These three factors – power-sharing, revenue-sharing and territorial control – lie at the heart of any resolution to the federalism question between Baghdad and Erbil. The dispute between the KRG and the federal government is primarily a political one that has been linked from the very beginning to Kurdish claims to exceptionalism and to the Kurds’ desire to preserve their self-governance and ultimately the option for eventual independence. (Kurdish leaders sought unsuccessfully to include an article in the constitution that would have sanctioned a referendum on independence within seven years of its ratification.) These views have established the context of the debate over federalism since it began. Moreover, as their rhetoric in the run-up to the 2017 independence referendum made clear, many Kurdish leaders – especially within the KDP that dominates the KRG – are ambiguous at best about remaining part of Iraq, with many rejecting the notion of the state as it stands.
Kurdish resolve to preserve the exceptionalism that the KRG has carved out is matched on the federal government side by a determination not to surrender the sovereign authority that it presently enjoys, and – by extension – not to implement the constitution as it is written. Political leaders in Baghdad are, for the most part, willing to accept the KRG as a state within a state, even as the Kurdish parties simultaneously demand to be full partners in the federal government. However, these leaders are not willing to accommodate the KRG at the expense of eroding the federal government’s power.
Nor has any federal government so far been willing to countenance constitutionally mandated moves by non-Kurdish provinces to establish autonomous regions elsewhere in Iraq. While Wasit, Diyala, Salahudin and Anbar have all proposed moves to autonomous status, the most concerted efforts towards creating an autonomous region have been witnessed in Basra, where local leaders have on several occasions since 2008 sought to hold a referendum on autonomy. Each time, however, the federal government has quashed these initiatives, through a combination of bureaucratic procedure, political pressure, and – if necessary – outright rejection. The legality of autonomy moves has been questioned, and the constitutional process has on occasion been simply ignored.
Instead, the federal government has countered over the past few years with limited decentralization measures designed to transfer greater technical, fiscal and administrative power to provincial authorities, especially in the areas of services and municipalities’ affairs, along with nominal authority to generate revenue locally. In the case of oil- and gas-producing governorates, budgetary mechanisms to transfer a small proportion of export receipts directly to provincial coffers have also been introduced in recent budgets (although local authorities have complained that funds have not been disbursed fully). Efforts have meanwhile been made to appease provincial demands for local officials to fill specific federal government positions, such as the Kadhimi government’s willingness in May 2020 to appoint an oil minister from Basra after requests from the province’s representatives in the CoR. Recent prime ministers and other senior officials have also lauded the economic role that Basra plays in the Iraqi economy (President Barham Salih called it the ‘economic capital of Iraq’), and have made regular visits to appease local sentiment.
But in all of these cases, decentralization of power has been used as an alternative to the type of federal measures outlined in the constitution or demanded by the KRG. In other words, the federal government has seen decentralization – which it views as a governance issue – as fundamentally different in political intent from the Kurdish view of federalism. Baghdad has regarded decentralization as an administrative issue, while Erbil has seen federalism as political and, ultimately, existential. Moreover, as it has become stronger, the federal government and the national leaderships of the main Islamist Shia parties have sought to taper the bounds of decentralization authorized through CoR legislation, even as local party leaders have lobbied for devolution. Such was the case in Basra’s moves towards regional status in 2018 and 2019, which was in both cases led by local representatives of national parties that did not support the initiatives.
Baghdad has regarded decentralization as an administrative issue, while Erbil has seen federalism as political and, ultimately, existential.
