankara.