The viability of Islamic State

Published in The Middle East, 20 July 2015 However unpalatable to the international community and despite what its critics says, ISIS does indeed look very much like a state, but is it on the path to becoming another failed state?

Just what to call the fundamentalist group that controls a large swathe of territory across Iraq and Syria has been a thorny issue over the past few years. ISIS, ISIL, Daesh and Islamic State are all used in what can be a confusing and very political mix of Arabic and English terms.

The UK Prime Minister David Cameron recently railed against the British media using the term Islamic State in an interview on the BBC in late June, suggesting it was both offensive to most Muslims and lent an unwarranted legitimacy to the terrorist group. In the Middle East, the group’s opponents often take a similar line. The veteran Saudi diplomat Prince Turki bin Faisal al Saud says he doesn’t like to use the organisation’s Arabic acronym Daesh, but instead prefers the similar sounding Faesh, which means obscene.

“They’re definitely not a state, they’re definitely not Islamic and they don’t control Iraq and Syria,” he told an audience at the Chatham House think-tank in March. “So Fahesh is a much better word for them and I wish the media here, particularly the Arab media, would use that word instead of continuing to give them what that they so obviously want to get, which is recognition as being a state and as being Islamic.”

Yet the unfortunate truth for Prince Turki, Cameron and others is that, in most ways you can think of, Islamic State looks very much like a state. It has its own territory, along with a flag, an army and a police force. There are ranks of administrators who run public services and impose taxes on the local population. It also trades with neighbouring countries, albeit via the black market.

Indeed, it is arguably in a better situation that some of the more widely-recognised states dotted around the region, like the rump administration of Bashar al Assad in Damascus, or the self-imploding Libya or Yemen.

Palestinian-born, UK-based writer and journalist Abdel Bari Atwan, author of Islamic State: The Digital Caliphate, suggests that people should accept the reality. “It is a state, a sovereign state,” he says. “They have a state which is bigger than Britain. They impose taxes on them, they have a cabinet, they have administration, institutions, you name it, they’ve got everything other states have.”

The real question is how long that will remain the case. If Islamic State is to have a future, then it will have to survive as an economic force as well as a political, military or religious one. If it cannot then it has little hope of lasting. From the current standpoint, its economic position looks rather more uncertain than its political or military positions.

“If indeed it is a state and has some sort of formal existence, well then it has all of the problems that any state or government or sovereign power would face and one of the critical ones is its financial model,” says David Butter, an associate fellow at Chatham House.

To date, the Islamic State has relied economically on a few major sources of income. Initially it had the ability to tap into the wealth of the states whose territory it was seizing. Civil servants in the parts of Iraq and Syria that it captured still received their salaries from their central governments and these could be taxed. It was also able to impose fees on truck drivers and others travelling through the areas it controlled.

It could also loot the vaults of banks in newly seized towns, the most prominent of which was Mosul which it captured in June 2014 and which provided more than $400 million by some estimates. But bank vaults can only be cleaned out once and the central governments in Baghdad and Damascus are now either unwilling or unable to keep paying a lot of the salaries in areas they don’t control.

Another important source of income has been oil and gas revenues. However, this is also likely to be a declining source of revenue, according to Butter. He estimates that the group was involved in production of up to 70,000 barrels a day of oil in mid-2014, but far less today.

“This trade I think has been severely disrupted since the coalition bombing [which began in September 2014],” he says. “A lot of the refineries have been hit, it’s become more difficult and the fields they’re operating do need maintenance. I suspect it’s going to be increasingly difficult for any sort of high-rated production to be maintained. Added to which, of course, the oil price has halved since October. So I don’t think that this oil bonanza is something that’s going to sustain them in the long term.”

Another source of income has come from the looting of ancient monuments and the sale of those artefacts on the black market. The scale of this trade is impossible to calculate, but it is clear from satellite imagery that illegal digging has been carried out on many sites on a grand scale. Not all of this will have been done by Islamic State – many refugees from Syria travel with small pieces on them as a store of wealth – but the group is certainly involved to some extent.

“The problem is there are hundreds, maybe thousands of illicit archaeological sites,” says Irina Bokova, director-general of the UN heritage body UNESCO. “They dig and then they sell. The scale is huge. I think nobody can say precisely [how big the problem is].”