Baghdad’s reluctance to cede power has been particularly evident in successive federal governments’ partial implementation (and repeated amendment) of law 21 of 2008, commonly known as the Provincial Powers Law. The law initially outlined a very broad transfer of power from the federal government to the provinces, including local security control and revenue-generating powers. Ostensibly, it represented a step towards the loose federal structure that Kurdish leaders have always advocated. However, mandates have never been fully transferred from centre to province as originally envisaged, and, under pressure from Islamist Shia political leaders in Baghdad, the authorities outlined in the law have been reduced in favour of restoring federal government control, with Baghdad reinforcing its executive authority through judicial means. It was only in 2015 that the then Abadi government, facing a backlash following the ISIS capture of territory in northwest Iraq, seriously began to implement an amended form of the legislation. But, even then, the initiative was limited, conditional and largely transitory, focused primarily on security sector reform. As the federal government recovered its footing, the scope and pace of decentralization was discussed but steadily reduced. Provincial officials, whose own lack of administrative capacity was quickly exposed as power was transferred, complained of a lack of devolved authority, especially in spending and appointments, and an overall uneven – and begrudging – process. At the same time, the lack of administrative capacity and endemic corruption at a provincial level were quickly exposed, further encouraging Baghdad to keep a tight hold on the reins of power.
A future federal formula in Iraq that is workable and enjoys broad consensus needs to take into account these two absolutes: that the KRG will not sacrifice its exceptionalism and its effective independence; and that the federal government will accept a certain amount of decentralization, but will not accept a framework that meaningfully undermines its current levels of sovereign authority. Fiscal, political and security pressures will influence the specific shape of the eventual arrangement, but these two conditions appear to represent a non-negotiable for any long-term plan, and for a lasting settlement to wider disputes between the KRG and Baghdad.
Independence
On the face of it, the simplest formula would be to allow the KRG to declare independence, and thereafter to negotiate the terms of its bilateral relationship as an independent sovereign entity. Support for this option in Baghdad has waxed and waned, but as time has gone on, it has been one that some officials have been willing to entertain privately – not on the basis of Kurdish rights, but rather because the KRG is regarded as a disruptive factor in federal government affairs, with – at times at least – unrealistic fiscal and political expectations.
Certainly, independence appears to remain the ultimate ambition for the KRG and much of the Kurdish population, even though the PUK appears increasingly less supportive of the formula than the KDP is, given the PUK’s view of the greater political and financial virtue in preserving ties with Baghdad. The practicality of secession has also increasingly been questioned in light of low oil prices. Nevertheless, the former KRG President Masoud Barzani sought to include an article permitting a Kurdish vote on independence within seven years in the 2005 constitution but was denied. The controversial KRG referendum in 2017 illustrated beyond doubt the continued popular support for secession, with official results showing that 92 per cent of voters supported the notion.
However, the refusal of the federal government and most international states to recognize the poll or its outcome illustrates the challenge to the independence option, at least for the time being. Baghdad rejected the legality of the poll unequivocally, setting in train a series of events concluding with federal government forces re-establishing control over the disputed city of Kirkuk, which had effectively been under KRG security control since 2014. The federal government’s grievance was as much about the way the poll was organized and implemented (independently by the KRG and with no coordination or approval from Baghdad) and the KRG’s apparent determination to include disputed territories in its eventual states, as it was with the vote itself. Federal government officials, and especially Islamist Shia leaders, recognized the dangers of the precedent that the KRG’s move could set for disgruntled groups or provinces in the rest of Iraq, and the risks that these could pose to the country’s territorial integrity and to federal government authority.
Kurdish aspirations were also dashed by the almost complete absence of regional and international recognition for the referendum or its outcome. While some states quietly backed the vote, only Israel recognized it formally. Crucially, the US – which had counselled the KRG to at least delay the poll until ISIS had been defeated in Iraq – was not one of those states. Meanwhile, Turkey and Iran – despite their increasingly close ties to Erbil – rejected the poll and its outcome, thereby denying the KRG backing for its ambitions from two states that were crucial to its hopes of establishing the necessary economic and fiscal independence that would make secession viable.
The referendum experience suggests that, for independence to be a viable option in the future, it will need to be shaped by negotiation not imposition. Erbil has neither the military nor diplomatic power to impose a new reality on Baghdad. Consequently, the first step for Kurdish leaders almost certainly needs to be reaching a consensus with the federal government over the political, economic and security contours of a new Kurdish state, and its geographic boundaries.
