Index Trend Previous Quarterly Editions
Expropriation Risk: 5 62 ▼ Political Violence Risk: 66 ► Terrorism Risk: 43 ▼ Exchange Transfer and Trade Sanction Risk: 55 ▼ Sovereign Default Risk: 6 66 ►
Overal Risk Temperature TREND ▼
Special topic: Government's commitment on climate policy 2
Iraq faces so many challenges (political, security, economic, corruption) that climate issues will possibly never be top priority for the government. Indeed, the country is emerging from a long gauntlet of crises: the Islamic State (IS) invasion, multiple oil price crashes, and the COVID-19 pandemic. Iraq views gas flaring reduction as a means to meet growing electricity demand and perhaps one day substitute domestic gas for imported gas and electricity: the climactic effect is secondary. When Iraq prioritises climate issues, it is typically to improve the country’s profile or leverage, for instance by making climate commitments during high-profile trips to the White House. Thus, when Iraqi Oil Minister Ihsan Ismail went to Washington in July 2021, he pitched an ambitious plan to end gas flaring by 2025, to better position himself with the US government.
Iraq should care a great deal about climate change, but typically only the earliest affected communities within Iraq are mobilised on the issue. Thus, the deep south of Iraq is becoming more focused on climate because this area suffers the most from desertification of the marshes, heat and dust storms, and rising salinity in rivers. Drought, migration from affected areas, and rapid urbanisation are underway, but they are overshadowed by Iraq’s more urgent daily crises. As many key oil and gas production areas are only just above sea level, a rise in Gulf sea levels could have major economic impact. Civil society has mobilised or used the media most effectively in the sphere of riparian issues, marsh rehabilitation, and conservation of trees and hunted animals.
Iraq has no climate master plan, but it is aiming to develop 7.5 gigawatts of solar generation in the next five years, largely partnering with United Arab Emirates (UAE) firms. However, due to a surplus of combined cycle gas turbines, Iraq must rely mainly on flared gas capture and gas-fired power generation for a decade or more, at the very least. Due to the long list of general policy backlogs and unfinished energy projects, Iraq is barely starting to think about hydrogen fuel and is largely building small pilot projects into major integrated conventional energy projects which are being started by super-major oil firms in the West.
Expropriation Risk 62 ( Significant ) TREND ▼
Though Iraq has nationalised foreign stakes in joint venture companies during the post-colonial era, the country has a good record of honouring contract sanctity in the post-2003 period and actively seeks the trust of foreign investors. Figures such as caretaker Prime Minister Mustafa al-Kadhimi, caretaker Finance Minister Ali Allawi and caretaker Oil Minister Ihsan Ismail are strongly pro-investment.
At the time of writing, a widening circle of states (including Saudi Arabia, the UAE, Jordan and Egypt) are throwing their diplomatic and economic support behind a second (2022-25) premiership for al-Kadhimi, which is currently being negotiated in a torturous government formation process following the October 2021 general elections. No new government is expected until May or even June 2022.
Iraq’s risk-intolerant bureaucrats are very hesitant to hazard an arbitration with international companies. Even though faced by significant payment challenges, Iraq continues to pay IOC investors as regularly as possible and largely cleared its 2021 arrears by year-end. The desire to keep paying operators is strong enough that successive governments have risked invoking the ire of parliament by seeking foreign debt capital to pay energy sector contractors and by bending constitutional limits on foreign ownership of Iraqi oil by paying operators in crude. Iraq continues to fight ExxonMobil’s intention to sell its shares in West Qurnah 1, which could become a legal imbroglio if Iraq sustains its opposition.
In international pipeline projects, Iraq is sensitive to enforcing contracts strictly and is currently suing Turkey in the International Chamber of Commerce in Paris for allegedly violating the Iraq-Turkey Pipeline (ITP) agreement (a decision is due in June 2022, due to delays). Where possible, Iraq seeks international joint venture partnerships to build cross-border infrastructure precisely to protect against expropriation of Iraqi property.
The Kurdistan Region of Iraq (KRI) is similarly desperate for foreign investment but has signalled some willingness to renegotiate oil production-sharing contracts to fall more closely in line with Iraq’s constitution, albeit only if the federal government adopts the region’s substantial sub-sovereign debts (which are calculated by the region at USD27 billion).
A February 2022 Federal Supreme Court ruling that established the unconstitutionality of KRI energy exports has added urgency to this issue, which may now be resolved in 2022, when Iraq intends to leverage the aforementioned ruling and ITP arbitration decision to force Turkey to support a transfer of marketing and debts to Baghdad.