If its domestic sources of income continue to decline, then Islamic State will need to raise more funds from outside its core territory. This already happens to some extent although, again, it is all but impossible to know how much money is flowing in and how effectively it is being used. Western law enforcement officials are trying to track the flow of funds coming from other countries within the Middle East as well as from Europe, Asia and elsewhere, but they do not have the ability to see what flows through grey market routes such as the hawala networks or one of the many alternative payment systems

The weaknesses of Islamic State’s position can probably only be alleviated in the longer term if it gains some sort of international recognition and is, as a consequence, is allowed to trade normally and establish a properly functioning economy. That helps to explain why politicians in the Gulf and in the West have been so vociferous in their criticism of terms like Islamic State and Daesh and the indirect legitimacy those words bestow. For now the group has no obvious allies that it can turn to for such recognition and without a move towards normality its long-term position looks extremely precarious.

While some might argue that it does not have enough of the ingredients to operate as a viable and sustainable state, it is nevertheless presenting itself as a state and trying to organize itself as a state.

What is without question is the damage – even at this nascent stage – it is able to wreak upon regional safety and security and the certain knowledge this will increase and continue unless and until its empire-building is brought to an end.

Welcome to the deadliest region in the world

The nature of war is changing in the Middle East and North Africa, and the death toll is increasing day by day. Published in MEED, 1 June 2015

In the first 24 hours after taking control of the Syrian city of Palmyra in May, forces from the jihadist group Islamic State in Iraq and Syria (Isis) executed at least 17 people, according to the Syrian Observatory for Human Rights (SOHR). Several hundred more have been killed since.

Further east, at around the same time as Palmyra fell, the group was carrying out mass executions in the Deir al-Zor province, including one man named as Ibrajim al-Shridah, who was killed by a rocket-propelled grenade fired by an Albanian recruit.

The brutality of the Syrian conflict is often shocking, but it is not only Isis forces who are guilty there. SOHR says 9,000 barrel bombs have been dropped from government helicopters on towns and cities across the country over the past seven months, killing rebel fighters and civilians without distinction.

The civil war in Syria is by far the deadliest conflict in the world, with an estimated 70,000 people losing their lives in 2014, according to data compiled by the London-based think-tank International Institute for Strategic Studies (IISS).

The second deadliest conflict is also in the Middle East, in Iraq, where 18,000 perished last year. Both figures mark a worryingly sharp rise from the year before. In 2013, some 49,000 people lost their lives in the Syrian war and a further 8,500 in Iraq.

The escalating death toll in these two countries is part of a global trend of conflicts getting more deadly. Around the world, the number of wars, insurgencies and other violent conflicts has actually been steadily declining over recent years, from 63 in 2008 to 42 last year, but what they have lost in number they have gained in ferocity. Total fatalities have risen from 56,000 in 2008 to 180,000 in 2014, says IISS.

The wars in Syria and Iraq account for almost half of the global total and mean the Middle East and North Africa (Mena) is today the world’s most dangerous region, with just over 101,000 deaths from eight conflicts last year. The next most dangerous regions are Latin America, where narcotics-led violence was largely responsible for the 30,500 deaths in 2014, and sub-Saharan Africa, where a dispiriting tapestry of ethnic, religious and political violence claimed more than 28,000 lives in seven countries.

Worsening situation

In most parts of the Middle East, the situation has been getting worse rather than better. Last year was the deadliest in the Israeli-Palestinian dispute since the 1967 Six-Day War, for example. The Israeli assault on Gaza, called Operation Protective Edge, which began in June and lasted 50 days, resulted in well over 2,000 deaths.

The number of fatalities also rose in the Sinai Peninsula area of Egypt, where 900 people lost their lives in 2014; in Libya, where 3,000 people were killed; and in Yemen, where the death toll quadrupled to 4,000. Among the main areas of conflict in the region, it was only in the Darfur area of Sudan that the number of deaths declined, from 3,000 in 2013 to 2,500 last year.

The number of refugees and internally displaced people has also been rising as a result of these conflicts, with Syria again at the forefront of the problems. As of early May, the UN High Commissioner for Refugees estimates that there are 4 million registered Syrian refugees in Egypt, Iraq, Jordan, Lebanon and Turkey, as well as 6.5 million internally displaced people within Syria itself.

“It is civilian populations that continue to pay the price of conflicts, both in terms of short-term dislocation but also in respect of longer-term impacts resulting from the collapse of government services, in particular education and healthcare, and economic development opportunities foregone, blighting the prospects of future generations,” says Nigel Inkster, director of transnational threats and political risk at IISS.

