Ahmadinejad’s Last Stand

Our guest author today is Reza H. Akbari (@rezahakbari). He is a Middle East researcher in Washington, DC and received his MA from the George Washington University. Reza’s last post for Al Ajnabee explored the diversity of conservative trends in Iranian politics.

Iran’s complex bureaucracy is slowly getting ready for another presidential election in June, but thus far the dynamic between the president’s faction and the regime has proven to be far from the ordinary.

Mahmoud Ahmadinejad’s tenure in office will be officially over this summer, however, he may not be ready to go down without a fight. Despite all warnings from regime officials, the president seems adamant about engineering a campaign victory for his right-hand man, Esfandiar Rahim Mashaei.

President Ahmadinejad (center) and Esfandiar Rahim Mashaei (left)

Rahim Mashaei has not officially announced his candidacy, but the campaign seems to be well on its way. Numerous analyses suggest that Ahmadinejad’s faction will not have a chance in the election. More than likely any candidate perceived to be associated with the “deviant faction” – a term used to refer to the president’s supporters and his controversial ally Rahim Mashaei – will be disqualified by the Guardian Council and eliminated from the political arena. So, why is Ahmadinejad still campaigning? And how does the government perceive the intentions of the “deviant faction?”

Shortly after the 2009 presidential election, regime stalwarts began referring to Ahmadinejad and his camp as the deviant faction. The rift began when the president publicly challenged the Supreme Leader over his constitutional right to choose the government’s ministers. The critics believe Ahmadinejad’s brand of politics has deviated from the path of the velayat-e faqih or rule by jurisprudence.

WHAT IS HE THINKING?

Ahmadinejad knows the history of the Islamic Republic well. As evidenced by the fate of his predecessors, Ahmadinejad understands that the regime is not kind to losers. The defeated tend to be marginalized, access to the state controlled media is lost, and at times they are even physically harmed.

Mohammad Khatami and his reformist allies were denied any major national prominence after his presidency ended in 2005. Another president, Hashemi Rafsanjani, was ousted from influential positions, after he called for unity following the 2009 presidential election. Mir Hossein Mousavi and Mehdi Karroubi, former regime members and presidential candidates, are still under house arrest at an unknown location.

Given his reputation among the influential regime members, Ahmadinejad recognizes that a dark horizon also awaits him and his camp. So, why stop fighting now?

In Ahmadinejad’s mind, the true test of his legacy will come in the next two months. Ahmadinejad has proven over and over again that he is not willing to go down without a fight and the home stretch is no time to quit. The best-case scenario will be for him to grant a safe passage for Mashaei through the Guardian Council’s vetting process, or at least assure that his faction will survive after he is no longer in office. He may even succeed in rallying the public opinion behind his camp, which may offer some kind of protection after he leaves the office.

The exact next steps of the president’s camp are not clear, but the regime should beware of a man with nothing to lose. The president has demonstrated that he is even willing to play dirty. As displayed on the floor of the parliament during an altercation with the speaker, Ali Larijani, Ahmadinejad is not afraid to publicly disclose sensitive information. In early February, Ahmadinejad challenged Larijani by accusing him of patronage, corruption, and “mafia-like rule.” He went so far as to play a tape of what he claimed was a recording of a conversation between Tehran’s Chief Prosecutor, Saeed Mortazavi, and Fazel Larijani, the speaker’s brother.

According to the tape, the Larijani family had used its prominence for economic gain. Larijani refuted the relevance of the tape and labeled it as blackmail. This unparalleled public confrontation forced the Supreme Leader issue harsh warnings. Ahmadinejad may have similar evidence and, more than likely, he will use such unorthodox tactics to ensure his longevity until the June presidential elections.

In the meantime, Ahmadinejad is doing all he can to paint himself as a populist president by paying lip service to the public. During his trip to the Khuzestan Province in southwestern Iran on April 22, Ahmadinejad announced, “They have sent a message saying that if I become any bolder, they will try to hurt me. I will fight in the service of justice, revolution, and people…until death. Thousands of Ahmadinejads are not worth as much as a drop of justice or a piece of hair from the head of an Iranian citizen.”

During his trip to Semnan Province on April 11, the president went so far as to throw a jab at the Supreme Leader and the ruling establishment. “Some say that the Leader’s opinion dictates that this person should run and that person should not [campaign]. How is this any of your business? The people should decide. All [political] types should run,” Ahmadinejad announced.

The president’s camp also hosted an event on April 18 at Tehran’s Azadi Stadium. The government had previously announced that the event’s purpose was to “acknowledge the servants of Norouz [the Iranian New Year].” However, critics of Ahmadinejad called it an illegal “election gathering,” because many expected Ahmadinejad to bring his chosen successor, Rahim Mashaei.

The controversial rally was held despite the president’s opponents accusing him of spending public funds for an extravagant gathering with political intentions. According to Hossein Shariatmadari, the editor-in-chief of Keyhan, a conservative newspaper close to the Supreme Leader, $40 million was spent on organizing the event. In an editorial written on April 23, Shariatmadari questioned the genuineness the president’s calls for justice and equality. “$40 million was taken away from the oppressed and disposed people in order to organize an election advertising event for Mr. Mashaei in the Azadi stadium. Is this an example of Mr. president’s justice seeking?”