Economic and financial arrangements as well as borders are likely to be the most contentious issues to disentangle in any secession negotiations. The levels of and conditions for budgetary disbursements from Baghdad have beset federal government–KRG relations for the past decade, and disagreements over long-term arrangements have blocked passage of a revenue-sharing law. Audits of mutual liabilities have been mandated in successive budgets over the past few years, but they have never been carried out. Kurdish leaders insist that they are owed around $54 billion in unpaid past revenue, while the federal government claims that these sums were forfeited due to Kurdish oil export arrangements, and that it is Erbil that is in debt to Baghdad. In more recent negotiations, the KRG has also pushed for higher real disbursement amounts, arguing that it needs the extra money to meet its public sector obligations.
The ongoing dispute reflects an underlying reality: that, in its present structure, the KRG lacks the financial basis for fiscal independence, at least without a massive restructuring of its public sector (and, therefore, underlying political patronage arrangements). The Kurdistan region is a financially weak entity with an economy that is no less oil-dependent than the rest of Iraq. The need to manage fiscal demands without depending on Baghdad and without any foreign reserves of its own has already forced the KRG to assume massive debt levels and engage in pre-export financing deals over oil that have limited its future options. Kurdish leaders have raised the spectre of reparations claims from Baghdad to compensate for past political and economic injustices, which would provide a future Kurdish state with the financial foundations for independence. But any such conditions would almost certainly scupper a negotiated settlement with Baghdad, and the federal government has no incentive to acknowledge these demands unless imposed by international authorities, which seems unlikely.
Financial concerns are also likely to colour negotiations over borders between a future Kurdish state and Iraq. Kurdish territorial claims have, in the past, extended to any areas where there are Kurdish populations, with some maps extending the boundaries of Kurdistan as far south as Maysan province. These ambitions may be exaggerated, but nonetheless there are areas that are likely to be particularly contentious – notably Kirkuk, which has been the source of repeated tension and the stumbling block in past negotiations and agreements between Kurdish leaders and authorities in Baghdad going back to the establishment of an independent Iraq in 1932. This historical and social attachment is important, but it is also underpinned by a fiscal imperative, with Kurdish leaders recognizing the political power that unimpeded access to Kirkuk’s oil resources would give them.
This is no less the case now than it was in the 20th century: the money that this oil would deliver would be vital to sustaining an independent Kurdish state budget in the long term. But while Kirkuk no longer plays the outsized role it once did in securing Iraqi finances, it is nonetheless a sizeable revenue generator. Roughly 250,000 barrels per day (b/d) are currently produced from oil domes under the federal government’s control representing more than 5 per cent of national oil output; it also promises significant increases in future crude production if and when long-term rehabilitation and development of this acreage begins. Consequently, Baghdad is unlikely to reverse its previous insistence on retaining authority over Kirkuk and over key border posts that link Iraqi trade with Iran and Turkey, unless there is a major change in economic conditions in the country, which is not expected any time soon.
Kurdish leaders also face regional and international obstacles to fulfilling their independence ambitions. Neighbouring states, especially Turkey and Iran, have actively facilitated Kurdish economic autonomy over the past decade, allowing (and, in the Turkish case, becoming partners in) independent Kurdish oil exports. Yet none is ready to countenance an independent Kurdish republic on its borders for fear of the impact on its own restive Kurdish populations. Just as neither country recognized the KRG’s 2017 independence referendum, despite the futile hopes of Kurdish leaders, both Ankara and Tehran are likely to remain opposed to independence even if Kurdish secession is the outcome of a negotiated process with Baghdad. This pressure would be only partially offset by the likely international recognition that an independent Kurdish state would receive if it were the product of a negotiated settlement with Baghdad. (Past opposition from the international community, including the US, has been based on concerns regarding the security and stability implications of unilateral Kurdish moves.) Kurdistan’s position as a land-locked territory that is dependent economically on Turkey in particular for its major finance-generating activities gives Erbil little leverage to change Ankara’s or Tehran’s opinion; both have the capacity to squeeze a new Kurdish entity economically and in other ways, were it to be established.