Jihadist strategies

There are some other important trends among these conflicts, beyond the merely depressing increase in the number of deaths and displaced people, which could have some far-reaching consequences for the region. Perhaps the most important is the changing nature of the jihadist groups fighting in these war zones and the strategies they are employing.

“Armed conflict has fundamentally changed the nature of jihadism, so that you now see jihadism as a state-building enterprise,” says Alia Brahimi, visiting research fellow at the University of Oxford in the UK. “I think that’s going to be the biggest impact on conflicts that are already going on.

“Jihadist space is geographically expanding, but also systematically deepening. Isis isn’t just exploiting chaos; it’s seeking to impose a long-term order, and that will have a significant effect on conflict.

“In order to compel local populations, you have to continually instill fear, so as a result we’ve seen ever more fanatical discourse, where mass casualty attacks against civilians are now presented as something self-evidently justified. This is a huge change from the days of [Osama] bin Laden.”

The strategy was clearly apparent in May, when Isis fighters captured Palmyra, but it has been going on for some time. SOHR estimates that the group now controls more than half of Syria.

“The capture of Palmyra is significant for several reasons,” says Matthew Henman, head of the terrorism and insurgency centre at IHS Jane’s, a UK research firm. “It further expands Isis’ territorial control, reinforcing its position as the single opposition group that controls the most territory in Syria. Palmyra is very strategically situated and can now be used as a launching pad for further territorial pushes towards Homs and Damascus.”

The more ground Isis controls, the more income it can generate from its territory, particularly from oil resources. This is to some extent a zero-sum game, with the government suffering a fall in its income every time an oil well or gas pipeline changes hands.

“So many states [in the Mena region] are fraying at the seams because of insurgencies and civil wars,” says Valerie Marcel, an associate fellow at UK think-tank Chatham House. “What’s happening in Syria and Iraq is that a fledgling state, previously just a jihadist group, is now acting like a government and controlling oil production.”

This is not just an issue in Syria. The practice of groups taking and holding land is also clearly visible in Yemen, where Al-Qaeda in the Arabian Peninsula (AQAP) occupies a substantial patch of territory in the east of the country, and in Libya.

“The loss of the state monopoly over the control of oil installations, production and marketing further weakens the central state,” says Marcel.

“If you look at Libya, you’ve seen different groups battle it out for territory, but more significantly for control over oil production facilities and export terminals. The more that sub-national groups control the oil infrastructure, the more it gives them the possibility to enrich themselves, but it also undermines the central states’ capacity to take the revenues, pay civil servants and consolidate their own power. So it hastens the weakening of the state.”

In Iraq, meanwhile, Isis forces have consistently shown themselves to be a good match for the under-motivated national army and, as a result, the jihadists now hold vast swathes of territory covering much of the west of the country. It has only been a combination of airstrikes by the US-led coalition and the response of Shia militia organised by Iran that has held them back from even greater gains. Even so, Isis was able to capture the city of Ramadi, little more than 100 kilometres west of Baghdad, in May this year.

Political solution

“What we have seen in Iraq is that the great blitz attack that Isis did last year has, broadly speaking, been contained by the coalition air strikes, but also just as importantly by the mass mobilisation of Shia militia,” says Ben Barry, senior fellow for land warfare at IISS.

“Quite clearly, the [recent events] in Ramadi demonstrate Isis still can counter-attack at the tactical and operational level and it can seize the initiative. It’s displaying tactics of quite a high order. My prediction is that this to-ing and fro-ing in the near future will continue.”

In the case of both Iraq and Syria, it is very hard to see how any side can win an outright military victory any time soon. As is the case in other conflicts such as Libya, Yemen and Palestine, a long-term political solution is needed if there is to be any hope of restoring stability, peace and prosperity. The prospects for diplomacy do not look promising at the moment, however. The Middle East looks set to remain a dangerous neighbourhood for many years to come.

Kurdistan focuses on boosting visitors

Infrastructure is being put in place to lure more tourists to the region. Published in MEED, 19 May 2014

With its 6,000-year-old citadel rising up in the centre of the city, there is no doubt that Erbil can lay claim to a rich history. The site is the most significant indicator of the tourism potential of Kurdistan, but there are also ancient castles, minarets and monasteries dotted around the region, along with impressive mountain scenery and ski resorts.

