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Iraq Report: September 15, 2006

September 15, 2006, Volume 9, Number 32

IRAQ'S KURDISH REGION SERIOUS ABOUT PROMOTING INVESTMENT. Over the past year, the Iraqi Kurdish regional government has taken steps to unify its Al-Sulaymaniyah and Irbil administrations, drafted a constitution for the region, passed an investment law, and drafted a petroleum law, which is expected to be presented to the Kurdish parliament for ratification this month.

The region's prime minister, Nechirvan Barzani, told representatives of some 800 international companies from 30 countries attending this week's international trade fair in Irbil that the region's free-market approach makes it a logical choice for investing in Iraq.

U.S. Ambassador to Iraq Zalmay Khalilzad was on hand for the opening ceremony of the four-day trade fair, telling U.S. companies on September 14 to focus on the tourism, agriculture, and energy sectors. "I do not want you to spend four days in Kurdistan, and then return without a contract, and personally I invite you to take advantage of Kurdistan and invest in this area," quoted Khalilzad as saying.

Government Incentives

The trade fair will also highlight major projects already under way in the Kurdish region, including the construction of an international airport, as well as hotels, a conference center, power station, a hospital, and hundreds of new housing units. Another international trade fair is already slated to take place in Al-Sulaymaniyah in November.

Local officials have touted the region's investment climate. Under the region's new investment law, foreign investors are given the same rights as Iraqi investors, giving them full ownership of projects. Companies and their non-Iraqi staff may freely transfer their profits or income abroad without paying taxes or customs.

The law also provides major investment incentives, including exemptions from all noncustoms taxes and duties on projects for 10 years. In addition, imported equipment, machinery, spare parts, raw materials, and even furniture are exempt from taxes, duties, and import licenses under certain conditions.

Wrangling Over Oil

By contrast, the status of the draft petroleum law is less clear. The regional government (KRG) published a revision of the draft on September 9, nearly one month after the first draft was made public. The initial version reportedly drew criticism in Baghdad and abroad. The government contends that the latest version, which has yet to be presented to the region's council of ministers and parliament, clarifies provisions disputed in the earlier draft.

"The revisions in the draft published [on September 9] reflect, for the most part, the KRG's effort to describe in greater detail an appropriate cooperative arrangement on petroleum licensing, operation, and revenue sharing between the KRG and the federal government of Iraq," the regional government said in a press release.

According to the draft, the regional government vows to work with the central government pursuant to the requirements laid out in the Iraqi Constitution only if the following conditions are met within three months of the law's entry into force: agreements must be set on revenue sharing, distribution, and administration of extracted petroleum; the regional government and the Iraqi government restructure the petroleum industry; and two federal institutions regulating current fields and the exploration and development of future fields must be established.

Iraqi Deputy Prime Minister Barham Salih confirmed in late August that an oil-sharing agreement had been reached, but said differences remained over who would hand out oil contracts. Details of the agreement were not released.

Should the conditions laid out in the draft not be met, the regional government retains the exclusive management and control of petroleum operations and revenues, the draft states. Given the current state of affairs in Baghdad, it is reasonable to assume that the central government could not meet the requirements laid out in the draft law, particularly the clause on restructuring the petroleum industry, which is quite vague.

Territorial Disputes

More contentious is the draft's clause on disputed territories, which states: "The [Kurdish] ministry [of Natural Resources] may enter into petroleum contracts for petroleum operations in disputed territories where the minister concludes after consultation with other governmental authorities in Kurdistan that it is likely that the citizens in those disputed territories, in the referendum required by Article 140 of the Constitution of Iraq, will decide that those disputed territories are to be part of Kurdistan."

The implication that Kurds reserve the right to begin oil production in Kirkuk ahead of any referendum that might place the oil-rich governorate legally inside the boundaries of the Kurdish region is sure to draw fire from both Baghdad and the governorate's Turkoman and Arab communities.

As the regional government works to promote foreign investment, it will need to better address the issues of corruption and transparency. It will also need to address infrastructure issues if it is to promote investment in areas outside the region's three major cities: Irbil, Al-Sulaymaniyah, and Dahuk.

As for security, the region has remained free of the violence that has plagued much of the rest of Iraq over the past 3 1/2 years, thanks in part to the strength of the region's security apparatus. But, the regional government must also convince investors of its commitment to the rule of law. The arrest of demonstrators, journalists, and other activists in recent months has not gone unnoticed in Western media reporting on the Kurdish region.

Issues such as the presence of PKK fighters along the northern border area and threats from the Turkish and Iranian militaries, are also likely to have a negative impact on investors. (By Kathleen Ridolfo. Originally published on September 15.)

DIVISIVE FEDERALISM DEBATE CONTINUES. Iraqi political leaders are at loggerheads this week over a proposal by a major Shi'ite party for a draft law detailing the mechanisms for establishing regional governments.

Representatives from the Supreme Council for the Islamic Revolution in Iraq (SCIRI) attempted to put the proposal before parliament on September 6, only to have it postponed until September 10, when Sunni Arab parliamentarians from the Iraqi Accordance Front backed by supporters of Shi'ite cleric Muqtada al-Sadr and members of the Islamic Virtue Party refused to attend the parliament session in protest of the draft.

The latter two parties, like SCIRI and Prime Minister Nuri al-Maliki's Islamic Al-Da'wah Party, belong to the Shi'ite-led United Iraqi Alliance, the largest political bloc in the Council of Representatives.

Media reports indicate that representatives from the Iraqis List of former Prime Minister Iyad Allawi also oppose SCIRI's federalism proposal, as does the Iraqi Front for National Dialogue, led by Salih al-Mutlaq.

