Post By Oldwazhisname
September 2015 Status of Iraq –
Are Conditions Conducive For An RV Event? Part 3 of 4
Very Current Updates
September 15, 2015: Iraqis are alarmed at recent media reports that Iranian Quds Force commander Qassem Soleimani recently made a second visit to Moscow. This comes after Iran and Russia insisting that a July 24th visit by Soleimani to Moscow did not happen. During the July trip Soleimani was said to have met with Russian defense officials and left after two days.
Since 2007 Soleimani has been under numerous sanctions, including ones that are not being lifted by the July 14th Iranian peace deal. Soleimani was not supposed to be able to travel to Russia and Russia knows it. But Russia and Iran simply deny the visits actually happened, the same way Iran denies that Soleimani has spent time in Iraq supervising the creation and use of pro-Iran Shia militias.
September 7, 2015: Several hundred Turkish troops entered northern Iraq in pursuit with some PKK Kurdish separatists believed involved in a roadside bomb attack in Turkey the day before that killed 16 soldiers.
~~~
September 2015 Status of Iraq –
Are Conditions Conducive For An RV Event? Part 3 of 4
Very Current Updates
September 15, 2015: Iraqis are alarmed at recent media reports that Iranian Quds Force commander Qassem Soleimani recently made a second visit to Moscow. This comes after Iran and Russia insisting that a July 24th visit by Soleimani to Moscow did not happen. During the July trip Soleimani was said to have met with Russian defense officials and left after two days.
Since 2007 Soleimani has been under numerous sanctions, including ones that are not being lifted by the July 14th Iranian peace deal. Soleimani was not supposed to be able to travel to Russia and Russia knows it. But Russia and Iran simply deny the visits actually happened, the same way Iran denies that Soleimani has spent time in Iraq supervising the creation and use of pro-Iran Shia militias.
September 7, 2015: Several hundred Turkish troops entered northern Iraq in pursuit with some PKK Kurdish separatists believed involved in a roadside bomb attack in Turkey the day before that killed 16 soldiers.
~~~
The Turks have been fighting the PKK again (after a ceasefire collapsed) since late July. So far about 200 people have been killed, nearly a hundred of them Turkish soldiers and police.
September 3, 2015: Iraqi F-16IQ fighter-bombers carried out their first combat missions against several ISIL (Islamic State in Iraq and the Levant) targets. This comes 16 months after the F-16IQ made its first flight.
Four F-16IQs arrived in Iraq in July so that Iraqi pilots and maintainers could undertake final training in preparation for the first combat missions. The F-16IQ is a custom version of the single seat Block 52 F-16C and the two-seater F-16D. Iraq has 36 F-16IQs on order.
The F-16IQ is similar to American Block 52 F-16s except they are not equipped to handle AMRAAM (radar guided air-to-air missiles) or JDAM (GPS guided bombs). The F-16IQ can handle laser guided bombs and older radar guided missiles like the AIM-7.
September 2, 2015: In Baghdad 17 Turkish construction workers and their Iraqi (Kurdish) translator were kidnapped by a Shia militia. The kidnappers demanded that Turkey stop the flow of ISIL recruits into Iraq, halt the flow of Kurdish oil via Turkey and do something to end the ISIL siege of several Shia villages in Syria (near the Turkish border) in exchange for the hostages.
On the 11th the kidnappers released a video of the prisoners pleading for help from their government.
On the 16th of September, two of the Turks were released in Basra, near the Kuwait border. The Iraqis government says it is negotiating to get the rest of the Turks released.
Meanwhile the two major Shia clerics in Iraq have condemned the kidnapping and apparently helped the government make contact with the previously unknown Shia group responsible. There are many radical Shia Iraqis who are hostile to Sunnis (for all the al Qaeda and ISIL violence against Shia) and Kurds (for not being Arab and for not obeying the Shia government).
Favorability Index – Government and Military
Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to Government and Military issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.
Without going back through this detailed perspective as outlined above, I had no idea how bad it really was. Clearly, under the second term of Maliki as Prime Minister the Favorability Rating would have to have been a “5”, with a near zero probability of a favorable event.