Even so, it was probably a surprise for many when in late 2012 the Kurdish city was named Arab Tourism Capital for 2014, beating the likes of Beirut, Sharjah and the Saudi Arabian city of Taif, which had all been competing for the honour. The Kurdish region may well be far safer than the rest of Iraq, but it is still not an obvious holiday destination for most people.

Events calendar

The authorities in Erbil plan to hold at least 40 events throughout the year to try to convince more visitors to come. A number of these have already taken place, including a children’s festival in mid-January, a skiing and ice-skating event at the end of that month and an international car show in early March. Horse racing and sky-diving events are also on the calendar, as is an international film festival.

In a sense, Erbil is tapping into an ongoing trend. In the years before the city was handed the accolade of tourism capital, the Kurdistan region had seen a surge of visitors. From about 377,000 in 2007, the number of tourists increased almost six-fold to more than 2.2 million by 2012, according to the most recent statistics from the General Board of Tourism, part of the Kurdistan Regional Government (KRG).

The greatest proportion of visitors come from other regions of Iraq, lured by the relative safety as much as anything else. In 2012, two-thirds of all tourists – almost 1.5 million – visited from other parts of the country. That year also saw international tourists outnumber those from within the KRG region for the first time in recent years, with about 434,000 visitors from beyond Iraq’s borders, compared with 313,000 from within the Kurdistan region.

Regardless of where they come from, most visitors to Kurdistan go to Erbil. In 2012, the province attracted 1.5 million of that year’s 2.2 million tourists. This is largely a consequence of it being the commercial centre for the region and having the best-connected airport. Some 21 airlines fly in and out of Erbil International, serving 24 destinations around Iraq, the wider Middle East, Europe and Asia. The smaller Suleimaniyah International airport offers flights to 16 destinations on nine airlines.

Despite the efforts to lure more holidaymakers, most of the people flying into and out of these two airports are either travelling for work or returning home to see family members. One hotel industry executive estimates that about 95 per cent of the guests at his Erbil hotel are visiting for business.

“It is mainly international businessmen coming in for the oil and gas sector, staying a week or two and talking to the government and opening factories and offices,” he says. “We have enjoyed some great occupancy levels since we opened, but it is mainly business.”

Business market

The nature of the visitors explains the character of tourism-related developments currently under way in the KRG region. There have been some efforts to make Erbil itself more attractive, not least the fountains and clock tower that now adorn the arcaded square to the south of the citadel. But the most notable additions for travellers have been the numerous hotels that have sprung up to cater for the business travel market, often in the four- and five-star categories.

Overall, the number of hotels across the region increased from 168 in 2010 to 259 by 2012, and almost 10,000 new rooms were added during that time, according to the General Board of Tourism. Several more have been completed since then. Among the more recent openings is the 78-room, four-star Copthorne Hotel Baranan in Suleimaniyah, developed by the local Faruk Holding at an estimated cost of $40m, and the larger Sheraton Dohuk, which has 202 rooms and was developed by the local Brilliant Role Group for $150m. The latter claims to be the first five-star hotel in the city.

Hotel projects

Many more hotels are due to follow in the near future, with a number of major international hotel chains moving in. Among the properties currently under construction are the five-star Hilton Erbil Hotel & Spa with 300 rooms close to the city’s airport; a 160-room Best Western hotel closer to the city centre; and the 293-room Sheraton Erbil hotel.

As these projects indicate, the Erbil governorate is attracting the lion’s share of investment in the region’s tourism and hospitality sector. In a number of instances, the hotels form part of a wider development, as is the case with a Marriott hotel that will form part of the Empire World real estate scheme in Erbil.

Construction was also due to start later this year on the $3bn Downtown Erbil development planned by the UAE’s Emaar Properties. This is set to include two hotels alongside a shopping mall, restaurants, office space, 15,000 apartments and associated facilities; the masterplan is still awaiting approval, however. Similarly, the $200m Korek Tower, planned by the local Korek Telecom, will house a five-star hotel as well as a shopping mall and office space in what will be the tallest building in the region.

Some other standalone projects are also under development, including Citadel Park in the Mustawfi area of Erbil. It will include a 2,000-seat open-air theatre and other space for public events. The project has an estimated budget of $200m, but is still waiting for approval from the client, the KRG. A main contract award is expected in the third quarter of this year, according to MEED Projects, which tracks project activity in the Kurdistan region and across the rest of the Middle East.