According to IRNA news agency, nearly 70,000 supporters were in attendance, but the Iranian state media showed footage of almost deserted bleachers. Supporters of the president claimed that the video angles were chosen purposefully to only capture the empty areas, and make the event look like a failure.

THE ESTABLISHMENT’S POINT OF VIEW

Ahmadinejad rarely provides any details about the threats he receives, but it is safe to say that he is being pressured by regime officials to end his uncouth behavior. More than likely traditional conservatives do not view Ahmadinejad as a legitimate political threat to their chances of an election victory. The Guardian Council, the major constitutional body in charge of vetting the candidates, is under their control, so any candidate supported by the president could easily be disqualified. But they still view the president as someone who could further damage their personal reputations and the regime’s legitimacy.

More than once Ahmadinejad has announced that he is willing to publicize confidential records exposing his opponent’s past indiscretions. According to the BBC Persian service, during his visit to the Khuzestan Province, the president once again made his intentions public.

“Some send messages saying that they will confront me because of some of my statements. You are nothing in front of the will of the Iranian nation. This nation has stood up in front of the biggest oppressors; compared to them you [traditional conservatives] are nothing. If only the smallest part of your past behaviors are exposed, you will lose your place among the people,” Ahmadinejad declared. Many influential members of the political establishment have warned Iran’s outgoing president about his bombastic behavior, but to no avail.

On April 12, Ayatollah Momen, an influential member of the Guardian Council, warned Ahmadinejad and his camp by stating, “Don’t have any doubt. If we just sense a little deviation from a [candidate], we will disqualify him.” According to the Young Journalists Club, an Iranian semi-official news agency, Sadeq Larijani, the head of the country’s judicial system, criticized Ahmadinejad’s election efforts, saying “Unfortunately, some activities that are carried out with the government’s budget feel like election campaigns.” He continued by adding that such actions are considered to be a “crime” and the Guardian Council and the Judiciary are closely watching the perpetrators.

On April 23, Major General Hassan Firuzabadi, Chief of Staff of the Iranian Armed Forces, rejected the validity of any threats aimed at Ahmadinejad and advised him to be more measured in his claims. According to Mehr News, a semi-official news agency, Firuzabadi labeled Ahmadinejad’s statements as “unacceptable” and aimed at “disturbing the public opinion.” He added, “Mr. Ahmadinejad should stop making such statements.”

The warnings go on, but the regime is not counting on Ahmadinejad to listen. Security preparations are underway to insure a safe and calm election season. Of course, such moves include but are not limited to just concerns about Ahmadinejad’s deviant faction. Having experienced months of instability following the disputed 2009 presidential election, the regime is not taking any unnecessary risks.

It is difficult to assess Ahmadinejad’s ability or willingness to create the kind unrest seen in 2009. But, in the regime’s point of view, any potential for instability is considered a risk; so it’s always better to be safe than sorry.

In an interview with Mehr News on April 22, Firuzabadi also stated that the Iranian armed forces are “completely ready to confront any potential sedition” in the upcoming June elections. “Our armed forces are highly trained and experienced. They have the experience of the 2009 sedition, so they are familiar with the manner and the details of how to confront any potential dangers.”

On April 19, Iranian Police Chief Brigadier General Esmail Ahmadi Moghaddam announced the reimplementation of new “moral and security” measures ahead of the upcoming elections. The move follows an April 16 announcement by Deputy Police Chief Brigadier General Saeed Montazeralmehdi on that an elections headquarters would be created for police to provide security for the elections and monitor anti-regime websites and social media.

The Cultural Ministry also recently announced that all mass text messages sent from election campaigns should be preapproved. According to TELNA, an Iranian information technology website, the spokesperson for ministry stated, “All SMS messages must be sent from traceable and known numbers…the content of such messages will also be controlled.”

In the coming months the battle between the president’s camp and the establishment will intensify. It is impossible to predict Ahmadinejad’s next move, but one thing that is guaranteed is his willingness to fight until the last breath. He does not have that many alternatives. He has to remain aggressive all the way up to the election, since otherwise he risks impending obsoleteness.

KRG’s Talking Points on Display in DC

From the Facebook page of the KRG’s Representative in the US.

A high-profile delegation from the Kurdistan Regional Government visited Washington, DC last week. Speaking on behalf of the KRG were: Fuad Hussein, chief of staff to KRG President Massoud Barzani; Natural Resource Minister Ashti Hawrami; Falah Bakir, Director of the KRG’s Foreign Relations Department; and former KRG envoy Qubad Talabani, now Director of the KRG’s Coordination and Follow-Up Department.

The timing of the mission’s visit is telling: it arrived in Washington just weeks before Turkish premiere Recep Tayyip Erdogan is set to visit the White House. The main topic discussed by the delegation—during joint panels and speeches—was Iraqi Kurdistan’s relationship with Turkey. Over the past five years, this relationship has grown rapidly. It constitutes a majority of Iraq-Turkey trade.