For its part, the Kurdistan Coalition supports the proposal. Kurds have attributed the success of their region to their 12 years of self-rule before the fall of the Hussein regime.

Ultimately, parliamentarians decided to open up discussions on federalism this week, but said parliament would not formally review any drafts until at least September 19.

Those opposed to the draft said they would submit alternative draft laws that would support decentralization in lieu of regional groupings. Adnan al-Dulaymi said the Accordance Front's proposal would include a call for the dissolution of the Kurdish autonomous region.

National Unity Under Threat

For many Iraqis, the issue of federalism is highly explosive and rooted in deep-seated fears of the country's future direction. For some, SCIRI's proposal equates to a first step towards the breakup of the country and the establishment of an Islamic state in south-central Iraq, closely allied with Iran.

SCIRI and Al-Da'wah leaders contend that such speculation is nothing more than a conspiracy theory promoted by the very people who once coveted Iraq's oil wealth. Both groups see federalism as a means of overcoming their recent historical experience in Iraq, placing the country's once-oppressed Shi'ite community at the forefront of Iraqi politics where they rightfully belong as the majority. Federalism will guarantee Shi'a never again suffer under the tyranny of a minority Sunni dictatorship, they claim.

Detractors say the issue, coupled with the Shi'ite insistence on pushing the issue through parliament quickly, goes against previous agreements, including the Accordance Front's support for the constitution -- which enshrines the concept of federalism -- ahead of its ratification last year, in exchange for a Shi'ite commitment to revisit federalism and other constitutional issues following the formation of the permanent government. The SCIRI proposal, Sunnis claim, in essence reneges on that agreement.

The perception by Sunni Arabs that their trust has been violated by Shi'ite leaders only threatens to foster further sectarian conflict in Iraq. It is a threat to Prime Minister al-Maliki's national-unity government, as well as his administration's national reconciliation project, which seeks to end the insurgency.

Postponing Debate

According to Iraqi media reports, the UN has suggested delaying debate over federalism for another year. Meanwhile, Arab League Secretary-General Amr Musa has called on Iraqis to reach an agreement "which serves the goals of accordance, reconciliation, and stability," that can be implemented in a way that "maintains Iraq's unity, safeguarding its territories and not its partition."

How political groups ultimately decide to deal with issue this week will give insight into how other hot issues are resolved in the coming months. Until now, the most contentious issues faced by the interim and transitional governments have been postponed rather than addressed head on.

Indeed, the prime minister may find that it is more advantageous to resolve the more pressing issues of the insurgency and national reconciliation before taking on a topic so emotionally explosive for Iraq's ethnic and sectarian groups.

However, it is unclear whether major issues could go unresolved for his entire four-year administration. At the very least, several articles of the constitution would need to be amended in order to accommodate such a decision.

Fierce Opposition For Various Reasons

While an array of political parties stand united in their opposition to federalism, their reasons are quite different. For Sadrists, the issue is nationalistic. Al-Sadr and his supporters believe that federalism in the south of Iraq will serve to further fragment the country. Al-Sadr's opposition to federalism is well-known, and his potential to use the issue to exploit current sectarian tensions apparently prompted SCIRI head Abd al-Aziz al-Hakim to visit the cleric in Al-Najaf on September 10 in an effort to, at the very least, convince him to not oppose the draft law.

Sunni Arab leaders have put the issue in much the same light as al-Sadr. Iraqi Accordance Front leader Adnan al-Dulaymi told reporters at a September 9 press briefing in Baghdad said his bloc would "stand in the face of those trying to dismember Iraq," adding, "Federalism is a prelude to partition." Likewise, Sunni Arab Vice President Tariq al-Hashimi called the SCIRI proposal a prescription to divide Iraq.

Sunni Arabs' fear of federalism is also rooted in the belief that they will be the losers in the division of riches from Iraq's most precious resource: oil.

All About Oil

A federal region established in the Shi'ite-dominated areas of the south would likely encompass the nine governorates that also happen to contain southern Iraq's vast oil fields. That region, coupled with the Kurdish region in the north, would leave Sunni Arabs with the potential to form a region in the governorates of Al-Anbar, Ninawah, Salah Al-Din, and Diyala -- none of which are known to have any substantial oil reserves.

Kirkuk Governorate, which borders the Kurdistan region, does have vast oil reserves, and as such, is highly contested among the Kurds, Arabs, and Turkomans living there.

But neither the Baghdad nor Kirkuk governorates are likely to join any regional grouping, the former because of its mixed population and status as the capital, and the latter because of the current political climate, although Kurds would like to see it incorporated into the Kurdish region.

Agreeing To Disagree

Shi'ite and Kurdish members of Prime Minister al-Maliki's administration remain committed to the federalism project. Government spokesman and Shi'ite leader Ali al-Dabbagh told the website Ilaf in a September 3 interview that federalism would help create a more democratic Iraq. The "federal system seeks to design a system for distributing authority and not limiting it to a certain group; a system that guarantees broader participation, justice, and an administrative system that has proven its feasibility in many countries," he said.

Meanwhile, parliament speaker and Sunni Arab leader Mahmud al-Mashhadani told "The Washington Post" that federalism is all but dead, the daily reported on September 13. He said it was likely that political leaders meeting that day would postpone the topic for another four years.

However, SCIRI head al-Hakim continues to push the proposal. He asked Shi'ite religious leaders this week to make federalism a central topic in their prayer sermons during the holy month of Ramadan, which is set to begin around September 24. (By Kathleen Ridolfo. Originally published on September 14.)