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FOREIGN INVESTMENT UNDERMINED BY CORRUPTION RISKS IN IRAQI KURDISTAN. BY DR. JOEL RUET *

Iraqi Kurdistan was once seen as a beacon of promise in the troubled country, but things have changed in recent years. Corruption and a disregard for rule of law are worrying for prospective international investors who are now avoiding Kurdistan, writes Dr. Joel Ruet.

Iraq’s semi–autonomous Kurdistan Region, which was once seen as a beacon of prosperity and promise in the troubled country, now faces many challenges. Budget shortfalls are one of them. The region is also suffering from a severe economic crisis amid wrangling between the Kurdistan Regional Government (KRG) and federal Iraqi authorities over control of the region’s oil revenues.

In March last year, an oil pipeline which delivered monthly revenues of nearly $1 billion to the KRG and oil companies in the region was closed, crippling the Kurdish economy and fomenting a crisis of confidence among international investors. The strangulation of Kurdistan’s energy sector—which funds some 80% of the government’s budget and has been described as “Erbil’s only economic lifeline”—has left the KRG unable to pay the salaries of officials in the region’s bloated public sector and has fanned the flames of political infighting.

This is the latest in a string of crises that has awakened the KRG to a longstanding need to diversify its economy away from a one track reliance on oil. Since inheriting the premiership from his cousin Nechirvan in 2019, KRG Prime Minister Masrour Barzani has made it his mission to shore up the Kurdish economy by bolstering the region’s private sector and attracting foreign investment.

In June 2023, Barzani launched Invest Kurdistan, an FDI–attraction platform with a vision “to make Kurdistan a premier investment destination in the Middle East.” Armed with expertly designed brochures promising a “land of untold opportunities,” delegates from the KRG and Invest Kurdistan set up shop in Davos this year for the World Economic Forum on a quest to court international investors.

Despite this coordinated public relations push, Iraqi Kurdistan faces its fair share of challenges to make this vision a reality. Ongoing legal squabbles with Baghdad make for a complex regulatory environment rife with uncertainty, while tensions between the KRG’s primary political factions threaten the integrity of the region’s governance structures.

Perhaps most worrying for prospective investors, however, is the prevalence of corruption and disregard for the rule of law among the region’s political and economic elite—many of whom serve as the would–be business partners for foreign investors. A 2022 U.S. State Department report warns that “KRG officials frequently engaged in corrupt practices with impunity,” while a second U.S. State Department 2023 report highlights “domination of the economy by politically powerful families.” This same report laments the “lack of contract sanctity” that has led some international oil companies to abandon their production efforts in Iraq, including the 2023 International Chamber of Commerce ruling that KRG oil exports had violated the Iraq–Turkey treaty.

Beyond this report, there are further examples of investor mistreatment at the hands of Kurdistan’s ruling elite. It has been over a year since a Paris arbitration tribunal ruled that Kurdish company Korek Telecom and its owner Sirwan Barzani, the Prime Minister’s cousin and commander of the region’s Peshmerga armed forces, had coordinated with Iraqi authorities to illegally expropriate assets owned by French telecommunications company Orange and its joint venture partner, Kuwaiti firm Agility. The tribunal awarded $1.65 billion in damages to the two foreign investors, but Barzani and Korek have continued to vigorously contest the ruling, showing no intention to part with their ill–gotten gains.

Echoing the U.S. State Department’s concerns over a lack of contract sanctity, British oil and gas company Genel Energy has launched arbitration proceedings against the KRG on the grounds that Kurdish authorities illegally terminated production sharing contracts for two gas projects it had been developing in the region. Genel has not yet disclosed the size of its claims, but has noted they are “substantial”—presumably reflective of the $1.4 billion the company sank into the doomed ventures.

These instances lay suspicion on the disregard held for the rule of law by the Barzani family and the government they control. As far back as 2006, leaked diplomatic cables from the U.S. State Department speak to how the ruling parties’ domination of the political system “lets corruption flourish” in the region. More recently, a 2024 UK parliamentary research report mentions the continued intimidation and indefinite detention faced by journalists in the region.

This evidence undermines the KRG’s claim to be fostering a “business–friendly” environment. Invest Kurdistan’s website boasts that the region has attracted $12 billion in foreign investment since 2006. It neglects to mention that nearly 14% of this figure is now owed back to foreign investors by Sirwan Barzani alone.

No investment promotion campaign, however extravagant and well–funded, can hope to paper over this gulf between promise and practice. Investors weighing expansion into Kurdistan should first consider how their peers have been treated and proceed with caution.

(*) Dr. Joël Ruet is an economist and a renowned specialist on the political economy of emerging markets. He is the Founder and Chairman of The Bridge Tank, a member of the G20 engagements group with think tanks (T20) and business (B20).

Source:  Diplomatic Courier,  APRIL 10, 2024

Foreign investment undermined by corruption risks in Iraqi Kurdistan (diplomaticourier.com)

 

 

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