Normally, the U.S. would champion prosperity and peace between neighbors who, just years before, were totally at odds over the question of Kurdish independence. But today, U.S. officials worry that Turkey and the KRG are ready to forfeit Iraq’s unity in favor of a comprehensive energy deal. That deal—if signed—would presumably connect Kurdish oil fields to Turkey and world markets. Conventional wisdom dictates that this move would grant the KRG independent oil revenues and enable it to withdraw from Baghdad’s orbit. In the worst-case scenario, the KRG would go its own way; Iraq would become a less diverse rump state with a weaker political opposition.

The KRG came to D.C. to relieve these fears and change minds before Prime Minister Erdogan arrives. Their talking points were sharp and polished. I say this as someone who saw the mission in person at George Washington University and the Atlantic Council on April 8.

Over the course of last week, the delegation met with Deputy National Security Adviser Tony Blinken and Acting Assistant Secretary of State for Near Eastern Affairs Beth Jones. According to an April 16 press release: “The delegation met with Congressional leaders and other key members of Congress, both Democrats and Republicans including the House Majority Leader, Rep. Eric Cantor (R-VA); Rep. Christopher Van Hollen (D-MD); Foreign Affairs Committee chairman, Rep. Ed Royce (R-CA); Intelligence Committee chairman, Mike Rogers (R-MI); Senator John McCain (R-AZ); Senator Roger Wicker (R-MS), as well as members of the Kurdish American Congressional Caucus including its new Democratic co-chair, Rep. Jarred Polis (D-CO).” (For pictures see last week’s entries on the KRG’s Facebook page.)

With this post I want to give readers a sense of how officials are framing the issues and what they’re seeking from the U.S. Much of this blog post is paraphrased unless quotation marks are used. The two events I attended were on-the-record and covered by media outlets so nothing confidential is contained herein. You can find audio and a copy of Hawrami’s prepared remarks on the Council’s website. Also be sure to read his April 14 op-ed for Real Clear World.

The delegation focused on the constitutionality of any future arrangement with Turkey. The KRG believes Iraq’s constitution allows the region to sign a bilateral trade deal with a foreign government without Baghdad’s input. Officials maintain that revenues from oil sales will be divided according to long-standing oil revenue-sharing agreements. Kurdish officials frequently cite a legal finding provided by a British law firm that upholds their claims—and they referenced it in D.C. more than once. Until it is tested in court, however, there is no telling how the argument will hold up if challenged by Baghdad, which has threatened to sue companies that export Kurdish oil.

Iraqi Prime Minister Nouri al-Maliki gives the KRG no choice but to sign these deals and pursue new infrastructure. Maliki represents the greatest threat to Iraqi unity because of his sectarian approach and refusal to apply the constitution. In his remarks at the Atlantic Council, Hawrami, the energy minister, said that the concentration of power for Iraq’s oil sector is unfair: “It’s what it was under Saddam Hussein.” He argued that oil and revenues are key sources of power in Iraq. As such, the U.S. cannot insist that Baghdad has final say on oil deals or export agreements. Maliki has no interest in developing Kurdish oil fields.

The sense of frustration and urgency felt by the Kurds was very real. They want to act now. In order to improve ties between Baghdad and Erbil, the only choice is to change the situation on the ground, and pursue reconciliation after the KRG’s success makes the central government reconsider its hard-line position. This argument makes sense given the long time horizons associated with the oil and gas industry (pipelines take months to build; commercial oil production levels are only achieved after years of surveys and drilling; etc.).

The Kurds want to initiate deals now because other options are no good. They could wait years more for an Iraqi oil law. Or they could wait for Maliki to change his mind or leave office.

Kurdish independence is a “myth,” Hawrami said. For the foreseeable future, the KRG wants its fair share of Iraq’s wealth, as guaranteed by the constitution. Erbil wants a federal system. But a decentralized oil policy is essential to that arrangement, meaning that the Kurds must be allowed to exploit resources and sell oil. A bruising fight over the Iraqi budget earlier this year has only confirmed for the Kurds that they need control over a revenue stream of their own. They cannot trust Maliki and his allies in parliament to produce a fair budget.

Hawrami’s most memorable line was delivered with a smile: “Iraq is a rich country. We want a share of that wealth… If even we have any motive for independence, we will wait until the last drop of Iraqi oil [is pumped and sold]—and then we might do something” (25:00 minute mark). The Kurds don’t want to prematurely cut themselves off when Iraq’s production could double or triple in the coming decades. Kurdistan may contain 45 billion barrels of recoverable oil. Iraq now estimates that the country holds 150 billion barrels total, placing it fifth in the world for proven reserves.

There is another upside to a Turkey-KRG deal and it has to do with Kurdish independence beyond Iraq. Hawrami suggested that the KRG’s dealings with Turkey had actually buoyed Erdogan’s outreach to Kurdish insurgents in his own country. How so? Cooperation with the KRG proved that the Turkish government was reliable; these ties gave the PKK confidence in Ankara’s sincerity.