Formalizing asymmetric federalism
A more viable alternative resolution to the federalism dispute in the medium term would be to take the situation as it exists at present and codify it through legal and institutional mechanisms to reinforce the political and economic foundations of the relationship, giving both sides a greater sense of confidence in its long-term stability and equity. What is currently in place is a de facto but still not fully stable form of asymmetric federalism. The KRG – with its own constitution, laws, treasury and security framework – enjoys more autonomous powers than Iraqi provinces that are not regions. But the ambiguities of the current political formula mean that the KRG is at once part and not part of the Iraqi state, and is unable to enjoy the full financial and military protection of the state. To some degree this latter point is due to the KRG’s insistence on imposing its vision of a loose federal model as the only basis for compromise with Baghdad. By accepting the status quo (rather than insisting on a maximalist solution), and building on it, both Baghdad and Erbil have an opportunity to solidify the foundations of the Iraq state in a way that would benefit both directly.
As is the case with independence, financial arrangements are the most important element to be resolved: crucially, what areas of its current fiscal independence Erbil is willing to forsake to reinforce its financial ties to Baghdad, and what concessions the federal government is willing to offer to restore the KRG’s confidence that the region’s economic interests will be protected in the long term. Erbil cannot expect to receive more funds proportionally than the rest of Iraq, irrespective of its autonomous fiscal obligations as a region; the stability of all Iraq is paramount to the federal government, and it faced a backlash in the CoR in the past when it was perceived to be making overly generous concessions to the KRG. But at the same time, Baghdad could and should use its sovereign fiscal and monetary powers to support Kurdish financial stability – including the provision of debt and guaranteeing international loans – in return for governance and authority concessions from Erbil.
Agreeing on long-term mechanisms for the management of oil production and exports would be critical first steps in this regard. Baghdad’s view of oil management in the Kurdistan region has evolved significantly since the federal government’s initial absolute rejection, in the early and mid 2000s, of Erbil’s right to sign contracts independently of the federal ministry of oil. Rather than the legality of these deals, it is the KRG’s authority to export crude oil autonomously and to collect revenue from these sales into the local treasury that Baghdad contests. While this opposition from Baghdad has not stopped Kurdish oil sales internationally, which have risen to more than 500,000 b/d, pursuing such sales places significant financial demands on Erbil and Iraq as a whole, with the Kurds forced to discount the price of their crude and pay lucrative transport contracts to third parties in order to secure a market for locally produced and exported oil. Erbil has also invested in an expensive export pipeline designed to bypass the existing Iraqi transport network (the northern part of which was made inoperable by ISIS) and thereby ensure an independent evacuation route to Turkey that generated additional revenues for the KRG through transfer fees.
Efforts to agree a workable budgetary formula that would facilitate Kurdish exports while ensuring the uninterrupted disbursement of federal funds to the KRG have consistently broken down over the issues of primacy and sovereign authority. Since late 2015, different exports-for-revenue formulas have been included in the national budget that would compel the KRG to hand over sales authority and revenue for a percentage of Kurdish exports to the federal government in return for guaranteed budgetary disbursements. However, these budgetary initiatives have unravelled due to the KRG’s preference for prioritizing local fiscal obligations over transferring crude and title to Baghdad authorities, and financial shortfalls at the federal government level that have limited the revenue available for disbursement to the KRG. That said, in proportional terms, the volumes of crude that the KRG has exported independently have largely been in line with the share of the federal budget that it would have received under the budget arrangements.
Despite these setbacks, the export-for-revenue formula provides the building blocks for a long-term revenue-sharing mechanism to underpin asymmetric federalism. It is not the framework proposed so far that is defective; it is the lack of political will to implement the deal, in part because of the KRG’s preference for preserving its export authority over a dilution of that mandate, and because of Erbil’s attempts to secure a preferential share of national revenue compared to the rest of Iraq because of its local fiscal obligations.
