Kurdish referendum thrusts already volatile region into deeper uncertainty

The September 25 Kurdish referendum in northern Iraq, which resulted in an overwhelming 93% of votes in favour of independence, faces staunch opposition from its neighbours in a region already fraught with conflict. Iraq’s central government has reacted by putting further pressure on the region through the suspension of international flights and foreign currency restrictions, while Turkey threatened to block oil from Kurdistan entering the markets by obstructing its pipeline, which transports around 500,000 barrels of oil per day from Iraqi Kurdistan to Ceyhan. Restrictions following the outcome of the vote fuelled uncertainty among investors as oil saw its first quarterly gain of 2017.

Being landlocked, the region is almost completely reliant on its relationship with its neighbours: around 80% of Kurdish revenue is generated by oil sold abroad through Turkey. Without the recognition of the legitimacy of a Kurdish secession, the region will have limited capabilities to export its resources.

The Kurdistan Regional Government (KRG) is extremely dependent on trade with Turkey, especially in the oil sector, with trade worth around $5bn in the first six months of 2017, said Ryan Turner, lead analyst at risk consulting firm Protection Group International. “All of Kurdistan’s oil exports are shipped via Turkey, most by pipeline but a small volume also travels by truck. KRG oil exports have averaged 583,600 barrels per day in 2017 and [capital city] Erbil had planned to increase this on the back of new investment unlocked by more regular payments to international oil companies that operate in the region,” Mr Turner said.

William Wakeham, CEO of Alfagates Brokers, a firm specialising in insurance provision in emerging markets, added: “In the short term, there will be significant effect on the region’s economy which has already been stagnated by the impact of an oil price slump and the rise of IS.”

Falling oil prices and clashes over the ownership of the region’s Kirkuk oil refinery post-independence leaves a difficult and complicated situation. Kirkuk’s oil is seen as vital to both Kurdistan and Baghdad’s economic survival, and tensions are now higher than ever over the already disputed territory.

“There are real fears that violence might break out in Kirkuk as a result of the poll, or that the Kurds may make an attempt to take control of the Northern Oil Company,” said Alison Pargeter, editor of risk consultancy Menas Associates’ Iraq & Kurdistan Focus. “Baghdad has made it clear that it won’t even enter into discussions with the Kurdish government unless it annuls the result of the referendum. It is difficult to see how this relationship can be smoothed over in the near term at least.”

Mr Wakeham added: “Kurdish economic independence largely depends on the Kirkuk question. Iraq is unlikely to agree to cede permanent control of Kirkuk and its world-class oilfield to the Kurds.”

Russian energy giant Rosneft plans to continue developing its energy projects in the region, despite mounting concerns that the central government in Baghdad may pave the way for surrounding nations to impose further sanctions on the Kurds. Iraqi oil has long been an interest to Russia, which is planning around $4bn-worth of oil and gas fields and infrastructure, to include a natural gas pipeline to export to Turkey and the wider oil market by 2020.

Iraqi Kurdistan had built strong bilateral relations with its neighbouring regions, so any long-term severe economic sanctions could hurt all sides.

“Kurdistan was Iraq’s post-war economic success story. The regional government is reported to have recently settled a large outstanding debt with Dana Gas, by borrowing from oil traders. This is seen as a move to attempt to clean up its finances and therefore present a more attractive proposition for inward investment, post-referendum,” said Mr Wakeham.

“Economically the Kurdish state is more ambitious than the rest of Iraq. Erbil’s skyline is littered with half-completed construction projects. For investors to return, they require confidence and security. Currently they have neither.”

The Kurdish claim to independence dates back to the Republic of Mahabad that existed for only 11 months in 1946. Now the most important question to the survival of Kurdistan is whether it can claim independence peacefully and build its reputation as an independent state.