Washington must adopt a neutral policy instead of backing Baghdad. Supporting Maliki in the name of “Iraqi unity” is a mistake. Supporting the constitution (i.e. the Kurdish reading of it) will prevent the country from fracturing. The Kurds recognize that U.S. influence over Baghdad is limited today. Washington prioritizes Iraqi “stability” above all but it has no real vision or policy for achieving that end, they say. Instead, Washington insists on reconciliation with Maliki, which favors central authority by default. Hawrami said the KRG can’t wait another seven years and do nothing. (Note: Maliki became PM in 2006.) The US approach is “outdated.”

Publicly-traded oil companies operating in the KRG slashed production in December because they could not rely on prompt payment from the central government. The newest Iraqi budget, which Hawrami called a “punishment,” provides only $650 million for operator costs in Kurdish territory, whereas the KRG demanded $3.5 billion. Kurdish oil exports flirted with 200,000 b/d late last year; volumes have since fallen to roughly 50,000 b/d, all of which is trucked across the border into Turkey because the federal government can’t be trusted to ship oil and compensate the Kurds as they see fit.

Looking forward, Hawrami believes the KRG can produce 2 million b/d by the end of the decade, most of which would be exported. A new pipeline like the one being considered by Turkey and the KRG would allow Iraq to sell ~3 million b/d through a northern corridor if the Kurdish and federal pipelines all become fully operational. As a rule, supply diversity is the best guard against energy insecurity. Hawrami mentioned “market stability” as an incentive for a deal with the Turks, something the U.S. can get behind.

Finally, the U.S. should not deter companies from operating in the KRG, the delegation said. The region is no different from anywhere else in Iraq. This goes back to the central theme of neutrality.

Kurdish prosperity will serve Iraq’s interests even if it angers Maliki. Speaking at the Atlantic Council, Hawrami said, “The KRG is confident that once oil export revenues are generated by KRG, and shared constitutionally, then Baghdad will become more reasonable, accepting a constitutional settlement on power and revenue sharing, thus creating lasting stability and unity in Iraq.”*

This kind of success, reinforced by timely transactions, will convince the people of Iraq—not just politicians—that the KRG was right all along. It will change minds and encourage the adoption of the constitution in practice. Kurdistan’s reputation for development and better services may even trickle down to the rest of Iraq, as more and more people ask: what are the Kurds doing right?

Conclusion: It’s hard to tell how successful the KRG mission was. We know who they met with but it’s impossible to tell how receptive their American counterparts were. Jackson Diehl of the Washington Post wrote an approving editorial on April 14 after meeting with at least one member of the delegation. That article ended with Diehl, a critic of Obama’s foreign policy generally, arguing that the U.S. policy towards the KRG was “wrongheaded.” Instead, Washington should encourage what he called Kurdistan’s “renaissance.”

The Kurds made a strong case last week. The rest is up to Erdogan when he raises the issue with Obama next month.

* Note: Revenue sharing is a thornier issue than first glance might suggest. Right now, the two sides disagree on the number and cost of “sovereign expenses,” which have cut the Kurds’ budget share year-on-year from 17 percent to about 10 percent. Might the Kurds push back once they control revenues? Could they retake 17 percent in full or compromise closer to 15 percent? Hawrami told the Associated Press on April 12 that the KRG will return revenues to Baghdad “after it has taken its legal allocation and paid contractors.”)

Erdogan’s Case for KRG Oil Exports

The Middle East Policy Council published my new briefing yesterday on the Turkish prime minister’s upcoming visit to Washington. Titled “Erdogan’s Case for KRG Oil Exports,” the article skips the issues that the U.S. and Turkey agree on, and instead focuses on a much thornier problem. By all indications, the Obama administration opposes future energy deals between Turkey and Iraqi Kurdistan. The White House is afraid that any comprehensive deal could supercharge Kurdish aspirations for independence, dissolve Iraq, or at the very least heighten the risk of conflict. Although American anxiety is sincere, the Turks and Kurds believe it is misplaced. They are convinced an energy deal will benefit all Iraqis–even if Baghdad appears irreconcilable for now. To paraphrase the KRG’s Minister of Natural Resources, who spoke this week at the Atlantic Council, “Baghdad will be more reasonable after they get their cut.”

From the section Erdogan’s Challenge:

If Erdogan is serious about pursuing a comprehensive energy deal, then he will have to explain the Kurdish side of their dispute with Maliki and point to the absence of the U.S. as an honest broker. As long as the U.S. and other members of the UN Security Council take Baghdad’s side in the dispute, any KRG exports to world markets could be rigorously challenged by Baghdad in various judicial venues. Erdogan’s case is made stronger by other negative developments in Iraq that reflect poorly on Maliki.

Baghdad and Washington at Odds Over Syria’s Future

U.S. Sec. of State John Kerry was sworn in on February 1, 2013

The Los Angeles Times reported yesterday that Iran is still using Iraqi airspace to shuttle weapons to Bashar al-Assad’s forces in Syria. This arrangement was first reported a year ago, to the dismay of U.S. officials who hoped Iraqi Prime Minister Nouri al-Maliki would stop it. Baghdad promised last year to inspect Iranian cargoes. However, according to anonymous sources quoted by the Times, they have not done so since two planes were brought down in October, one of which was inspected after its cargo was discharged in Syria. On February 25, the New York Times quoted an American official who said the shipments were so routine they could be called “a milk run.”

