A Russian Revolution: Can the Rosneft Deal Reverse Kurdistan's Fortunes?

6/8/2017 2:15:00 PM
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Megan Connelly
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An official delegation of the Kurdistan Regional Government (KRG) arrived in Russia on Thursday for the St. Petersburg International Economic Forum. For the next several days, Prime Minister Nechirvan Barzani, Deputy Prime Minister Qubad Talabani, Minister of Natural Resources Ashti Hawrami and Spokesman Safin Dizayee met with Russian officials and energy executives. The result of their efforts was an agreement with Russian state oil company Rosneft to develop five oil fields in the Kurdistan Region for a period of twenty years and will include significant infrastructure investments that will support increased production and export capacity, expected to reach 1 million barrels per day by next year. While PM Barzani expressed hope that the Rosneft agreements would stimulate the Kurdish economy and bring the Region back to prosperity, others are skeptical of the benefits of the deal, pointing to the secrecy surrounding the location of the fields subject to the agreement and the other terms of the contract.

Implications of Russian investment

There could be substantial economic and political benefits to the deal for the KRG. From the few details made available about the contract, we know that it is a comprehensive, long-term agreement that will include substantial infrastructure development. Diversifying the Region’s sources of income will provide the KRG with greater economic security in the long term as it will no longer be fully dependent upon Turkish investment and will bring Kurdish oil to new energy markets in Europe. Moreover, although the location of the five blocs is not yet clear, it seems likely that Rosneft will develop fields in Sulaimaniyah and Kirkuk that were relinquished by American firm, ExxonMobil last year. These governorates, whose economies have been disproportionately affected by the Region’s economic crises, have seen little benefit from other development projects and may gain from the extensive infrastructure development that the deal reportedly entails.

According to PM Barzani, there are two dimensions of the emerging Russian partnership: an economic and a political dimension. In addition to meeting with Rosneft executives, the KRG delegation met with Russian Foreign Affairs Minister Sergei Lavrov and President Vladimir Putin. Although it is unclear exactly what was discussed in those meetings, we can expect a deeper Kurdish-Russian diplomatic and security partnership in the coming years. Alongside the KRG’s access to Turkish and American diplomatic, military and financial aid channels, access to Russian support will give the KRG greater leverage and flexibility to advocate for its own interests internationally. The ability to maximize the benefits of relationships with rival world powers will also advance the KRG’s strategic importance and international influence.

However, it is unlikely that Turkey will be ceding its influence over the KRG to the Russians anytime soon. According to press releases, Rosneft will be improving and expanding the KRG’s existing pipeline infrastructure, meaning that the company will be exporting oil to Turkey via the Ceyhan pipeline. The Rosneft deal also follows a meeting between Presidents Erdogan and Putin in Sochi in early May in which Putin declared that the "recovery process in Russian-Turkish ties is complete" and both sides pledged a commitment to energy cooperation and to lifting sanctions. Therefore, it appears that Turkey and Russia’s economic interests, at least for the time being, are aligned in the Kurdistan Region.

The deal could, however raise eyebrows in the United States. Despite concluding a 20-year defense agreement with the Ministry of Peshmerga just last year, the US’s competing loyalties to Erbil and Baghdad, as well as its direct support to the ruling KDP’s enemies, the YPG, has been a source of frustration for the KDP government and their common ally, Turkey. Therefore, with Turkey, and now the KRG, improving their ties with Russia, the United States will face pressure to reevaluate its position on the YPG and its official line on Kurdish independence, as well as to maintain its current level of influence in Kurdistan through more generous promises of military and economic support.

Recovery or more of the same?

Although the process of securing oil and gas investments has always been secretive and dominated by the Region’s two veto players, the KDP and PUK, nearly every institutional mechanism to ensure accountability has been defunct since October 2015, when the KRG Parliament was dissolved and members of reform movement, Gorran, were expelled from the Council of Ministers. Today, the KDP almost exclusively controls nearly all the KRG’s central institutions with the provisional consent of the PUK.

The KRG’s Oil and Gas Law requires that energy contracts be approved by a council consisting of the Prime Minister, Deputy Prime Minister, Minister of Natural Resources, Minister of Economy and Finance and Minister of Planning .  However, the Premiership, Ministry of Natural Resources and Ministry of Planning are controlled by the KDP and the Deputy Premiership by the PUK. The Minister of Finance, a member of Gorran, was expelled from the government and accordingly, cannot review PSCs.  Additionally, Gorran and other opposition parties argue that because oil and gas is property of the citizens of the Kurdistan Region per federal and KRG law, PSCs should be subject to parliamentary review prior to their finalization. While the Oil and Gas Law does not necessitate consultations with Parliament in the process of drafting and approving oil production contracts, it does place public oil revenue accounts under its supervision . However, MPs (particularly from Gorran and Komal) and the Finance Minister (a member of Gorran) frequently complained even prior to October 12, 2015 that they had no access to these accounts and are unaware of basic information regarding revenue flows. Oil export volumes have not been reported since September of 2016, and even then, contained suspect or incomplete information. Additionally, there was, and continues to be, no official supervision of the allocation of the $1 billion advance payment from Rosneft for the previous two-year PSC signed in February and no reporting from the Ministry of Natural Resources regarding export volumes from the fields currently under Rosneft. Therefore, Gorran and the opposition expect more of the same under the present Rosneft agreement.