Prior to his second term in office, when the US led coalition was having some success in bringing the needed stability into Iraq, a case for a Favorability Rating might be made for a “3” or even a “2”.
But “on paper” as they say, it would appear that more recently the Abadi-led government is a vast improvement over the Maliki government with Abadi’s reforms to root out corruption, change out unsatisfactory government structures, hold people accountable and be responsive to demands of the people, including being responsive to other sectarian voices.
Nonetheless, many laws still need to be passed and we have seen how difficult it is to get anything passed. The reemergence of the US-led military presence has the potential of being a game changer for the ISIL threat. Seemingly, ISIL is increasingly on its heels and trying to find a new foothold.
It appears they may be forced to regroup outside of Iraq, most probably in Syria. Their resilience and commitment are not to be underestimated.
On the contrary, the true commitment of the US Administration is still in doubt, at least up until the next US Presidential election when possible different attitudes may develop.
The Iranian Problem and Its Current Situation
It is beyond the scope of this paper to go into all of the background of Iran and what all of its issues are. However, because it seems to me that there is a general misunderstanding of who Iran is and why Iran is in part acting the way it is, I want to point out a couple of fundamental observations that might be helpful to a Dinarian in beginning to understand this complex issue.
First, although Iran is a country, what we are talking about when we use the term “Iran” is an extensive, mafia-like network of Mullahs that have sought to establish a crony-run economy and government that benefited allies and members of their clan.
This Theocracy of religious and political leaders run the country of Iran as a “client state” with appointed leaders, as they do the same in other “client states” like Syria and Lebanon.
At times, this Theocracy has advocated for a state-run economy and trade agreements but can also, when convenient, run capitalist enterprises. But make no mistake, the cleric’s concern for economic well-being of its people and those whom it dominates is not of its concern.
It’s primary focus is to become a regional hegemony. Nonetheless, secondly, Iran has operated under international sanctions since 2006 for refusal to place its nuclear intentions under international scrutiny. The effects of this action have had a devastating effect on the economy of Iran.
The value of the Iranian rial has plummeted and is in worse shape than the Iraqi IQD. The market for imports in Iran is dominated by state enterprises and state-friendly enterprises, because the way to get around the sanctions is smuggling, and smuggling requires strong connections with the government.
This has weakened Iranian civil society and strengthened the state. And lastly, Iran and Iraq fought an eight year war beginning in 1980. Opposing sides were the Shia military of Iran against the Sunni dominated military of Saddam Hussein.
The cost to Iran was astronomical with some estimates placing Iranian casualties alone at 600,000 and causing 130,000 children to be orphaned. Understandably, Iran puts huge importance on its relationship with Iraq.
Government Speaking
Iran is a dominant player in Iraq’s electoral politics and uses its close ties to Shia, Kurdish and select Sunni figures to shape the political landscape to effect a pro-Shia outcome. A pro-Iranian, Shia dominated and preferably Islamist government, led by a united Shia alliance remains Iran’s top priority for the Iraq government.
With the exit of the US Military presence in December 2011, Iran became the most influential regional power to shape and influence the outcomes of Iraq’s internal politics.
Iran’s tools of influence include financial support to and pressure on a cross-spectrum of Iraqi parties and officials through economic development assistance; lethal aid to select militant Shia proxies and sanctuary to Iraqi figures fearful of US targeting. With the vacuum created by the leaving US military presence, the game immediately changed.
The most influential Iraqi politicians (including Maliki, Talibani, Sadr and other high ranking politicians), both nationally and regionally, cozied up to the Iranian government benefiting from money, militia protection and assurances of favorable treatment in the coming new era.
It was widely reported that Iran had the President of the country, Jalal Talibani, answering to its dictates, specifically shielding al-Maliki from the vote of no-confidence threatened in 2012. Some, like Moqtada al-Sadr, have been known to turn pro-Iranian to revitalize their political/religious credentials.
It is important to note that Iran’s power in Iraq, although extensive, is not without limitations outside of the American influence. Iran’s greatest political roadblock remains the domineering authority and religious credentials of the Iraq resident, Grand Ayatollah Ali Sistani.