No doubt these shipments have taken on greater importance in recent weeks. Syria’s rebels “scored a string of strategic victories” early this year and aid from outside sources is strengthening the resistance. Even though the war has not reached a tipping point, Assad needs all the help he can get. And Iran is happy to help. He may need more assistance now than ever before, as the U.S. reconsiders its options, the second anniversary of the uprising approaches, the capital becomes less secure, and the death toll eclipses 70,000.

The sectarian conflict in Syria is deeply unsettling for Maliki. Assad and his most loyal forces belong to the Alawite offshoot of Shia Islam, while certain religious minorities have gravitated to his side or remained neutral out of fear. By all accounts, the resistance draws its power from the country’s Sunni majority; it represents both secular and ultra-conservative trends, all of which aim to drive Assad from power.

Maliki’s logic is simple. The prime minister, who belongs to Iraq’s Shia majority, is worried that Assad’s ouster could inspire Sunnis to rise up in Iraq or—at the very least—resist his rule, which many complain is autocratic. He fears the spill-over effects of a new insurgency, like the one Maliki faced when he first became prime minister in 2006. “Neither the opposition [in Syria] nor the regime can finish each other off,” Maliki told the Associated Press in a February 27 interview. “If the opposition is victorious, there will be a civil war in Lebanon, divisions in Jordan and a sectarian war in Iraq.”

More specifically, Maliki is worried about the strong cross-border ties that connect Sunnis in Iraq’s Anbar province with those fighting Assad next door. For years, Anbar was the beating heart of the anti-American, anti-government insurgency following the 2003 invasion. Violence there subsided only after Sunni militias joined forces with the U.S. to fight Al Qaeda in Iraq.

At the end of last year, outraged Sunnis took to the streets in increasingly large demonstrations against Maliki’s government. They accuse Baghdad of systematic intimidation and abuse. As proof, they point to high-profile cases in which Sunni politicians, including Vice President Tariq al-Hashemi, were charged with crimes against the state—despite a lack of evidence and the use of forced, televised confessions (a hallmark of Saddam Hussein’s rule). Hashemi has been sentenced to death five times in absentia; he now lives in exile. In December, the security detail of Sunni politician and Iraqi Finance Minister Rafi al-Issawi was arrested, kicking off the newest wave of protests. Channeling demands heard elsewhere in the Arab world, demonstrators are calling for the downfall of “the regime.”

Maliki says the Anbar protests can continue but he is eager to dismiss them. Like other Arab heads of state—both democratically elected and self-appointed—he swears the demonstrations are sponsored by foreign powers. At the same time, he has made some concessions, freeing about 4,000 prisoners in order to satisfy Sunni demands. Thus far, his calls for dialogue have not gained traction.

It’s worth noting that Maliki is already locking horns with the Kurdistan Regional Government, the semi-autonomous grouping of provinces in Iraq’s north (these are administered by Erbil rather than Baghdad). The two sides have exchanged threats over oil contracts, export rights, the constitution, and revenues. The KRG and federal government even deployed forces and heavy artillery to disputed provinces in November.

For the prime minister, raising the stakes and risking conflict in the country’s west at the same time may not be an option, especially if it backfires or changes attitudes ahead of Iraq’s upcoming provincial elections. Instead, Maliki has relied on a friendly judiciary to undercut his enemies, security forces to do his bidding, and the Assad regime to suffocate an insurgency before it can poison Iraq’s western territory. Turning a blind eye to Iran’s aid achieves this end.

Iraq’s refusal to intercept Iranian aid to Syria has not been overlooked by Washington. In a September 2012 hearing, Senator John Kerry told Robert Beecroft, now the U.S. Ambassador to Iraq, that aid to Baghdad should be conditional. Informed that Iraq had already been engaged on the matter, Kerry said:

“Well, I mean, it may stop when it’s too late. If so many people have entreated the government to stop and that doesn’t seem to be having an impact, that sort of alarms me a little bit and seems to send a signal to me maybe we should make some of our assistance or some of our support contingent on some kind of appropriate response… it just seems completely inappropriate that we’re trying to help build their democracy, support them, put American lives on the line, money into the country and they’re working against our interest so overtly—against their interests too, I might add.”

Kerry is now Secretary of State. He is closer to President Obama than ever before and his counsel will carry additional weight. It’s unclear if he still thinks holding back aid is a wise choice. But it is one of the only remaining points of leverage the U.S. has now that the occupation is over. In FY 2012, the U.S. provided $1.7 billion of aid to Iraq. That sum could climb over $2 billion in FY 2013.  And, in 2014, Iraq is set to receive its first batch of American-made F-16 fighter jets. This administration doesn’t want to act directly in Syria by arming rebels or intervening militarily. So cutting off Iranian supplies to Assad may be the easier option, even if it complicates relations with Iraq.

Maliki, for his part, may seek to avoid being leveraged, however, as I’ve argued before. Last year, a $4.2 billion deal for Russian military hardware collapsed at the last minute when accusations of corruption were revealed. Officials later said that the deal would be renegotiated. This past week, another deal—this one for roughly $1 billion of Czech aircraft—also fell through.

