MESOP RECOMMENDATION : Denise Natali: Kurdistan seems to be following rentier states’ path

Interview by Mohammed Hussein: Kurdistan Tribune – 21-12-2013

Dr. Denise Natali – Senior Research Fellow, Institute for National Strategic Studies, National Defense University, Washington DC – talks about the problems of Kurdistan-Turkey oil contracts, rentierism and chances that an oil dependent economy can lead to dictatorship.

MH: What is wrong with the (Kurdistan-Turkey) oil contract and pipe,  and why  hasn’t the Iraqi Federal government (Baghdad) accepted it as a legal deal?

Denise Natali: The contention is rooted in larger issues over where authority should lie between Iraq and the Kurdistan Region; what kind of state Iraq should become, and who should have control over one of the key sources of power in Iraq: oil.  The 2005 Constitution exacerbated these issues through its vague nature and the different interpretations it has been accorded to different groups in Iraq.

I also would be careful to assume the KRG-Ankara contracts and pipelines have been finalized, because no one has seen these contracts and there is no independent pipeline that extends outside Iraqi territory.  The KRG (Kurdistan Regional Government) pipeline built will eventually be tied into the Iraqi pipeline, which places Kurdish crude back into the authority of Baghdad.  Moreover, there are no agreed upon and legal payment mechanisms finalized in these “agreements”.  This is very important, because the media seems to neglect “who will pay?” and how much – which is another source of contention between various actors.

MH: Politically, how could the KRG use the oil deal to expand its position toward both Iraqi federal government and Iran?

Denise Natali: I think the KRG, as well as Turkey, can attempt to use these proposed deals and investments to leverage Baghdad to negotiate according to the terms the KRG seeks.  The higher the volumes the KRG can offer to the Iraqi exports, the more potential influence it hopes to attain.  This is the logic; however, regional geopolitics also is important and I do not see any of the regional neighbors, including Iran, supporting any type of agreement that will undermine Iraqi sovereignty and give the KRG or Kurds more autonomy that could encourage their own Kuridsh populations.  It is important not to over determine KRG leverage as well, and a practical and successful strategy will seek to maximize KRG interests, which may not be exactly everything the KRG seeks, but will gain more than it could without an agreement.

MH: Do you think Turkey use Iraq-KRG disputes about the deal to decrease Kurdistan’s oil price?

Denise Natali: I think Turkey is playing a very clever energy game in Iraq, keeping its interests in the Kurdistan Region and southern Iraq, where the real oil wealth is in the country.  If Kurdish crude reaches Turkey’s port in Cehan, as part of Iraqi oil, then there is no negotiating the price as payment will be based on international oil prices.  However, if the KRG seeks to offload its crude through trucks or other means, and continue negotiating with private companies such as PowerTrans in Turkey, then it will evidently get about half of the world prices, which is hardly a way to run an energy sector over the long term.

For Turkey, it is a win-win scenario because ultimately the KRG will become highly dependent and is highly dependent upon Ankara to export its crude.  Note that Turkey does not really need Kurdish crude but seeks natural gas.  Thus the relationship is not necessarily an interdependent one, particularly since the KRG is landlocked and has no alternative independent source of revenue.

MH: Back to Kurdistan’s internal situation; do you think Kurdistan is on the road to become an oil-based society, like Arabic Gulf States. If so what would be the consequences of that?

Denise Natali: That depends upon how the Kurdistan Region will develop economically and politically as it exploits hydrocarbons resources.  At the moment, the Region seems to be following the same path as other rentier states; high dependency on oil revenues, increasingly bloated government sector, subsidizing services, importing food, and falling back on democratization.  One of the obvious consequences is the “oil curse”, given the trends I just mentioned above.  The other though, is more serious for KRG stability.  By creating a system whereby loyalty and legitimacy is based on government handouts, and having to increase these handouts over time, the KRG is now becoming more dependent than ever on assuring the continued flow of oil revenues to support itself among the population.  This means providing jobs for ever-increasing student graduates, benefits, services, etc.  If any of these payments stops or decreases, there could be a risk of social instability.

