Index Trend Previous Quarterly Editions
Expropriation Risk: 64 ▲ Political Violence Risk: 66 ► Terrorism Risk: 43 ▼ Exchange Transfer and Trade Sanction Risk: 55 ► Sovereign Default Risk: 6 57 ▼
Overal Risk Temperature TREND ▲
Special topic: Geopolitical alignment 3
Alignment five years ago 4
Degree of contestation 2
Iraq has long been open to almost all international partnerships, excluding Israel. During the Iran-Iraq War, Iraq simultaneously received investment and imports from the Soviet bloc, the West, Asia, and non-aligned countries such as Brazil and South Africa. After the 2003 invasion of Iraq, the U.S. and U.K. became the most influential powers in Iraq but, after the departure of foreign forces in 2011, the Anglo-U.S. status as occupiers left Iraq more open to non-intervening powers such as Russia, China, and European states such as France and Germany. This stigma was short-lived, as the U.S. and U.K. both aided Iraq in defeating Islamic State (IS) from 2014-2017 and, to some extent, thus reset the relationship.
Iraqi politicians, and particularly anti-Western partners of Iran, have sought to explore a greater Chinese and Russian role in Iraq but the results have generally been disappointing. In 2014, as IS neared Baghdad, an effort was made to establish a non-Western security cooperation cell that involved Russia, Syria, Iran, and Iraq. This failed to generate any real capability and undermined the sense Russia could significantly aid Iraq as a security partner; China has never expressed interest in playing a major role in Iraq as a security guarantor.
In the economic sphere, China has touted Iraq as a key part of Beijing’s Belt and Road Initiative and offered USD10.5 billion in infrastructure-focused soft loans. Thus far, however, Iraqis have been surprised at how slowly such promises are realised by China and how sensitive the Chinese are towards security and stability risks. Even in the oil sector, where Chinese and Russian firms are very active, Iraqi officials have learned that the life-cycle cost and overall value and quality of Chinese and Russian projects are rarely as attractive as advertised.
The leaning of pro-Iranian factions towards China and Russia is also noted by their opponents, such as Moqtada al-Sadr. Thus, when pro-Iranian factions backed a Chinese bidder for a new mega-port project
in Basra, Moqtada blocked the deal and instead supported a successful South Korean vendor.
Finally, despite all the sour history between Iraq and the U.S., the Iraqis are very aware of the dominant role of the U.S. dollar in oil trading. Iraq’s vulnerability to being cut off from the U.S. and the international financial system was explicitly discussed by U.S. officials during the Trump administration.
As long as oil sales, which account for 90% of Iraqi revenues, are
dollar-denominated, Iraq’s central bank will need to maintain close ties to US policymakers.
Iraq is emerging from a long gauntlet of crises: the IS invasion, multiple oil price crashes, and the COVID-19 pandemic. Washington has committed to keeping ‘non-combat’ military trainers in Iraq at the government’s invitation. Investment from the U.S., Europe and the Gulf States is increasing gradually.
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 since 2003 and actively seeks foreign investors’ trust. 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 international oil company 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 parliament’s ire 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 June 2022, Iraq agreed to buy ExxonMobil’s 32.7% stake in the West Qurnah 1 oil field, to avoid a legal imbroglio.
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, with the case hearing its final evidence in June 2022 and with the ruling expected by the end of December 2022. 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’s commitment to contract sanctity in its oil production-sharing contracts is now being tested. In February 2022, Iraq’s Federal Supreme Court ruled unconstitutional the Kurdistan Region oil and gas law, on which the contracts are based, and began to reach out to Kurdistan investors, oil traders and banks. Thus far, Kurdistan has supported its investor rights, while Iraq’s oil ministry appears determined to crush the semi-independent Kurdistan energy sector, perhaps intending 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 68 ( Medium-high) TREND ►
Social and political tensions between establishment political parties and youth or tribal protestors have been elevated since 2018, based on a mixture of 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.
New major unrest was evident in July and August 2022 as government formation dragged into its eighth and ninth months, representing an unprecedented deadlock. Parliament and other government buildings were overrun and occupied by rioters to prevent government formation and now new elections are being discussed, suggesting, for the first time, a set of elections have failed to produce a government.
This routinised political violence is starting to destabilise Iraq and cause major project delays, cancellation of air travel, and significant lost time for foreign contractors. Sustained high 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, 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 ▼
By Iraqi standards, the country faces by far the weakest insurgency it has seen since 2003, with the risk of a major near-term IS resurgence being negligible. The second class of major terrorism risk is poised by Shia militias, the most powerful of which are supported by Iran. These militias are scaling back their anti-U.S. campaign, swearing off regular attacks on diplomatic facilities and the airport in Baghdad. Their remaining actions are largely symbolic.
The only negative trend is the rising incidence of militia rocket and drone attacks into the Kurdistan Region, 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 eased the financial pressure on the government and was described as a “one time only” measure. Deadlock in politics has prevented politicians from reopening the debate on restoring the value of the dinar.
The government and central bank do not seek to put any capital controls on the financial sector or impose trade restrictions. Iraq wants 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 2022, 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 U.S. 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 ministry has committed to observing U.S. restrictions on Iranian use of the dollar and the relationship between the Central Bank of Iraq and the U.S. Treasury is strong.
Sovereign Default Risk 57 (Significant) TREND ▼
In January 2022, Fitch Ratings held the outlook for Iraq's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 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 sustained high oil prices and deadlock, which prevents investment spending, Iraq has strongly rebuilt its sovereign reserves, rising from USD64 billion at the end of 2021 to USD80 billion at the start of Q3 2022. International Monetary Fund financing and bond issues are on hold.
