Index Trend Previous Quarterly Editions
Expropriation Risk: 64 Political Violence Risk: 66 Terrorism Risk: 45 Exchange Transfer and Trade Sanction Risk: 73 Sovereign Default Risk: 66
Risk Temperature
67 (Medium-High)
TREND ►
Iraq is emerging from the dual crises of the Islamic State invasion and multiple oil price crashes. The United States has committed to keeping military trainers in Iraq at the government’s invitation. Meanwhile, countries including Saudi Arabia and the United Arab Emirates are attempting to bolster confidence in the premiership of Iraq’s Prime Minister Mustafa al-Kadhimi with investment deals.
Though protests and low-level insurgency will continue, Iraq will treat investors and creditors with care in 2021, always seeking to make Iraq a more attractive investment location and re-thread it into the global financial community. Iraq is likely to hold elections in October 2021 or shortly afterwards, and the country will remain stable and open for business.
Expropriation Risk 64 (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. In one recent example, Iraq waited a full 20 years for a Vietnamese oil contract signed with Iraqi former President Saddam Hussein’s government to expire before forcing the relinquishment of the exploration block.
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 has committed to clearing its 2021 arrears by the end of 2021. 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.
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 agreement. Where possible, Iraq seeks international joint venture partnerships to build cross-border infrastructure precisely to protect against expropriation of Iraqi property, as occurred with the Iraq Pipeline through Saudi Arabia (known as IPSA), seized by Riyadh in 1990.
The Kurdistan Region of Iraq is similarly desperate for foreign investment but has signalled some willingness to renegotiate oil production-sharing contracts (PSC) 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 USD27bn). As Baghdad is unwilling to accept these debts, the region has negotiated a new year-long compromise in the 2021 budget that allows the Kurds to export their own crude and directly pay PSC contract-holders.
Though the current budget calls for the constitutional review of all energy contracts, which is squarely aimed at Kurdistan’s PSCs, this is very unlikely to be implemented due to a lack of legal capacity, time or political will.
Political Violence Risk 66 ( Medium-High) TREND ►
Iraq is wracked by annual protests each summer due to electricity shortfalls and drought at the hottest time of the year. In 2021, this period also coincides with the run-up to the scheduled October 2021 parliamentary elections, which are likely to take place roughly on time. Social and political tensions between establishment political parties and youth or tribal protestors have been elevated since 2018, based on a mixture of long-standing 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. In the run-up to elections, and probably for all of 2021, there will be regular large protests, periodic violent street battles in southern Iraqi cities and in Baghdad, and 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. Rising oil prices have given the government some cushion to keep paying state employees, which is the key driver for the economy.
In the Kurdistan Region of Iraq, the 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 45 (Medium) TREND ►
Islamic State (IS) has been whittled down to a reasonably weak rural insurgency that is incapable of holding terrain and must hide itself in caves and desert camps, and can only throw occasional, small terrorist attacks into the cities. By Iraqi standards, the country faces the weakest insurgency that it has seen since 2003. The risk of a major near-term resurgence of IS 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. 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 have no illusions about the disastrous effects of joining and supporting the movement.
The second class of major terrorism risk is that posed 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 Kurdistan Region of Iraq, 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 73 (Medium-High) 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, and the lack of prior devaluations suggests Iraq does indeed take this step very rarely.
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.
Iraq is unlikely to be subjected to significant new trade sanctions in 2021. The United States has signalled a break with the Trump-era sanctions policy by issuing a long 120-day extension to waivers for the purchase of Iranian gas and electricity. Iraq has committed to observing US restrictions on Iranian use of the US dollar, and the relationship between the Central Bank of Iraq and the US Treasury is strong.
Sovereign Default Risk 66 (Medium-High ) TREND ►
In March 2021, Fitch Ratings revised the outlook for Iraq's Long-Term Foreign-Currency Issuer Default Rating (IDR) to stable from negative 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.
In the meantime, Iraq will seek USD4.1bn of rapid financing from the International Monetary Fund and around USD5bn from an internal bond issue. Iraq’s sovereign reserves have been stabilised by higher oil prices, settling today at USD54bn. They are expected to hold at this level or grow slightly, in contrast to their decline of USD14bn in 2020.