Although Erbil is the focus of most of the investment, there is some activity in other parts of the region too. In Suleimaniyah, for example, the KRG is planning a $2bn development known as Dukan Tourist City. This will include hotels, restaurants, a theme park, cinemas and casinos on a 2.4-square-kilometre site. The project is currently at the study stage, with Emaar and Faruk Holding both involved as developers.

The local Sherwan General Construction Company, owned by Kurdish developer Ibraheem Othman Khoshnaw, is also constructing a five-star hotel in Suleimaniyah, which will include a casino. There are further shopping malls planned by the Erbil-based Darin Group in Suleimaniyah and Dohuk, and the Kurdistan Board of Investment is behind the $500m Avro City project in Dohuk, which will include a sports stadium, a five-star hotel and several thousand residential units.

Not everything is going smoothly, however. Work on a $30m shopping mall planned by the local UB Holding in Dohuk, and known as the Dohuk UB Mall, is reported to have been put on hold during its execution phase and it is not clear if or when the work will resume. The project was to include a cinema complex and other leisure facilities alongside the retail outlets.

Perhaps the most important projects for the future of the region’s tourism industry are the various plans to improve aviation infrastructure. Significant expansion work is earmarked for the two existing international airports at Erbil and Suleimaniyah, with the KRG’s Ministry of Transportation & Communications as the client.

The $500m expansion of Erbil International is still in the initial planning stage, but could include a theme park, a golf course and a convention centre alongside more conventional additions, such as improved logistics and cargo-handling facilities. The contract for the expansion of Suleimaniyah airport is not due until June 2015. That project is designed to lift capacity from 2 million passengers a year to 3.5 million.

Third airport

The government is also hoping to tap into rising demand by building another international airport in the northwest of the region. Speaking to the Royal United Services Institute, a defence industry think-tank, in London in October last year, Falah Mustafa Bakir, who as head of the Department of Foreign Relations is the de facto foreign minister of the KRG, said, “We have major international airlines flying in and out of Erbil and Suleimaniyah and we are building a third airport in Dohuk.”

In March 2013, a joint venture of two Turkish firms, Makyol and Cengiz Holding, was awarded the contract for the construction of Dohuk airport. Earth works are currently being carried out on the site and the main construction work is due to be completed by June 2016. Once complete, the airport will have six aircraft gates and the capacity to handle about 1 million travellers a year, along with 34,000 tonnes of cargo.

Having put so much infrastructure in place, the task for the authorities will be to persuade more people to come and use them. For the hospitality sector to thrive in the Kurdistan region, people must come for leisure as well as business. Notwithstanding the award of the tourism capital title this year to Erbil, it is likely to be some time before the region is seen as an enticing destination for most holidaymakers, but some at least are hopeful it will eventually succeed.

“I think there will be a tourism industry in time,” says the Erbil hotelier. “It does have a lot more to offer in terms of tourism, but the tourist psyche needs to be a little more prepared. I don’t think people are completely ready yet to travel for a two- or three-week holiday to Iraqi Kurdistan.”

Baghdad sees mixed economic progress

With rampant corruption, a weak non-oil sector and high unemployment hindering the economy, questions linger over Baghdad’s ability to make the most of the high oil revenues that are pouring in. Published in MEED, 3 March 2014

It is almost 11 years since Saddam Hussein was overthrown by the invading armies of the US and its allies, yet Iraq and its economy remain in a parlous state. Unemployment levels are high and government services and utilities are extremely unreliable in most of the country. To make matters worse, violence and sectarianism have been increasing in recent months.

It is clearly a tough environment in which to do business, as Carlo Sdralevich, a senior economist for the Middle East at the Washington-based IMF, pointed out in March last year.

“Iraq will need to address serious medium-term challenges in order to be able to create the conditions for high and sustainable growth that is necessary to improve the living standards of its people,” he said, following his organisation’s most recent review of Iraq. “The economy continues to suffer from severe structural weaknesses such as a small non-oil sector, high unemployment, public sector dominance and a weak business environment.”

Utilising revenues

Things have not got much better since he made those comments, but there is at least a chance to rebuild the country by using the massive oil revenues that are now pouring into the government’s coffers.

Iraq’s oil output is expected to reach 3.7 million barrels a day (b/d) this year, higher than at any point in the previous 30 years. That in turn has fuelled strong growth in the country’s economy. In 2010, GDP grew by 5.9 per cent and then accelerated to 8.4 per cent by 2012 and an estimated 9 per cent last year, according to the IMF. At the same time, inflation has stayed largely under control. From 6 per cent at the end of 2011, it dropped to 3.6 per cent at the end of 2012, mainly because of lower imported food prices, before creeping back up to 5 per cent in 2013.

