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 01/04/10
Political risks to watch in Iraq
BAGHDAD, April 1 (Reuters) - Iraq faces lengthy coalition talks after last
month's parliamentary election, with the jury still out on whether the divided
nation is heading for stability and reconstruction or renewed sectarian
conflict.
The political horse-trading will be crucial in determining whether Iraq
can capitalise on its great oil wealth, revive a moribund economy and recover
from years of war and sanctions. Iraq, which has the world's third largest oil
reserves, has signed contracts with energy majors such as Royal Dutch Shell
and Lukoil , but needs to broaden investment to
create jobs and prevent renewed insurgent activity.
Investors, understandably, are wary. [ID:nLDE61P02H]
Iraq remains largely isolated from world financial markets. Only a few
years ago, local banks were so cut off that the only way to transfer money
across borders was in cash-stuffed bags. Today, Iraq has an extremely tight
credit market. Only a few dozen companies trade on the local stock market. The
Iraqi dinar is lightly traded.
Below are some of the major risks facing Iraq seven years after U.S.
troops toppled Saddam Hussein.
HORSE-TRADING, POWER VACUUM
Because no single bloc won a majority in Iraq's 325-member parliament,
coalition talks have begun. [ID:nLDE62G0MZ]
It is not yet clear even who will get first shot at forming a
government. The Iraqiya bloc led by former Prime Minister Iyad Allawi, a secular
Shi'ite with wide support among Iraq's Sunni minority, took 91 seats, two more
than Prime Minister Nuri al-Maliki's State of Law bloc, according to preliminary
results.
Maliki, a Shi'ite who built his reputation on rescuing Iraq from civil
war, has formally challenged those results.
The Iraqi National Alliance, a Shi'ite bloc which includes anti-American
cleric Moqtada al-Sadr, took 70 seats, while a Kurdish alliance picked up 43.
Sadr's faction, which wants U.S. troops to leave faster, is well-placed to join
a new government.
Any prolonged failure to form a workable coalition could undermine
security and create a dangerous power vacuum just as U.S. troops accelerate
their departure.
U.S. President Barack Obama, focused on a growing conflict in
Afghanistan, plans to cut U.S. troop numbers in Iraq to 50,000 by August ahead
of a full pullout by the end of 2011.
What to watch:
-- Sectarian or political violence flares, as it did during the five
months it took to form a government after 2005 parliamentary polls. While this
may not derail oil investment already clinched, it could scare away potential
investors in other sectors such as housing, industry and agriculture.
-- Parliament, which cannot function without a government, fails to pass
investment legislation already delayed by years of political squabbling, sending
a poor signal to firms interested in Iraq but worried about legal risks and an
opaque bureaucracy.
A RETURN TO MAJOR VIOLENCE
Iraq is far less violent than when sectarian killing peaked in 2006-07.
Maliki takes credit for security gains, but a U.S. troop rise and Sunni militia
cooperation also played a big part.
Yet Sunni Islamist insurgents, who the government says are in cahoots
with allies of Saddam's now-banned Baath party, still stage attacks. Since
August, they have killed hundreds of people in suicide bombings at ministries
and other state targets.
Political feuds, Sunni discontent or an attack on a holy site or a
clerical leader could all spark renewed violence, as could any Israeli strike on
Iran's nuclear facilities. Such an attack might prompt mostly dormant Shi'ite
militias to retaliate against U.S. forces in Iraq. A bilateral security pact
requires American troops to leave by end-2011, but it might be revised. Any
major violence will push up prices on global oil markets ,
especially if it appears set to persist.
What to watch:
-- Attacks on oil facilities or staff. As Iraq takes steps to secure
global investment, attacks on foreigners could derail plans to use foreign cash
to rebuild the economy. [ID:nLS424978]
Such violence may affect investment unevenly. Since Iraq began to reopen
its oil sector to foreign investment two years ago, state-owned Chinese firms
have been the first to sign contracts. Chinese, Malaysian and Senegalese firms
were the big winners in Iraq's most recent energy auction, suggesting they have
a higher risk appetite than U.S. or European competitors. [ID:nGEE5AQ1J9]
-- Signs that U.S. forces are delaying or changing withdrawal plans. If
security were to deteriorate markedly, the Obama administration might be forced
to reconsider its plans despite pressing military commitments in Afghanistan.
Washington might reconfigure its remaining force structure to focus on
unstable parts of northern Iraq, perhaps signalling readiness to keep troops
deployed beyond the 2012 deadline. [ID:nN16122723]
-- Challenges for Iraqi security forces as they take over from U.S.
troops. Local forces are vulnerable to infiltration and some key ministries are
still politicised. Iraq is only slowly reequipping its military and still relies
on American troops for air support, logistics and forensic investigation.
KURD-ARAB CONFLICT
Democracy in Iraq has yet to ease tensions between Arabs and minority
Kurds, who have enjoyed virtual autonomy in their northern enclave for almost 20
years. Kurds suffered massacres in Saddam's era, but have gained unprecedented
influence since 2003 and hope to reclaim areas they deem historically Kurdish.
Others in disputed areas complain Kurds have exploited their newfound
prominence at the expenses of Arabs and Turkmen. At the heart of the impasse is
Kirkuk, the northern province that sits on an estimated 4 percent of world oil
reserves. [ID:nLDE60L0ON] The feud has destabilised areas dotting the border of
Iraqi Kurdistan and given a foothold to al Qaeda insurgents.
What to watch: -- Confrontation between the Iraqi army and Kurdish
Peshmerga forces. A U.S. initiative is promoting cooperation between them, but
new joint patrols have not erased rivalry. [ID:nLDE60P17X]
-- Any breakthrough on oil. Oil officials in Kurdistan, which estimates
its oil reserves at 45 billion barrels, have signed development deals with
foreign firms -- contracts which the Iraqi Oil Ministry labels illegal.
-- Any resumed exports from Kurdish fields, halted because of that
dispute, would be a positive sign. Officials on both sides hint at detente, but
this has yet to materialise. [ID:nLDE61E02W]
-- Passage of oil legislation. A package of proposed laws to set a new
framework for oil investment has been held up for years because of the Kurd-Arab
feud. [ID:nLDE5BS0GK]
The delay has not deterred oil majors from signing deals, but potential
investors in other sectors view the legislation as an indicator of Iraq's
stability and friendliness to business.
A NEW AUTHORITARIANISM
Iraq's democratic experiment is important in a region where leaders
often lose power only in a "coffin or coup", but the country is still trying to
define its future as it emerges from decades of military rule and, more
recently, a bloody civil war.
Many Iraqis believe their country needs a strong ruler. Western powers
would be unlikely to stand by if a military coup installed a leader hostile to
their interests.
What to watch:
-- Any constitutional changes that would allow leaders to amass power or
remain in office, raising investor concerns about the continuity of Iraq's legal
and regulatory environment.
-- Re-nationalisation. Saddam threw global oil firms out of Iraq in the
1970s when he nationalised the oil industry.
Political risks to watch in Iraq - Source
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