The secrecy surrounding the negotiations and contents of the Rosneft PSCs will also be interpreted by Gorran and the Islamic parties as a signal that neither the PUK nor the KDP, despite their insistence that they are working toward structural and political reforms and greater transparency, have any genuine interest in doing so and are, conversely, making a bid to revive their exclusive 50-50 strategic agreement.  Talabani’s involvement in the Rosneft negotiations was a flagrant rebuff to the PUK-Gorran power sharing agreement and reform plan concluded last May which, among other things, promotes the reactivation of Parliament and restoration of the Gorran Ministers and MPs to their posts in addition to more transparency in the Region’s oil and gas industry. With this violation of the agreement, the latest and most egregious in a series of acts demonstrating bad faith on the part of the PUK, Gorran cannot expect the PUK to support the reform program or to honor its obligations to forming a united electoral list in the upcoming elections. This will be particularly problematic for Gorran as Rosneft’s reported $3 billion advance payment to the KRG  along with increased oil production will stimulate short-term growth and provide relief for a region suffering under a harsh austerity regime, just in time for the elections. Therefore, the PUK can be expected to regain some of the support it lost to Gorran in 2013. By contrast, Gorran’s insistence upon parliamentary involvement at every step of the PSC negotiation process runs the risk of being interpreted as being overly cynical, and even obstructionist, by voters, most of whom simply await relief from the “savings plan” implemented last February.  The KDP also appears to be unwilling to gain the confidence of Gorran and the opposition on matters of energy sector transparency. In a press conference held after his return to Kurdistan, PM Barzani, dismissed the opposition as "Facebook parties" and warned, “You cannot have one foot in the opposition and one in the government,” while praising the PUK’s partnership. Adding to the opposition’s list of problems, now Russia, in addition to Turkey and the United States, has invested significantly in keeping a government in power that will have the flexibility to negotiate investor-friendly PSCs without interference or dissent from the ministries or Parliament. Conversely, there is no incentive for the KDP and PUK elites to promote more inclusiveness or enact democratic reforms if their opaque and exclusive political dealings are being rewarded with more lucrative foreign investment.

Although the KDP and PUK appear to be making amends by jointly securing foreign investment in the Kurdistan Region’s oil industry, the parties will surely encounter problems in reviving their partnership. Despite a previous agreement between the KDP and PUK to split the budget (which is completely dependent on oil revenues) 54% to 46%, respectively, the PUK (and Gorran) has, and continues to accuse the KDP of withholding its share of the oil rents, distributing exorbitant sums of to its own client network and investing in infrastructure projects in Duhok and Erbil while neglecting development in the PUK areas.  However, the KDP accuses the PUK of mismanaging its share of the wealth and shifting blame to avoid responsibility. Until there is more institutional accountability and transparency, we can expect to see a continuation of these types of inter-party disputes over the accounting and allocation of revenues from Rosneft exports, and perhaps their escalation due to the high stakes of the present agreement.

The contract’s announcement also comes at a time when the PUK is experiencing inner turmoil and power struggles that threaten to weaken the party as an effective counterweight to the KDP. While some politburo members have praised the Rosneft agreement, many in the PUK do not trust Talabani to deal honestly on behalf of the politburo, report the details of the agreement accurately or distribute its benefits fairly. Failure to be fully transparent with the details of the Rosneft PSCs will surely intensify accusations that Talabani and his family are monopolizing power in the politburo and of collaborating with the KDP to preserve their share of the Region’s oil wealth. This perception was in no way assuaged by the delegation’s failure notify the KRG’s envoy in Moscow, Aso Shex Jangi, and other members of the PUK of the official visit.              

Conclusion

While the Rosneft contracts and closer ties with Russia may provide the KRG with opportunities to revive its economy, expand its international influence and relieve the suffering caused by the past year and a half of austerity wage cuts, it is not a panacea. Increasing oil windfalls may provide an economic stimulus and mask institutional bankruptcy in the short-term but the KRG’s dependence on oil rents without a strong and accountable institutions to responsibly manage their allocation will guarantee long-term instability, a path well-traveled by other oil-producing nations. All parties must commit to enact policies to increase transparency and accuracy in accounting for oil revenues, producing a budget every year,  full transparency with regards to the contents of PSCs and other government contracts and the reduction of patronage. These reforms will require the reactivation of Parliament, which is responsible for overseeing public trusts and passing yearly budgets, and furthermore, that the parties agree to establish a more efficient and inclusive government in which political power is gained by appealing to public preferences rather than public dependence.

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Megan Connelly is a Ph.D candidate with the Department of Political Science at SUNY University at Buffalo and concentrates in civil war, peace-building and power-sharing studies with a focus on the Kurdistan Region of Iraq.

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 22/2007, § 4, 5

Gorran considers the appointment of Rebaz Muhammad’s deputy minister as the acting Minister of Economics and Finance to be illegal.

Ibid. § 15 (5) and § 17

PM Barzani, Minister Hawrami and Speaker Dizayee are members of the KDP and Deputy PM Talabani is a member of the PUK.

The KRG’s pashakawtkrdn, i.e., “savings” policy was implemented to reduce public expenditures by cutting public salaries and pensions 15% to 75%.

Mustafa, N. (2009). Ême û Êwan: Nakokîekanman leser çîn? Sulaimaniyah, Çapxaneî Zergete.

The areas that are considered to be under PUK control produce most of the KRG’s oil but their reported incomes and employment rates are also substantially lower than those in Duhok and Erbil.

 The KRG has not produced a budget since 2013