The compromise proposed in the 2019 budget offers the blueprint for a first step: KRG transfer of 250,000 b/d of crude to the federal government’s State Oil Marketing Organization (SOMO) in return for an equivalent net revenue share, with the KRG topping up its funding through independent oil sales. To further strengthen KRG authority and allow it to reduce the discount – and therefore increase the netbacks – on its independent crude sales, Baghdad could also formally recognize the KRG’s right to export local crude through a regional branch of SOMO. Moreover, over time, Baghdad could – subject to the introduction of a transparent audit of federal and KRG crude sales – introduce a fiscal mechanism that would ensure top-up funds to the Erbil treasury if overall national volumes of oil production and exports increase propitiously and, as a result, leave the share received by the KRG below a set proportion of net budgetary revenue (the figure currently used is 13 per cent). In return, Erbil could guarantee open use of its pipeline to Turkey for northern Iraqi exports without being subject to any transport fees, in view of eventually transferring ownership of the pipeline to the federal government, on the understanding that Baghdad would assume all financial liabilities for the project.
This initiative could serve as a confidence-building prelude to a future arrangement that would bring the Kurdish oil sector back under the umbrella of national authorities. At that point, Baghdad would potentially assume the contractual liabilities that the KRG has committed to, as well as the right to renegotiate contracts with foreign investors to align them with national terms. But this step would not be a necessity, rather an option for greater integration of the two federal units in the long term, based on commensurate concessions from the Kurdish side, such as Baghdad’s control over production policy. Either way, agreement on revenue management and sales authority would provide the basis for renewed discussion on a hydrocarbon law that would also address long-term obligations and liabilities.
More importantly, an oil deal could be used as a basis to readdress long-stymied revenue-sharing legislation and long-term mechanisms for budgetary distribution that will bolster stability. Concluding a workable law acceptable to both Erbil and Baghdad has long required a key concession by the KRG: acknowledging that limiting the federal government’s fiscal and monetary powers, and making it little more than a distribution hub for Iraqi revenue, is a non-starter for most if not all Arab-Iraqi factions, and that any formula must preserve Baghdad’s current spending power. A deal that finally and unambiguously recognizes the legality of Kurdish oil sales and the mechanisms for future oil revenue distribution (for example, by making budgetary disbursements to the KRG a first-line budget item) could provide the KRG with long-term confidence in its access to its unimpeded share of the national budget. The federal government would remain fiscally powerful, but that would be part of the essence of asymmetric federalism in the Iraqi case.
An oil deal could be used as a basis to readdress long-stymied revenue-sharing legislation, and long-term mechanisms for budgetary distribution that will bolster stability.
Secure fiscal arrangements to consolidate an asymmetric federal framework could also unlock new opportunities to resolve disputed territories, such as Kirkuk, by reducing the financial incentive for independent control on both sides. A KRG that is secure in the knowledge that its access to revenue flows will not be impeded, and a federal government that is confident that Kurdish demands to control the city are not linked to secession aspirations, may both be willing to consider joint arrangements for this and other territory. This arrangement could begin with joint political, security and economic administration of Kirkuk, with authority and revenue collection divided equally between the federal and regional governments. If this model can be shown to reduce tensions and conflict, it could be introduced into new mechanisms to manage any other disputed territories that are likely to create an obstacle to agreeing internal borders between the Kurdistan region and the rest of Iraq. Moreover, it would address some of the most complicated security sector issues that need to be confronted, including joint operations and the areas of responsibility and movements of Kurdish and Iraqi federal troops.
An asymmetric federalism model between Baghdad and Erbil would not be without its difficulties. One possible area of tension is long-term Kurdish representation in the federal government, although there are numerous examples worldwide of regions with independent governing institutions that also enjoy full participatory rights in national governments (as is the case with Quebec in Canada). What will be critical is to agree a broadly accepted and unambiguous constitutional formula that lays out the division of powers between the region and the federal government, and which aims at integrating the two rather than separating them.