Despite his Iranian heritage, Sistani is Iraq’s most revered Shia religious and political authority. We have keenly seen his ability to drown out Iranian influence particularly in his recent total support thrown Abadi’s reform efforts in direct opposition to Iran’s wishes.
He has been a critic of Iran’s system of justice and its theocratic governance, not doubt a thorn in the sides of aggressive Iranian Mullahs. However, his unique style to influence Shia politics is to keep well above the political fray while at the same time ensuring himself significant impact on those rare occasions when he does pronounce on political issues.
Militarily Speaking
In Iraq, the Shia militias, many of them with Iranian advisors, are increasingly being seen as a problem by the new Iraqi government and Iraqis in general. The previous Maliki government had long worked closely with Iran but lost power because Maliki and his allies would not do anything about the corruption that is largely seen as the main reason ISIL made such rapid advances in 2014.
Iraqis are discovering, as the anti-corruption efforts now accelerate, that a lot of that corruption, especially in the military, was encouraged, and sometimes paid for, by Iran. This has caused public opinion among the majority Shia Arabs in Iraq to turn against Iran.
Another reason for that is the Iran supported (and often armed and paid) Shia militiamen are seen as fanatics and undisciplined who are mainly loyal to Iran. These Shia militiamen are largely motivated by revenge (for years of Islamic terrorist attacks on Shia civilians) and their Iranian advisors encourage that.
The Iran backed Shia militias are now seen as a potential threat to the Iraqi government. While the Shia militiamen have less training they are more fanatics and undisciplined. To the Americans the biggest risk is the Shia militiamen terrorizing (kidnapping, murdering, looting and so on) Sunni civilians in areas ISIL has been driven out of. The Americans realize that the key to regaining control of Anbar is gaining the support of the Sunnis (who comprise nearly all the Anbar population).
Iran is not happy with this new attitude. It got worse recently when Iraq got its first few F-16s into service. While being used mainly for attacking ISIL on the ground, the F-16s can also use air-to-air missiles and the
Iraqi pilots can go after Iranian cargo aircraft transiting Iraqi airspace on their way to Syria and force them to land or turn back.
Iraq could never do this before and Iran was able to pretty much use Iraqi air space for these flights without any fear of the transports being threatened. Iraq has always tolerated this Iranian use of Iraqi airspace to rapidly supply the Assad government in Syria.
Iraq did this despite constant pressure from the United States to block the Assad aid. Now the Iraqis are paying more attention to their American allies than their Iranian neighbors. It appears that very recently Russia may have brought in its own jets to support Syria and Iran in this matter and act as a deterrent/counter-balance to any Iraqi bravado.
Economic Speaking
With bilateral trade between Iran and Iraq estimated at $4 billion (up 30% since 2008) and comprised mostly of Iranian imports (approximately half of Iraq’s imports are Iranian goods), Iran continues to jockey for economic domination in Iraq through corruption and its targeted economic development assistance.
Iran has focused largely on refurbishment of Shia religious shrines, trade agreements and bilateral agreements aimed at and fostering Iraqi economic dependence on Iran.
These efforts have been quite successful. The reason is twofold: first, Iran’s geographic proximity and cultural similarities gives it clear advantages and secondly, access to Iraqi markets by the US, Europe and other industrialized countries is more difficult and politically more challenging given the current rampant culture of corruption, lack of security and absence of economic-related laws and norms of international business practices.
Favorability Index – Iranian Influences Upon Iraq
Given the international sanctions that Iran currently operates under causing a huge need to suck wealth out of Iraq, the political desire to dominate Iraq for its own protection and the aggressive style of expanding Iran’s regional influence, it is easy to see how Iran’s expanding influence of Iraq is directly detrimental to our desired outcome.
Conversely, it would appear hard to imagine that Iran would want a more economic successful and stable neighbor from which its own population could see the benefits of a pro-West society. It would be my general expectation that continued clear and aggressive interference by Iran into Iraq’s affairs will be a reality in Iraq for decades to come, if not endemic to its culture.
Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to Iranian Influence issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.
Again, given hindsight, it is easy to gain the perspective that Iran is doing all it can do to keep Iraq from moving forward and such would otherwise cause a rating of “5”. A year or two ago, the chances of any revaluation event was practically zero.
However, now that a new Prime Minister with an apparent inclination to offset Iranian domination with Iraq first policies, the efforts to rid the military and government of certain pro-Iranian figures, the advancement of non-sectarian policies and the renewed involvement of the US in matters relating to Iraq, I feel something of a tide has turned.
Again, it is too early to tell. If needed laws are passed, if the military of Iraq can get its act together such that the ISIL threat diminishes and that moderate political figures remain in power, the future for our investment looks better. Nonetheless, it is far from certain.
The Economic Situation in Iraq
No conclusive opinions about the revaluation of the IQD (and maybe an estimate of the timing of such an event) can be made without a basic understanding of the economic issues that face Iraq and the current state of economic affairs.
Economic Overview
An improving security environment and foreign investment are helping to spur economic activity, particularly in the energy, construction, and retail sectors. Broader economic development, long-term fiscal health, and sustained improvements in the overall standard of living still depend on the central government passing major policy reforms. Iraq’s largely state-run economy is dominated by the oil sector, which provides approximately 95% of government revenue and 80% of foreign exchange earnings.
Iraq in 2014 boosted oil exports to a 30-year high of 3.5 million barrels per day, a significant increase from Iraq’s average of 2.2 million in 2011. Government revenues had increased as global oil prices remained persistently high for much of 2009-13, with per barrel of oil prices hovering around $110.
This had generally allowed for a slight surplus in government spending. However, starting in mid-summer 2014, global oil prices began a precipitous drop and now are under $50/barrel.
This has turned a generally favorable Government of Iraq budget into a budget crises where revenues are not covering expenditures by a significant amount, in spite of spending slashes.
Iraq’s contracts with major oil companies have the potential to further expand oil exports and revenues, but Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable these deals to reach their economic potential.
The Iraqi Kurdistan Region’s (IKR) autonomous Kurdistan Regional Government (KRG) passed its own oil law in 2007, and has directly signed about 50 contracts to develop IKR energy reserves.
The federal government has disputed the legal authority of the KRG to conclude most of these contracts, some of which are also in areas with unresolved administrative boundaries in dispute between the federal and regional government.
Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors’ concerns regarding the uncertain business climate, which may have been harmed by the November 2012 standoff between Baghdad and Erbil and the removal of the Central Bank Governor in October 2012.
The government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles including a tenuous political system and concerns about security and societal stability.
Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors.
Iraq is considering a package of laws to establish a modern legal framework for the oil and non-oil sectors and a mechanism to equitably divide oil revenues within the nation, although these reforms are still under contentious and sporadic negotiation.
Under the Iraqi Constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (Law 4 of 2006) and the Kurdistan Board of Investment, which is designed to provide incentives to help economic development in areas under the authority of the KRG.
Inflation (estimated at 2% in 2013) has remained under control since 2006 as security improved. However, Iraqi leaders remain hard pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace.
Unemployment (hovering around 16% – ranking a very low 143 out of 182 nations) remains a problem throughout the country despite a bloated public sector. Encouraging private enterprise through deregulation would make it easier for Iraqi citizens and foreign investors to start new businesses.
Rooting out corruption and implementing reforms – such as restructuring banks and developing the private sector – would be important steps in this direction. However, we have seen these positive steps largely stalled out in a dysfunctional Parliament when it comes to passing needed laws.
September 3, 2015: Iraqi F-16IQ fighter-bombers carried out their first combat missions against several ISIL (Islamic State in Iraq and the Levant) targets. This comes 16 months after the F-16IQ made its first flight.
Four F-16IQs arrived in Iraq in July so that Iraqi pilots and maintainers could undertake final training in preparation for the first combat missions. The F-16IQ is a custom version of the single seat Block 52 F-16C and the two-seater F-16D. Iraq has 36 F-16IQs on order.