Over the coming years, as oil production continues to rise, government spending is expected to climb quickly. The IMF forecasts that overall investment will increase from ID129 trillion ($110bn) this year to ID175 trillion by 2018. Capital expenditure will rise even more quickly, from ID43 trillion in 2014 to ID72 trillion four years later.

But there are plenty of reasons to be cautious. Media reports in late February suggested international oil majors were getting increasingly frustrated with the level of bureaucracy in Baghdad, a situation that could lead to ambitions for further production increases having to be scaled back.

“Iraq initially harboured high hopes of ramping up production very quickly, from 2.5 million b/d to 12 million b/d over the course of the decade. With production stuck at about 3-3.5 million b/d, this is all but impossible,” said the UK-listed Investec Bank in a market review issued on 24 February.

There are also question marks over how well the money that does come in might be spent. The oil sector accounts for the vast majority of government revenues and state-owned enterprises employ close to half of the labour force. But while the government may be enjoying an oil windfall it has not been doing so well when it comes to using its income in ways that benefit the wider economy.

Rampant corruption

“The problem is not that there are not enough funds,” says Zaid al-Ali, senior adviser on constitution-building for the Stockholm-based International Institute for Democracy & Electoral Assistance. “The problem is that the funds that are available are either not spent or are stolen. It has always been the way. What money is spent often just disappears. So the problem is not a lack of funds; the problem is oversight [and] corruption in the government.”

Al-Ali, who was a legal adviser to the UN in Iraq from 2005 to 2010, paints a bleak picture of the environment in the country these days and the lack of progress made since 2003.

“The due process requirements and guarantees that are contained in the constitution are completely ignored,” he says. “Corruption is completely out of control. Services are completely non-existent: electricity; healthcare; education. Sectarianism has worsened since 2003. All this is taking place against a backdrop where the government is almost never held accountable for its actions.”

Despite all the difficulties, the lure of oil revenues means many international firms are still willing to work in the country. The oil majors have led the way, and as their investments take effect they are helping to draw in other firms. The UAE-based Arabtec Holding is among the most recent to announce a move into Iraq. On 29 January, the contractor said it will open an office in Baghdad to take advantage of the anticipated growth in construction activity. Hasan Abdullah Ismaik, its CEO, said at the time that it aimed to “capitalise on the significant new business opportunities that are available, particularly in oil and gas and infrastructure”.

Weak exchange

If there is an improvement in the construction sector then local construction firms will also be hoping to benefit, although recent evidence suggests investors remain wary. Most Iraqi contractors listed on the Iraq Stock Exchange saw their share price drop last year, including Al-Nukhba for Construction, Fallujah for Construction Materials, and Iraqi Engineering Works.

Overall, the stock market had a weak performance in 2013. The main market index was relaunched as the ISX 37 index in February last year, but fell from 120.1 points that month to about 113.2 points by the end of December. Since then it has slipped slightly further, to about 112.6 points at the end of January.

The only company to join the exchange last year was mobile telecoms firm Asiacell in February. There were hopes at the time that it might encourage others to follow, but even the two other mobile operators, Zain Iraq and Korek Telecom, that are meant to list their shares as part of their licence conditions have yet to do so. The lack of depth in the market is underlined by the fact that Asiacell accounted for 62 per cent of the trading volume last year.

But more will be needed than international investment and an active stock market if the economy is to perform to its true potential, not least reforms to the country’s banking system.

There are some 50 private banks in the country but most are small. The IMF says two state-owned banks, Rasheed and Rafidain, hold 71 per cent of all deposits between them and continue to make loans to unviable government-related bodies, often to pay for salaries. These two banks, along with the Trade Bank of Iraq, enjoy an almost complete monopoly over government transactions, but they look to be on shaky foundations. The fund has warned that “while Rasheed and Rafidain are very liquid, they are likely not solvent”.

Overall the Iraqi banking system is far smaller than in other countries around the region. Total banking assets are worth about 77 per cent of GDP, compared with a regional average of 130 per cent, and total credit is about 29 per cent of GDP, against 55 per cent for the region as a whole. Excluding all the loans to state-owned enterprises, the amount of credit to the private sector is just 15 per cent of GDP.

