The swift moves by Iraqi security forces to retake large portions of disputed territories in northern Iraq from the control of the Kurdish Peshmerga forces that had fought with them against ISIS poses significant risks even beyond the associated security and political perils for both sides. The new strains further hamper Iraq’s ability to manage its massive post-ISIS stabilization and reconstruction, and the related need to keep Iraq’s economy moving in a positive direction. 

Gas flares at an oil field in Kurdish-controlled territory near Kirkuk, Iraq, Oct. 2, 2017. Kurds voted overwhelmingly for independence in a referendum in September that drew threats of retaliation from the Iraqi authorities, but since then, the Kurds have taken no steps to actually declare independence, and Baghdad and its allies have done nothing to make good on their threats of intervention. (Ivor Prickett/The New York Times)
Gas flares at an oil field in Kurdish-controlled territory near Kirkuk, Iraq, Oct. 2, 2017. Photo Courtesy of The New York Times/Ivor Prickett

The destruction to Mosul, Iraq’s second-largest city, is massive and the estimated cost of demining, facilitating the return of displaced people and rebuilding is in the billions of dollars. International donors seem willing to provide stabilization funding in the hundreds of millions, but they seem unlikely to provide the billions needed.

U.S. officials have made clear they expect the Iraqi authorities to take the lead and to redouble their efforts to find private-sector solutions.  However, Iraq has a long history of government-centered economic policies, with an anemic private sector and a business climate that has not been attractive for foreign investors even in relatively stable times. Iraq ranks 165 out of 190 on the World Bank Ease of Doing Business index, making it particularly daunting to attract a new wave of private investors for rebuilding.

Regaining Stability

Even once the dust settles on the dramatic military skirmishes over disputed territory, its potential fallout risks undermining efforts to regain political and economic stability. The threat is not to Iraqi oil production, which is the lifeline of both government revenue and the broader economy. Oil production occurs overwhelmingly in Iraq’s relatively peaceful and stable southern provinces or in Kirkuk, where the fields were transferred peacefully to the central government last week.

Instead, the threat is to the overall climate and perceptions of political risk. Foreign investors and businesspeople, who were already very cautious about the odds of doing business successfully in Iraq, have now seen another example of an internal crisis that came very close to turning into a large-scale military conflict.

Moreover, the prospects for negotiated solutions between Erbil and Baghdad took an additional hit when the Iraqi forces followed their Oct. 15-17 advances—which apparently did not cause large numbers of casualties—with further moves to Altun Kopri, well north of Kirkuk city on the road to Erbil. The two sides fought a battle there on Oct. 19. 

Business Climate

The Kurdistan Regional Government had succeeded to an extent in recent years in building up Erbil as a relatively business-friendly location.  Many businesses based or supported their Iraq operations out of the Kurdistan Region, given its relative safety and better business climate compared with Baghdad. In recent years, Iraqis from other parts of the country travelled to the region’s malls to shop.

But any business—even Iraqi businesses—may be reluctant to take on projects in northern Iraq and risk further eruptions of violence.  Businesspeople are likely to balk at undertaking projects in Mosul or Hawija if the Iraqi Security Forces and Peshmerga are shooting at each other at the Ninewa-Dohuk border or in Altun Kopri or Makhmur.  The central government’s decision to ban international flights to Erbil combined with the recent military moves can only make conditions worse. 

Authorities in Baghdad could quickly reassure the private sector and pave the way for its involvement in reconstruction by halting military advances in the North and engaging in negotiations.   

Read Part 2: Economy Led Iraq’s Recovery After ISIS…Until Now

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