The F-16IQ is similar to American Block 52 F-16s except they are not equipped to handle AMRAAM (radar guided air-to-air missiles) or JDAM (GPS guided bombs). The F-16IQ can handle laser guided bombs and older radar guided missiles like the AIM-7.
September 2, 2015: In Baghdad 17 Turkish construction workers and their Iraqi (Kurdish) translator were kidnapped by a Shia militia. The kidnappers demanded that Turkey stop the flow of ISIL recruits into Iraq, halt the flow of Kurdish oil via Turkey and do something to end the ISIL siege of several Shia villages in Syria (near the Turkish border) in exchange for the hostages.
On the 11th the kidnappers released a video of the prisoners pleading for help from their government.
On the 16th of September, two of the Turks were released in Basra, near the Kuwait border. The Iraqis government says it is negotiating to get the rest of the Turks released.
Meanwhile the two major Shia clerics in Iraq have condemned the kidnapping and apparently helped the government make contact with the previously unknown Shia group responsible. There are many radical Shia Iraqis who are hostile to Sunnis (for all the al Qaeda and ISIL violence against Shia) and Kurds (for not being Arab and for not obeying the Shia government).
Favorability Index – Government and Military
Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to Government and Military issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.
Without going back through this detailed perspective as outlined above, I had no idea how bad it really was. Clearly, under the second term of Maliki as Prime Minister the Favorability Rating would have to have been a “5”, with a near zero probability of a favorable event.
Prior to his second term in office, when the US led coalition was having some success in bringing the needed stability into Iraq, a case for a Favorability Rating might be made for a “3” or even a “2”.
But “on paper” as they say, it would appear that more recently the Abadi-led government is a vast improvement over the Maliki government with Abadi’s reforms to root out corruption, change out unsatisfactory government structures, hold people accountable and be responsive to demands of the people, including being responsive to other sectarian voices.
Nonetheless, many laws still need to be passed and we have seen how difficult it is to get anything passed. The reemergence of the US-led military presence has the potential of being a game changer for the ISIL threat. Seemingly, ISIL is increasingly on its heels and trying to find a new foothold.
It appears they may be forced to regroup outside of Iraq, most probably in Syria. Their resilience and commitment are not to be underestimated.
On the contrary, the true commitment of the US Administration is still in doubt, at least up until the next US Presidential election when possible different attitudes may develop.
The Iranian Problem and Its Current Situation
It is beyond the scope of this paper to go into all of the background of Iran and what all of its issues are. However, because it seems to me that there is a general misunderstanding of who Iran is and why Iran is in part acting the way it is, I want to point out a couple of fundamental observations that might be helpful to a Dinarian in beginning to understand this complex issue.
First, although Iran is a country, what we are talking about when we use the term “Iran” is an extensive, mafia-like network of Mullahs that have sought to establish a crony-run economy and government that benefited allies and members of their clan.
This Theocracy of religious and political leaders run the country of Iran as a “client state” with appointed leaders, as they do the same in other “client states” like Syria and Lebanon.
At times, this Theocracy has advocated for a state-run economy and trade agreements but can also, when convenient, run capitalist enterprises. But make no mistake, the cleric’s concern for economic well-being of its people and those whom it dominates is not of its concern.
It’s primary focus is to become a regional hegemony. Nonetheless, secondly, Iran has operated under international sanctions since 2006 for refusal to place its nuclear intentions under international scrutiny. The effects of this action have had a devastating effect on the economy of Iran.
The value of the Iranian rial has plummeted and is in worse shape than the Iraqi IQD. The market for imports in Iran is dominated by state enterprises and state-friendly enterprises, because the way to get around the sanctions is smuggling, and smuggling requires strong connections with the government.
This has weakened Iranian civil society and strengthened the state. And lastly, Iran and Iraq fought an eight year war beginning in 1980. Opposing sides were the Shia military of Iran against the Sunni dominated military of Saddam Hussein.
The cost to Iran was astronomical with some estimates placing Iranian casualties alone at 600,000 and causing 130,000 children to be orphaned. Understandably, Iran puts huge importance on its relationship with Iraq.