If the U.S. attempts to leverage Maliki by making aid conditional or withholding military sales, look for both of these deals to be revived soon. Any American threat would be conveyed quietly at first, behind closed doors, so that Maliki is not humiliated. And given the tremendous investment made by the U.S. in Iraq over the past decade, we should expect Washington to give Maliki another chance to redeem himself. But if the Russian and Czech arms deals are seriously expanded in the coming months, it may be the first signal that Maliki is preparing other options in case he’s punished for enabling Syria’s crackdown.

Egypt’s Prospects Wane Without Leadership

The Middle East Policy Council just published a new briefing titled “Anxiety Grips Egypt’s Economy.” Co-written by this author, it addresses some of the systemic issues facing Egypt right now. Subsidy reform, the Central Bank’s struggle to manage currency devaluation, inflation, fuel shortages, black markets, and loan prospects are all covered. Perhaps most importantly, the article makes the case that the United States is not sworn to approve a $4.8 billion loan from the International Monetary Fund. This seems apparent now that the U.S. Ambassador has called on Egypt’s government to do more and act fast.

The IMF loan, negotiated last year and expected to be finalized last December, was delayed by drawn-out political crises in Egypt, which began in late November. It is still on hold today even though all parties recognize that it is absolutely necessary. (The IMF deal is now considered the ultimate stamp of approval by the international community. It could unleash an additional $14.5 billion in aid from other sources.)

The problem is leadership, which Cairo lacks. President Mohammad Morsi has thus far shown a perplexing willingness to consolidate power by decree and rush through political reforms by referendum. While, at the same time, he has refused to make tough decisions affecting Egypt’s economy ahead of parliamentary elections. He and his party–the Muslim Brotherhood’s Freedom and Justice Party or FJP–are clearly afraid of alienating voters, even though the value of the Egyptian pound falls to news lows every day and the poor stand to lose the most from steady inflation.

Take an extra moment and revisit our November 15 briefing for MEPC. That article (“Egypt’s Economy Looks to 2013“) was hopeful by comparison. Until that point, Morsi’s government had said all the right things; the IMF loan looked certain. But three short months have turned Egypt’s prospects upside down. A courageous leader needs to deliver an ambitious economic plan, campaign for it publicly, and–at the same time–protect Egypt’s most vulnerable.

Can Morsi be that leader?

The KRG’s Predicament and Turkey’s Involvement

Turkey’s PM Erdogan (L, blue tie) with KRG President Barzani (R, in tan uniform) in 2011 (Source: KRG.org)

The Kurdistan Regional Government enjoys a special status inside Iraq’s federal system. It administers the provinces of Erbil, Duhok and Sulaimaniya, while Kurdish control of Diyala, Ninewa, and Kirkuk are challenged by the central government in Baghdad. The KRG has its own president, parliament and military force (peshmerga)—even though it is part of Iraq. This unique arrangement was formalized ten years ago after Saddam Hussein was deposed in 2003 and a new constitution was finalized in 2005.

The status of disputed and oil-rich territories was supposed to be settled by referendum before 2007. However, no such vote has taken place, primarily because the result is anyone’s guess. In the meantime, Iraqi Kurdistan has enjoyed an economic rebirth thanks to its oil wealth. Over the past year, exports climbed to nearly 200,000 b/d, and major international oil companies like Exxon and Chevron have signed exploration contracts with the KRG. Unlike Baghdad, Erbil—the capital of Iraqi Kurdistan—is happy to extend generous terms to foreign companies.

Friction with Baghdad

The central government insists that these deals are illegal and that only Baghdad can negotiate contracts. It also maintains a tight grip on Kurdish exports because it controls the federal pipeline connecting Kurdistan’s fields to international markets. Unfortunately for the KRG, Baghdad controls the national purse too. Parliamentarians opposed to Kurdish designs are currently threatening to slash the KRG’s share of the federal budget, which stands at 17 percent.

Last year, the KRG halted oil exports from April until September because Baghdad refused to compensate producers operating in the north. Iraqi officials demanded audits and only delivered one tranche of payments in October. A deal hammered out in September collapsed before year’s end, leading the Kurds to cut exports again in December. Today, the KRG has no choice but to truck oil across the border to Turkey; any oil shipped through the federal pipeline is essentially forfeited as long as Baghdad withholds payment. KRG exports have fallen from 200,000 b/d to just 20,000 b/d as a result.

Turkey Enables

The party that enables this conflict is Turkey. Its leaders and business class should not be faulted, however. As a landlocked territory, the KRG needs an export route and customer. Turkey satisfies both needs. For decades, Turkey exported Kurdish oil, which was mixed into Iraq’s Kirkuk blend and transported by pipeline to Ceyhan, on Turkey’s Mediterranean coast. Now the Kurds have two options. They can export at the mercy of the central government and hope for payment later, which no foreign company would accept. Or, if they want to come anywhere close to their production targets of 1 million b/d by 2015 and 2 million b/d by 2019, they can pursue a new pipeline separate from the federal one. Look at a map and you’ll see Turkey is the only option for this project (see August post).