“Developing a stronger financial sector will require moving away from the current model in which weak state-owned lenders dominate the sector and enjoy favourable treatment compared with private banks,” said Sdralevich. “A solid banking system that can support growth and employment will require the full financial and operational restructuring of state-owned banks and creating a level playing field for both private and public banks.”

Tackling joblessness

An overhaul of the banking sector could in turn help boost the non-oil economy, which is needed if the country is to have any chance of tackling unemployment. Officially, joblessness was estimated at 11 per cent in 2011, although the actual level is probably far higher, particularly among young Iraqis. The IMF estimates that 2.1 million more people will join the labour force between 2013 and 2018, but jobs growth is running at just 1 per cent a year, which is nowhere near enough.

As with other oil-rich Gulf states, the government is the most important employer. About 40 per cent of the existing workforce is in the state sector and it accounts for half of all new jobs created. The government was forecast to hire about 150,000 of the 300,000 entrants to the jobs market in 2013, with 130,000 taking up jobs in the private sector and the rest left looking for employment. State-sector jobs often involve relatively high salaries and low levels of work, and this situation is no more sustainable in Iraq than it is anywhere else.

Perhaps more than anything, Iraq also needs to come to a consensus on how power and revenues should be shared between Baghdad and the regions, particularly the Kurdistan Regional Government in the north. A viable solution to this ongoing debate should help create an environment in which the economy can prosper, but it remains up in the air for now.

At least some observers are optimistic that the country will stay intact. “I don’t think Kurdistan will choose independence any time soon, [but] it will always be on the table,” says Ranj Alaaldin, a doctoral researcher at the London School of Economics and Political Science, and visiting scholar at Columbia University in the US. However, he adds, “sectarianism is the most influential and significant of Iraq’s problems”.

As a result, the country’s future remains in the balance. As the oil and gas sector gradually improves, albeit fitfully, the domestic political scene also needs to improve and mature. If not, Iraq could become yet another example of a country where high oil revenues simply lead to a lot of money being wasted.

Improving relations between Baghdad and Ankara put KRG on edge

Recent promises to mend relations between the Kurdistan Regional Government and Baghdad have not led to any real progress on disputes over politics, land and oil. And as Baghdad makes overtures towards its former sparring partner – and close Kurdish ally – Turkey, the government in Erbil is feeling not only frustrated, but vulnerable. Published in Gulf States News, 14 November 2013

The 29 April framework accord signed by Iraqi Prime Minister Nouri Al-Maliki and Kurdistan Regional Government (KRG) Prime Minister Nechirvan Barzani was intended to steer the process of resolving disagreements over issues such as customs and border procedures, proposals for a new oil law, and the status of disputed areas. It was followed by a series of meetings in June and July, when the two sides promised further co-operation. But beyond the verbal reassurances, there has been little concrete progress, and long-running issues – most notably oil and gas resources – are once again rearing their heads.

Of great concern to Erbil is Baghdad’s nascent rapprochement with Turkey. After a significant period of open hostility, Ankara and Baghdad seem to be taking a more pragmatic approach to relations, and have been trying to patch things up. In late October, federal foreign minister Hoshyar Zebari visited Ankara, where he and his Turkish counterpart Ahmet Davutoglu agreed to co-operate more closely on issues such as Syria. Davutoglu started a two-day visit to Iraq on 10 November, making his first trip to Baghdad since March 2011.

Maliki is said to have started the overture of friendship, dispatching parliamentary speaker Osama Al-Nujaifi to Ankara in mid-September, at the head of a parliamentary delegation. Kurdish politicians have expended a lot of energy building relations with Turkey in recent years, and drawn considerable strength from the animosity between Baghdad and Ankara.

Speaking at the Royal United Services Institute in London on 17 October, head of the KRG’s department of foreign relations (and thus de facto foreign minister) Falah Mustafa Bakir said the friendship had come of strategic need.

“We wanted to make sure that with Turkey we had good relations because we knew that we needed each other,” he said. “Turkey was the easiest way for us to connect with the outside world. We encouraged trade relations, commercial relations, hoping that they would understand that we are a safe neighbour and that we can be friends… In 2008, they had close to 100,000 Turkish troops at our border. We were able to change that confrontation into co-operation. Just two years afterwards, we had, on 10 March 2010, the first ever Turkish consul general arrive in Erbil and sit in my office to strike a new era in our relations.”