Government Speaking
Iran is a dominant player in Iraq’s electoral politics and uses its close ties to Shia, Kurdish and select Sunni figures to shape the political landscape to effect a pro-Shia outcome. A pro-Iranian, Shia dominated and preferably Islamist government, led by a united Shia alliance remains Iran’s top priority for the Iraq government.
With the exit of the US Military presence in December 2011, Iran became the most influential regional power to shape and influence the outcomes of Iraq’s internal politics.
Iran’s tools of influence include financial support to and pressure on a cross-spectrum of Iraqi parties and officials through economic development assistance; lethal aid to select militant Shia proxies and sanctuary to Iraqi figures fearful of US targeting. With the vacuum created by the leaving US military presence, the game immediately changed.
The most influential Iraqi politicians (including Maliki, Talibani, Sadr and other high ranking politicians), both nationally and regionally, cozied up to the Iranian government benefiting from money, militia protection and assurances of favorable treatment in the coming new era.
It was widely reported that Iran had the President of the country, Jalal Talibani, answering to its dictates, specifically shielding al-Maliki from the vote of no-confidence threatened in 2012. Some, like Moqtada al-Sadr, have been known to turn pro-Iranian to revitalize their political/religious credentials.
It is important to note that Iran’s power in Iraq, although extensive, is not without limitations outside of the American influence. Iran’s greatest political roadblock remains the domineering authority and religious credentials of the Iraq resident, Grand Ayatollah Ali Sistani.
Despite his Iranian heritage, Sistani is Iraq’s most revered Shia religious and political authority. We have keenly seen his ability to drown out Iranian influence particularly in his recent total support thrown Abadi’s reform efforts in direct opposition to Iran’s wishes.
He has been a critic of Iran’s system of justice and its theocratic governance, not doubt a thorn in the sides of aggressive Iranian Mullahs. However, his unique style to influence Shia politics is to keep well above the political fray while at the same time ensuring himself significant impact on those rare occasions when he does pronounce on political issues.
Militarily Speaking
In Iraq, the Shia militias, many of them with Iranian advisors, are increasingly being seen as a problem by the new Iraqi government and Iraqis in general. The previous Maliki government had long worked closely with Iran but lost power because Maliki and his allies would not do anything about the corruption that is largely seen as the main reason ISIL made such rapid advances in 2014.
Iraqis are discovering, as the anti-corruption efforts now accelerate, that a lot of that corruption, especially in the military, was encouraged, and sometimes paid for, by Iran. This has caused public opinion among the majority Shia Arabs in Iraq to turn against Iran.
Another reason for that is the Iran supported (and often armed and paid) Shia militiamen are seen as fanatics and undisciplined who are mainly loyal to Iran. These Shia militiamen are largely motivated by revenge (for years of Islamic terrorist attacks on Shia civilians) and their Iranian advisors encourage that.
The Iran backed Shia militias are now seen as a potential threat to the Iraqi government. While the Shia militiamen have less training they are more fanatics and undisciplined. To the Americans the biggest risk is the Shia militiamen terrorizing (kidnapping, murdering, looting and so on) Sunni civilians in areas ISIL has been driven out of. The Americans realize that the key to regaining control of Anbar is gaining the support of the Sunnis (who comprise nearly all the Anbar population).
Iran is not happy with this new attitude. It got worse recently when Iraq got its first few F-16s into service. While being used mainly for attacking ISIL on the ground, the F-16s can also use air-to-air missiles and the
Iraqi pilots can go after Iranian cargo aircraft transiting Iraqi airspace on their way to Syria and force them to land or turn back.
Iraq could never do this before and Iran was able to pretty much use Iraqi air space for these flights without any fear of the transports being threatened. Iraq has always tolerated this Iranian use of Iraqi airspace to rapidly supply the Assad government in Syria.
Iraq did this despite constant pressure from the United States to block the Assad aid. Now the Iraqis are paying more attention to their American allies than their Iranian neighbors. It appears that very recently Russia may have brought in its own jets to support Syria and Iran in this matter and act as a deterrent/counter-balance to any Iraqi bravado.