The other problem is that the KRG does not have the quantity of resources or level of revenues available in Gulf states, and because of its landlocked status, will be dependent on different states for its economic survival.  What happens if world oil prices dropped, if a regional state closed its borders, and the KRG was no longer receiving its revenues (now about $13 billion) to pay for its region to function?

MH: Do you think the oil factor increases the chances of a tyrannical system in Kurdistan?

Denise Natali: There are the theories of the oil curse and rentierism, and the inverse relationship between democracy and oil states; however, there is no direct relationship between the presence of petroleum reserves per se and authoritarianism.  What matters is the type of regime that was in place when hydrocarbons were discovered and exploited, and how the vast oil revenues will exacerbate or support this type of regime.  Thus, if a regime was authoritarian at the time of oil discoveries, then the oil revenues will likely enhance authoritarianism.  If it was a democratic regime, then oil wealth could support democracy.

There are also transitional regimes, and there is where the equation becomes more complicated.  The nature of regime in an oil state also depends upon the proportion of oil revenues of the total budget: the higher the percentage, the more likely that democratic governance could be compromised.

It is important to note when assessing the KRG’s prospects for democratization as it emerges as an oil quasi-state, that there are important security issues as well, which can hinder democratization even if there was no oil involved.  Checking and controlling terrorism in any region requires harsher and tighter security measures which may lead to greater closures of political space.

MH: In your article, “Iraqi Kurdistan’s Silent Revolution” you described Kurdish leaders’ inability to financially sustain the growing expectations of local populations as a challenge. What do you expect for this problem?

Denise Natali: This is one of my biggest concerns for the future of the Kurdistan Region.  There is an unhealthy trend emerging that requires larger and more payments to local populations to pacify and appease them, particularly given the opposition movements in the Region.  IF the money decreases or payments stop, I envision some type of social protests or upheaval.

There also the issue of what kind of society the Kurdistan Region will become if people become used to getting things without working, much the way society has been formed in some of the wealthy oil states.  The “Rentier Mentality” that emerges could lead to a situation where the region is producing nothing much but oil, and expects the government to pay for everything since the oil wealth is a national product.

This trend or potential outcome could be checked, though.  It depends upon the policies of the KRG leaders moving forward, how much they can or are willing to diversify the economy, to maintain multiple alliances across the region, rather than become fully dependent upon Turkey, and what kind of real private sector that can emerge so that people can seek employment and lower their expectations of what the government should provide.

MH: Do you think oil revenue could solve Kurdistan’s economic problems – for example the lack of a proper economic plan not having any local produce?

Denise Natali: Oil revenue is not necessarily a curse, but it has to coincide with an integrated political, economic and social policy that ensures that the Kurdistan Region’s human and resource capital reaches its full potential.  One of the key questions is what plans are being made to assure a Sovereign Wealth Fund for the Future Generations, how much of the oil and gas will be used for domestic purposes and how much for export?  Where are the oil revenues going to and what is the allocation?

These oil developments also are occurring as the Kurdistan Region is undergoing important socio-economic and demographic trends.  Young populations are migrating to the cities, gaining access to better education, and becoming more aware of the world and the idea of citizenship and political rights.  Many do not want to return to the villages and farm the land like their parents, which makes it increasingly difficult to re-engage in agricultural production. Still, the Kurdistan Region is a very fertile land and it would behoove the leaders and people to engage in agricultural development, manufacturing and other forms of production that would decrease the dependence of the Region on outside actors.

This interview was conducted for ‘Awene’ newspaper.

Mohammed Hussein lives in Slemani where he is an editor for .  In the last two years he has reported from Iraqi Kurdistan for various Kurdish and English publications. He has also worked as a translator and translated three books into Kurdish.