Iraq’s tug of war with Kurdistan highlights risks to foreign investors

Following a round of talks with Kurdish officials, Iraq’s oil minister recently announced plans to establish a new oil company in Kurdistan that will be owned and operated via Iraq’s federal government in Baghdad.

The announcement comes nearly two months after the Iraqi Supreme Court ruled that the semi-autonomous region of Kurdistan could not produce and export oil without the approval of the federal government in Baghdad. The ruling was initially opposed by the prime minister of the Kurdistan Regional Government (KRG), Masrour Barzani, who branded it ‘unconstitutional’. However, negotiations between the Iraqi government and Kurdish officials this week provide renewed hope in a mutually agreeable resolution between Baghdad and Ebril.

Nevertheless, the crisis has been emblematic of the type of risks foreign investors face in a country plagued by corruption and influence-peddling. Indeed, Western oil companies operating in the region still face the threat of their existing contracts with the Kurdish administration being brought under review or simply invalidated. Their situation and the prolonged uncertainty they face over major investment projects, however, is by no means exceptional. Foreign investors in Iraq face a variety of different risks, from issues relating to security and political unrest to those that emerge from falling foul of local power brokers and highly influential families.

In Kurdistan, for instance, the influential Barzani family has essentially ruled the semi-independent region for generations, siphoning wealth through alleged corrupt deals in telecoms, oil, and real estate. Visiting diplomats seeking to increase their ties with the region are likely to find themselves dealing with three members of the same family: Prime Minister Masrour Barzani, President Nechirvan Barzani, and the leader of the Kurdistan Democratic Party (KDP), Masoud Barzani.

Unsurprisingly, their control over the oil-rich region has made the Barzani family vastly wealthy, with most of their assets reportedly hidden abroad, including in the US. Another family member, Salar Hakim, is the largest identified property owner in Dubai, where he has been linked to nearly 300 properties reportedly worth in excess of $100m.

Aside from their wealth, the Barzani family has considerable political influence that it often uses to maintain control over their business interests. In 2011, for instance, two major foreign telecoms players – France’s Orange Group and Kuwaiti logistics firm Agility – agreed to take a 44% stake in Korek Telecoms - majority-owned by the president’s nephew, Sirwan Barzani - for $810 million.

However, Iraq's telecommunications regulator halted the takeover and, in a remarkable decision, stripped the two investors of their shares, transferring them to Barzani, amongst others. Amid allegations of kickbacks and bribes, it is unsurprising that the head of Iraq’s telecommunications regulator was therefore found to have strong ties to the Barzani family. After over a decade, the matter is still in international arbitration.

More recently, the Barzani’s influence and dubious activities were exposed as part of the media investigation into telecoms giant Ericsson, which has been accused of relying on bribery and kickbacks in Iraq. The company reportedly courted the patronage of Sirwan Barzani in the region, paying $50,000 to him as a charitable donation and employing another family Barzani member as a facilitator on an annual salary of $1.2 million.

Corruption in Iraq is not limited to Kurdistan, however. The great power wielded by a few notable families and political fixers makes the country as a whole a hotbed for corruption, which has been facilitated on an industrial scale by “consultancy” firms that act as fixers between companies looking to score lucrative contracts and the government officials that control the purse strings.

For instance, the Monaco-based energy consultancy Unaoil, which collapsed in 2016 following a bribery scandal, was particularly active in Iraq. Unaoil was found to have paid public officials at the South Oil Company and the Iraqi Ministry of Oil to secure contracts for the company’s clients to construct oil pipelines and other large infrastructure projects.

Such practices, naturally, resulted in several arrests. After pleading guilty to paying $17 million in bribes to dishonestly secure $1.7 billion of Iraqi government contracts, the company’s manager for Iraq was jailed in 2020 by the UK. Also convicted for Iraqi bribes in the Unaoil scandal was a former employee of Dutch energy multinational SBM, who was jailed for taking part in a plot to pay more than $900,000 in bribes to Iraqi public officials to win a $55 million contract for SBM. Just last month, however, the conviction was overturned over a procedural error during his trial.

The influence of Iraq’s political dynasties and corrupt fixers, as exemplified by the Barzanis and the Unaoil scandal, highlights the operational risks that foreign companies face in Iraq and the complex web of politics, oil wealth, and regional patronage that they must navigate. The situation facing oil majors operating in Kurdistan, who risk having their contracts reviewed or simply cancelled, should be viewed in this context – as yet another risk to investment in Iraq, and yet another roadblock in the country’s development.

Ultimately, the crucial step in Iraq’s development lies in ridding itself of corruption and those who facilitate it. Only by dismantling the webs of patronage can Iraq free itself from the constraints that are strangling its economy and discouraging foreign investment.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)