Economic Speaking
With bilateral trade between Iran and Iraq estimated at $4 billion (up 30% since 2008) and comprised mostly of Iranian imports (approximately half of Iraq’s imports are Iranian goods), Iran continues to jockey for economic domination in Iraq through corruption and its targeted economic development assistance.
Iran has focused largely on refurbishment of Shia religious shrines, trade agreements and bilateral agreements aimed at and fostering Iraqi economic dependence on Iran.
These efforts have been quite successful. The reason is twofold: first, Iran’s geographic proximity and cultural similarities gives it clear advantages and secondly, access to Iraqi markets by the US, Europe and other industrialized countries is more difficult and politically more challenging given the current rampant culture of corruption, lack of security and absence of economic-related laws and norms of international business practices.
Favorability Index – Iranian Influences Upon Iraq
Given the international sanctions that Iran currently operates under causing a huge need to suck wealth out of Iraq, the political desire to dominate Iraq for its own protection and the aggressive style of expanding Iran’s regional influence, it is easy to see how Iran’s expanding influence of Iraq is directly detrimental to our desired outcome.
Conversely, it would appear hard to imagine that Iran would want a more economic successful and stable neighbor from which its own population could see the benefits of a pro-West society. It would be my general expectation that continued clear and aggressive interference by Iran into Iraq’s affairs will be a reality in Iraq for decades to come, if not endemic to its culture.
Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to Iranian Influence issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.
Again, given hindsight, it is easy to gain the perspective that Iran is doing all it can do to keep Iraq from moving forward and such would otherwise cause a rating of “5”. A year or two ago, the chances of any revaluation event was practically zero.
However, now that a new Prime Minister with an apparent inclination to offset Iranian domination with Iraq first policies, the efforts to rid the military and government of certain pro-Iranian figures, the advancement of non-sectarian policies and the renewed involvement of the US in matters relating to Iraq, I feel something of a tide has turned.
Again, it is too early to tell. If needed laws are passed, if the military of Iraq can get its act together such that the ISIL threat diminishes and that moderate political figures remain in power, the future for our investment looks better. Nonetheless, it is far from certain.
The Economic Situation in Iraq
No conclusive opinions about the revaluation of the IQD (and maybe an estimate of the timing of such an event) can be made without a basic understanding of the economic issues that face Iraq and the current state of economic affairs.
Economic Overview
An improving security environment and foreign investment are helping to spur economic activity, particularly in the energy, construction, and retail sectors. Broader economic development, long-term fiscal health, and sustained improvements in the overall standard of living still depend on the central government passing major policy reforms. Iraq’s largely state-run economy is dominated by the oil sector, which provides approximately 95% of government revenue and 80% of foreign exchange earnings.
Iraq in 2014 boosted oil exports to a 30-year high of 3.5 million barrels per day, a significant increase from Iraq’s average of 2.2 million in 2011. Government revenues had increased as global oil prices remained persistently high for much of 2009-13, with per barrel of oil prices hovering around $110.
This had generally allowed for a slight surplus in government spending. However, starting in mid-summer 2014, global oil prices began a precipitous drop and now are under $50/barrel.
This has turned a generally favorable Government of Iraq budget into a budget crises where revenues are not covering expenditures by a significant amount, in spite of spending slashes.
Iraq’s contracts with major oil companies have the potential to further expand oil exports and revenues, but Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable these deals to reach their economic potential.
The Iraqi Kurdistan Region’s (IKR) autonomous Kurdistan Regional Government (KRG) passed its own oil law in 2007, and has directly signed about 50 contracts to develop IKR energy reserves.
The federal government has disputed the legal authority of the KRG to conclude most of these contracts, some of which are also in areas with unresolved administrative boundaries in dispute between the federal and regional government.
Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors’ concerns regarding the uncertain business climate, which may have been harmed by the November 2012 standoff between Baghdad and Erbil and the removal of the Central Bank Governor in October 2012.
The government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles including a tenuous political system and concerns about security and societal stability.
Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors.
Iraq is considering a package of laws to establish a modern legal framework for the oil and non-oil sectors and a mechanism to equitably divide oil revenues within the nation, although these reforms are still under contentious and sporadic negotiation.
Under the Iraqi Constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (Law 4 of 2006) and the Kurdistan Board of Investment, which is designed to provide incentives to help economic development in areas under the authority of the KRG.
Inflation (estimated at 2% in 2013) has remained under control since 2006 as security improved. However, Iraqi leaders remain hard pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace.
Unemployment (hovering around 16% – ranking a very low 143 out of 182 nations) remains a problem throughout the country despite a bloated public sector. Encouraging private enterprise through deregulation would make it easier for Iraqi citizens and foreign investors to start new businesses.
Rooting out corruption and implementing reforms – such as restructuring banks and developing the private sector – would be important steps in this direction. However, we have seen these positive steps largely stalled out in a dysfunctional Parliament when it comes to passing needed laws.
Oil Revenues
The economic driver of Iraq is crude oil production, of course. In the Saddam years, Iraq’s crude oil production was very volatile depending upon whether Iraq was at war (the Iran-Iraq War or the first Invasion by Coalition forces).
Average Daily Production varied from a low of 305,000 barrels in 1991 to a high of 2,897,000 barrels in 1989. This high point was never again matched until 2012 and Iraq’s production has exceeded that each year since.
The 2015 production is expected to be at an all-time high of an estimated 3,981,000 barrels per day. Iraq has the potential to increase production from 4 million barrels a day to over 5 million barrels a day or more in the next five to ten years. In fact, Iraq has announced an ambition to reach 10 to 12 million barrels a day of production.
Oil reserves in Iraq are considered the world’s fifth-largest proven oil reserves, with 140 billion barrels. Iraq is expected to seek a higher share for its output inside the Organization of Petroleum Exporting Countries (OPEC).
Rising output from Iraq would likely alter the balance of political power within OPEC and challenge Saudi Arabia’s current leadership. Iraq’s massive oil expansion program is highly dependent on continuity of the governing infrastructure of Iraq and the successful implementation of a power-sharing deal emerging from recent elections.
Hopes are high that Abadi can forge a stable government coalition and end the long running dispute over oil development with the Kurdish Regional Government. The Iraqi oil industry will need strong technical leadership but political rivalries have in the past thwarted cooperation on major economic development programs.
In 2009, the Iraqi Ministry of Oil awarded contracts to international oil companies for some of Iraq’s many oil fields. The winning oil companies entered joint ventures with the Iraqi Ministry of Oil, and the terms of the awarded contracts include extraction of oil for a fixed gain of $1.40 per barrel for the oil companies with the remainder going to Iraq.
The fees will only be paid once a production threshold set by the Iraqi ministry of oil is reached. Iraq’s Production Cost to produce a barrel of oil is estimated at $4.80, the second lowest cost (behind Kuwait) in the World. Notable was a mention in an Iraq Business Journal article that Iraq was $9 billion in arrears in its payments to international oil companies at the end of 2014.
Iraq’s expected revenue from sale of oil in 2015 is expected to approximate $70 billion. As this makes up 95% of the government’s revenues and the total expenditure budget for the government of Iraq is $102.5 billion, it is not hard to see that Iraq has a huge funding problem.
The ever present problem of corruption plagues this rich segment of the Iraq economy. According to a US Study from May 2007, between 100,000 and 300,000 barrels per day of Iraq’s declared oil production over the past four years could have been siphoned off through corruption or smuggling.
In 2008, Al Jazeera reported $13 billion of Iraqi oil revenues in U.S. care was improperly accounted for, of which $2.6 billion is totally unaccounted for. Some reports that the government has reduced corruption in public procurement of oil; however, reliable reports of bribery and kickbacks to government officials continue to persist.
The longer term prospects for the price of oil are expected to improve. A reliable estimate pegs a slowly improving price to approximately $71/barrel in 2020. At today’s level of oil output and if everything else remained the same, Iraq would need a $69/barrel of oil to breakeven.
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