I wrote about the Kirkuk-Ceyhan pipeline last year because it seemed like the natural path for new Kurdish oil exports (see my May, June and October articles). When officials from Kurdistan or Turkey spoke about forming closer ties, this pipeline appeared to be the only feasible option for increased exports, so long as it was refurbished. This assumption was based on my reading of official statements and silence in some cases.

The Kurds, for their part, began talking seriously about bilateral energy cooperation last year. The Turks did nothing to check this notion but in public they never expressed the same kind of enthusiasm. Instead, the Turkish Energy Minister appeared beside his Kurdish counterpart at conferences (most notably in May 2012) and insisted that existing pipelines should operate at max capacity. Others echoed this statement while the Kurds spoke vaguely about export targets and infrastructure, some of which connected fields inside the KRG.

Converging Sentiment

Turkey’s silence made the KRG’s excitement impossible to substantiate. But 2013 already feels different. Turkey seems to be shifting gears as it tackles its own Kurdish problems, thus enabling it to invest in Kurdish territory beyond its borders.

Turkey still hasn’t shown its cards when it comes to energy and Iraqi Kurdistan. And yet both official and private sentiment is converging. To get a sense of where many in the Turkish business community stand, look no further than Abdullah Bozkurt’s recent commentary for Today’s Zaman. Titled “Turkey and Hydrocarbons in Iraq,” it is essential reading, as it neatly argues why Turkey must commit to Kurdistan’s energy sector.

When interviewed this month by the same publication, Turkey’s ambassador to Washington, Namik Tan, made a similar case. “As a growing country, Turkey cannot turn its back on resources that are nearby. We do the same things American companies do,” he said. Ambassador Tan spoke more bluntly to Hurriyet Daily News just days before. He also confirmed that the U.S. and Turkey disagree on the political risks of speedy development inside the KRG.

“They [the Americans] say, ‘You cannot convince us,’ and we go, ‘You cannot convince us either.’ We will not have a conflict here on this issue. We will talk and find a common basis for a solution. However, if they think that we will turn our back on those resources and shelve [this opportunity inside Iraqi Kurdistan], they cannot convince us on that,” Tan said. Washington worries that Erbil might declare independence once it secures its own revenue stream. This position should sound familiar. Until recently, Turkey feared the exact same thing.

Changing Minds

Three developments have changed minds inside Turkey these past few months. Without these, a serious and consequential relationship on energy matters would not be possible with the KRG.

First among these is the fallout between the prime ministers of Turkey and Iraq. Though never close, the relationship between Prime Minister Erdogan of Turkey and Iraqi PM Nouri al-Maliki soured so much last year that they sniped at each other in dueling interviews. Erdogan accused Maliki of bullying minorities and, in return, Maliki accused Erdogan of meddling in his country’s affairs. Erdogan’s tendency to personalize relations may lead him to choose Erbil over Baghdad.

The second issue affecting calculations in Ankara is the Kurdish question inside Turkey. Turkey is home to a large Kurdish minority (15-20 percent) which has been subjected to second-class status for generations. Next year, the conflict between Turkey and the PKK, a Kurdish rebel outfit, will turn thirty years old after having killed more than 40,000 people. There is a chance, however, that it could be resolved before reaching that anniversary.

Right now Turkish officials and the PKK are discussing a ceasefire and disarmament plan that ends the conflict. PKK leader Abdullah Ocalan is reportedly participating from his jail cell. Prior to these dealings, it was hard to imagine Turkey doing swift business with Iraq’s Kurds while fighting its very own Kurdish insurgency. On a more practical level, it’s worth noting that unrest in Turkey’s southeast, where the Kurdish insurgency is most active, also threatens oil infrastructure, including the Kirkuk-Ceyhan pipeline. A raging conflict would only make a new project less appealing for investors.

A third development underpins those noted above and that is the increasing non-oil commercial activity between the KRG and Turkey. This contact has bred familiarity. And, more importantly, it has proven lucrative for both sides. About 70 percent of Turkey’s trade with Iraq is conducted with the regional government. Estimates last year placed the annual value at about $8.5 billion, up from $5 billion in 2008. There should be no doubt that oil deals could multiply current figures.

New Deals

Going forward we should look for two mile-markers in particular. The first is the announcement of a new pipeline connecting Turkey and the KRG. This would be a direct challenge to the central government in Baghdad. Such a move would strain relations between Ankara and Baghdad even more, perhaps to the breaking point, thus confirming that the Turks are betting on Erbil and are done with at least this iteration of the Iraqi government. In 2012, KRG Energy Minister Ashti Hawrami speculated that a contract for a new pipeline could be wrapped up by August 2013. An announcement may come sooner.

We should also look for Turkish oil companies to enter the KRG’s upstream sector (i.e. exploration and crude production) in a big way, perhaps even before a pipeline is announced. These companies might have a better sense of which way the government is leaning and so they may take the plunge early. Chances are the Turks will be rewarded with real estate if they take such a bold risk.

Libyan Oil Held Hostage By Politics

In 2011, when Libya’s rebellion raged and Qaddafi was on the run, the conflict completely shut down the country’s oil production. State oil companies halted work, international oil companies fled, and production of 1.6 million b/d was suspended. While some facilities were damaged, the industry was largely spared. It bounced back with miraculous speed in 2012. By the end of last year production had returned to 1.5 million b/d.