Political Violence Risk 66 ( Medium-High) TREND ►
Social and political tensions between establishment political parties and youth or tribal protestors have been elevated since 2018, based on longstanding economic grievances and new generational dissatisfaction with the ageing ruling elite. Deadly crackdowns by the militia wings of establishment political parties are increasingly common since major protests erupted in October 2019.
Iraq is wracked by annual protests due to electricity shortfalls and drought at the hottest time of the year. Militias have effectively dissuaded large-scale protests with selective assassinations and intimidation of anti-establishment protestors and electoral candidates. This routinised political violence will probably not destabilise Iraq or cause major project delays, cancellation of air travel, or significant lost time for foreign contractors. Sustained high oil prices (especially given the Russian/Ukraine crisis) have given the government some cushion to keep paying state employees, which is the key driver for the economy.
In the KRI, security conditions are somewhat more controlled. The same economic and political resentments exist but the environment is far better controlled from a social policing perspective. Protests will remain small and largely inconsequential. Intelligence and policing standards remain very high, allowing little room for widespread social dissent.
Terrorism Risk 43 (Medium-Low) TREND ▼
IS has been whittled down to a weak rural insurgency that is incapable of holding terrain, must hide itself in caves and desert camps, and which can only throw occasional, small terrorist attacks into cities. By Iraqi standards, the country faces by far the weakest insurgency that it has seen since 2003.
The risk of a major near-term IS resurgence is minor. The movement suffers regular leadership losses due to the still-energetic counterterrorism efforts of the US-led coalition and Iraqi and Syrian forces (IS’s leader Abu Ibrahim al-Hashimi al-Qurayshi died during a US raid on February 3, 2021-the second IS leader to have died in two years). Iraq continues to penetrate and disrupt IS rural hideouts. Iraq’s Sunni population has been badly burned by the experience of despotic IS rule and has no illusions about the disastrous effects of joining and supporting the movement. IS tries to amplify its small impact by striking strategic targets such as electricity transmission towers, exacerbating instability in the already fragile power grid.
The second class of major terrorism risk is that poised by Shia militias, the most powerful of which are supported by Iran. These militias are scaling back their anti-US campaign, swearing off regular attacks on diplomatic facilities and the airport in Baghdad. Their remaining actions are largely symbolic: non-lethal bombings of logistic convoys in which foreigners are not present, or rocket attacks on US military sites that stand a low chance of causing casualties. The only negative trend is the rising incidence of militia rocket and drone attacks into the KRI, which Iraqi militias view as a safe target as they will hit Kurds, Turkish military and perhaps Westerners, but probably not Iraqi Arabs.
Exchange Transfer and Trade Sanctions Risk 55 ( Significant) TREND ▼
Iraq implemented a long-considered planned devaluation of the dinar at the start of 2021 from IQD1,182:USD1 to IQD1,450. This step considerably eased the financial pressure on the government and was described as a “one time only” measure- the lack of prior devaluations suggests Iraq does indeed take this step very rarely. As populist figures such as Muqtada al-Sadr have gained more power since the October 2021 elections, the issue of restoring the value of the dinar has gained a higher profile but remains unlikely.
The government and central bank do not seek to put any capital controls on the financial sector or impose trade restrictions. Iraq is seeking to attract investors and has historically been careful to allow companies to expatriate their earnings.
The country is unlikely to be subjected to significant new trade sanctions, as long as an energy exemption is observed on Iraqi-Russian energy joint ventures and as long as Iraq buys no major Russian defence systems. The United States has signalled a break with Trump-era sanctions policy by issuing back-to-back extensions to waivers for the purchase of Iranian gas and electricity. Iraq’s finance minister Ali Allawi has committed to observing US restrictions on Iranian use of the dollar and the relationship between the Central Bank of Iraq and the US Treasury is strong.
Sovereign Default Risk 66 (Medium-High ) TREND ►
In January 2022, Fitch Ratings held the outlook for Iraq's Long-Term Foreign-Currency Issuer Default Rating (IDR) as stable and affirmed the IDR at 'B-'. Iraq will seek to gain access to international capital markets in 2022 and will continue to build its investment profile before undertaking new bond issues.
On the back of high oil prices, Iraq seems to be slowing down plans to seek USD4.1 billion of rapid financing from the International Monetary Fund and around USD5 billion from an internal bond issue. In any case, no movement can be made on such efforts until a government is formed in May or June. Iraq’s sovereign reserves have been bolstered by sustained higher oil prices, rising in December 2021 from USD47.4 billion to USD64 billion.