Consequently, constitutional reform of some sort will eventually be necessary to codify asymmetric federalism. A long-term agreement will require the KRG to concede that the current constitution, while legally valid, is not workable in its present form given the prevailing politics. Articles 110 (listing the powers of the federal government), 112 (on oil sector management), 115 (giving competent authority to regions and provinces), and 116 to 121 (defining the establishment and powers of regions) would need to be renegotiated to systematize the unique relationship between Baghdad and the KRG, while reinforcing the federal government’s authority in the rest of Iraq. Other key articles covering executive, legislative and judicial authority would also need to be negotiated and amended to reflect the new arrangement.
Constitutional reform of any sort is likely to run into two major hurdles: Kurdish opposition; and a backlash in the rest of Iraq to asymmetric federalism proposals. Since its introduction, Erbil has consistently opposed any efforts to amend the constitution for fear that any changes would include measures to undermine their autonomous powers and strengthen the federal government at their expense. Article 142 of the constitution created provisions for an early review of the text when the document was first approved, but it also provided the KRG with an effective veto over any changes. In the end, Kurdish refusal to countenance serious debate over amending regional powers provisions helped to stymie this process. The constitution does make alternative provisions for amendments to be proposed; according to Article 126, amendment measures can be initiated by the president and prime minister collectively, or by one-fifth of the Council of Representatives, with the articles of amendment subsequently put to a national referendum for approval. However, Kurdish opposition to any form of constitutional amendment has been an insurmountable obstacle to any initiatives, including most recently in November 2019, when the Council last discussed a constitutional review. The KRG’s solution to the federalism impasse has been simple: implement the provisions that already exist in the constitution.
However, rather than weakening the KRG or threatening the security and integrity of the Kurdistan region, it would be to the region’s advantage to amend the constitution as the final stage in a process that is designed to reflect KRG exceptionalism and codify measures that solidify a mutually advantageous relationship with Baghdad based on the current status quo. It would enshrine and protect Erbil’s special status and its autonomy, while giving Baghdad greater confidence in the long-term ambitions of its Kurdish partner. Moreover, by introducing constitutional reform at the end of the negotiating process, not the beginning, it could be used to codify deals reached on oil, revenue-sharing, territorial control and power-sharing once there is confidence that both sides are willing to implement them as agreed.
One of the key challenges for the federal government in this process would be how to revisit the constitution without opening up a Pandora’s box of other demands for concessions and amendments from other communities and provinces in the rest of Iraq. While Baghdad has generally acknowledged KRG exceptionalism (albeit reluctantly and inconsistently at times), it has also been cognizant that in responding to Kurdish fiscal and security demands, it must be sensitive to the need for equity with the rest of Iraq, especially the oil-producing governorates of the south. This recognition has checked the federal government’s willingness to make concessions to Erbil in the past, especially in fiscal areas, for fear that it will engender a backlash in other Iraqi provinces and calls for equal measures to be applied outside the Kurdistan region.
History suggests that any initiative by the federal government will prompt some reaction in the non-Kurdish provinces, especially those that have been most vociferous in calling for a degree of autonomy for themselves. Thus, Baghdad will be forced to address its current relationship with the provinces it controls, and potentially offer a new social compact there that responds to at least some of the core provincial demands. One obvious way for the federal government to approach this challenge is to implement the decentralization measures mandated in existing legislation more systematically through the rest of Iraq.
As is the case with the KRG, revenue-sharing reform presents an opportune early confidence-building avenue that could provide the basis for wider initiatives. Successive governments have included direct fiscal disbursements of a portion of locally generated hydrocarbon revenue in the federal budget and, while these transfers have been prey to financial pressures at the centre, this formula nonetheless provides the basis for negotiating a longer-term mechanism for direct revenue-sharing with hydrocarbon-producing provinces, which could mitigate some of their likely grievances about asymmetric federalism. Local tax collection, including keeping a portion of custom receipts, is another possible mechanism. The process of constitutional reform itself would enable new dialogue between the federal and provincial governments to negotiate and agree on a long-term power-sharing arrangement that acknowledges the need for greater decentralization, while preserving core areas of federal government authority, and establishes the stable foundations for longer-term centre–periphery relations.