Now, however, Libyan oil—the beating heart of the economy—may be more vulnerable than it was during the civil war. In recent months it has become a hostage to politics and public grievances. Demonstrations and protests have shut down refineries and ports for days; labor strikes have closed some facilities; and militias have threatened other terminals in protest of Tripoli’s hold on power.

The steady rise in the frequency of these incidents forced Prime Minister Ali Zeidan to respond harshly this week. On January 9, he told AFP, “We will be compelled to use force to protect the state… Oil is our only source of revenue.” With urgency he added, “We cannot be patient when violence results in the disruption of oil supplies and the loss of life.” The prime minister’s comments followed the closure of Zueitina in late December. The oil terminal and port exported 60,000-70,000 b/d before being forced offline by protesters two weeks ago. (Over that period, the European benchmark oil price stood at $111, meaning losses at Zueitina have probably eclipsed the $100 million mark.)

Whether or not the central government can act decisively—to address grievances or break up protests—is an open question. Judging by most reports, though, it seems that the scale of demonstrations should be manageable. For the government, the sudden uptick in protests is a major test of both its power and prudence. Can it secure its most vital industry without shedding blood? And can it calm the nerves of foreign investors and oil companies?

Activists have taken to sit-ins on major roads. Some prevent staff from entering facilities. In April, state-run AGOCO (Arabian Gulf Oil Company) closed its offices for two weeks and cut oil production by 100,000 b/d. Each protest is different but certain complaints have become more common. Chief among these are jobs and wages. Many believe it is their right to a higher standard of living and that the state-owned oil companies should be more generous. This demand would have been unthinkable under the old regime. Last year, activists also demanded that the government be more transparent and address youth unemployment.

Another group of protesters has made headlines repeatedly. Composed of hundreds of veterans demanding compensation and medical care abroad, they closed down the Zawiya Refinery at least once in November (capacity: 120,000 b/d). Protests at other facilities that feed Zawiya prompted a group of Libyan oil officials—including the oil minister—to visit the site in mid-December as the situation grew worse. Production was eventually suspended.

Perhaps most worrisome of all was an episode in July that, to my knowledge, we have not seen a repeat of. On July 6, gunmen forced two oil terminals offline ahead of Libya’s first free election. Their complaint: Libya’s eastern province—so long neglected by Qaddafi—was not granted enough seats in the new National Congress, to be elected the next day. The men arrived in pick-up trucks with anti-aircraft cannons and demanded that crews shut down operations. With that, Ras Lanuf was closed for days and exports were temporarily slashed in half (at mid-2012 levels).

Since then, other offices in the east have been targeted by citizens who fear Qaddafi’s favoritism of western Libya will only continue under the new government. The National Oil Company may ultimately split its offices and personnel so that Tripoli (in the west) controls oil exploration and production while Benghazi (in the east) manages the refining and petrochemical industries. There’s no telling if the move could really soak up venom and mistrust, however.

Any discussion of this topic would be incomplete without measuring the impact. If we judge by export volumes, so far, these disruptions haven’t added up to much, probably because they only last a few days each and affect anywhere from tens of thousands to just over a hundred thousand barrels on a given day. In the fourth quarter of 2012, when protests grew more frequent, oil production climbed to 1.5 million b/d and remained steady through December.

Estimates by oil ministry officials suggest losses can be calculated in millions or tens of millions of dollars. As noted above, the real costs are now approaching 9-figures. With its ample funds, however, Libya’s government still has some breathing room. Domestic consumers are feeling the brunt of these losses: refinery shutdowns inspired petrol station rushes and shortages in major cities supplied by those facilities. Real dangers still linger and there remains the threat of escalation, deterioration of public opinion, and the challenge posed to a fragile government.

Regarding escalation, we should keep in mind that militias have not systematically targeted the country’s most vital industry—yet. But it remains vulnerable and the situation could change overnight. Public perception is also essential. Libya’s government is representative but weak. An overly aggressive response to protesters, including veterans, would be counterproductive for leaders seeking a mandate. Right now, Libya plans to expand oil production with the help of international companies. Repeated closures may force these companies to think twice about their commitment.

One hopes force is not the solution, although Prime Minister Zeidan’s frustration it totally understandable. Instead, the state should persuade while projecting force, although it should be careful not to use it. Additional security is clearly needed at these facilities. Authorities announced this week that the army will be deployed to protect critical infrastructure. At the same time, the government has moved to negotiate with protesters. It must do so in a discreet way so that other groups do not rely on the same tactics and target the oil industry anew.

Maintaining a sustained dialogue with the east should be the highest priority because this division defines the country’s post-revolutionary politics. Healing the divide will take a generation or more, but splitting up the National Oil Company may be worthwhile. It will not be sufficient though. Leaders might also want to consider substantive and symbolic moves that elevate the east’s concerns. Calling an emergency committee to address underdevelopment in the east is a start. Perhaps a special budgetary supplement is in order.

Libya’s oil industry will only be secure if authorities tackle today’s complaints and Qaddafi’s legacy.