Since then, things have further improved. On 30 March 2011, Turkish Prime Minister Recep Tayyip Erdogan became the first Turkish premier to visit the KRG region, and stood side by side with KRG President Massoud Barzani as they opened Erbil International Airport. Erbil’s energy plans with Ankara have at times felt like a kick in the teeth for Baghdad, with a new pipeline to Turkey due to be completed by year-end, and Erdogan stating in March that the animosity between Erbil and Maliki had driven the KRG straight towards Ankara.

The recent turn of events will therefore be ringing alarm bells in Iraqi Kurdistan. On 1 November, Turkish energy minister Taner Yildiz was quoted by Reuters as saying Ankara would take Baghdad’s views into account when considering any new deal to import oil from Kurdistan – an alarming suggestion to the KRG, which is not only building an export pipeline to Turkey, but would also like a second one. At a joint news conference with Zebari in Baghdad on 10 November, Davutoglu underlined the message. “We set no limits to our relations and our co-operation,” he said.

In an interview with the Turkish paper Today’s Zaman that same day, Dr Aziz Barzani, a professor at Salahaddin University and a nephew of the Kurdish president, articulated Kurdish nerves. “Iraqi Kurds have concerns over the recent thaw between Ankara and Baghdad because the KRG has not yet solved its problems with Baghdad,” he said. “Ankara’s support for Iraqi Kurds against the central government in Baghdad is of great importance. We hope that the recent thaw will not affect the strategic ties between the KRG and Turkey.” Erbil’s reliance on Turkey extends beyond oil. Some 35,000 Turks are living and working in Kurdistan, and Turkish firms often play a prominent role in major projects. For example, two Turkish firms, Makyol and Cengiz Holding, built Erbil International Airport and have recently won a contract to build the Kurdish region’s third international airport, at Dohuk.

Erdogan is due to travel to Diyarbakir in south-east Turkey on 16 November, to attend a wedding, and is expected to tack on a meeting with Massoud Barzani. That could smooth things over, although it is hard to conceive of a solution that would satisfy all sides. For the Turks, the trade benefits offered by Kurdistan will have to be weighed against the political and diplomatic benefits of mending links with Baghdad.

Kurdish frustration

The KRG has been getting increasingly frustrated with Baghdad over the lack of progress since April. While in London, Bakir made that quite clear. “Relations with Baghdad are not easy,” he said. “There is no political will. There is no partner. We had agreed on a seven-point memorandum on all the outstanding issues. But we have not seen any progress.”

Oil-related disputes are also simmering. Baghdad’s recent awarding to BP of a contract to revive output at the Kirkuk oil field which straddles the border with Kurdistan is highly controversial. The KRG’s Ministry of Natural Resources declared it unconstitutional – not an uncharacteristic response, but one that again highlights the desperate need for a federal hydrocarbons law.

The Kurds will take some heart from the passing of an amended electoral law on 4 April, which should work in their favour. Washington may have played a role in securing Kurdish support for the law, which was only passed after weeks of wrangling. US vice-president Joe Biden telephoned Massoud Barzani on 28 October, and emphasised the importance the US placed on holding the elections on time. This echoed the calls between Barzani and both US President Barack Obama and Biden in late 2009, when they urged him to drop Kurdish objections to the election law then on the table.

Bakir also voiced Kurdish frustration at the lack of international action on Syria. “Some people are arguing that there should be a safe haven [in Syria], that there should be a no-fly or a no-drive zone. We were of course advocates of that because we have benefitted from that,” he said. “It is unfortunate that we have seen inaction from the international community. The regime’s days are numbered… [There is] still no solution in sight. What we have seen is no commitment for a military intervention, no commitment for boots on the ground, no commitment for a no-fly zone, not for a safe zone.”

When it comes to Iran, the KRG has to toe a more cautious and neutral line in public, not least because of Baghdad’s close ties to Tehran. Iran has in the past warned the KRG against threatening its interests in Syria. “With Iran we have tried to keep a balance to our relations. We do not want to be in this camp or that camp. We have to have manageable relations, but it is not easy,” said Bakir.

Promise of growth draws international banks to Iraq

Published in Gulf States News, 19 September 2013 In the coming months, Lebanon’s Blom Bank will open its first branches in Iraq. According to the bank’s chairman, Saad Azhari, it has approval for branches in Baghdad and Erbil and expects to start business in both cities before the end of the year.

Iraq may be a new market for the Lebanese bank, but it will find plenty of familiar faces when it gets there. At least six other Lebanese banks are already active in the country, vying for business alongside dozens of other home-grown and foreign owned institutions, and more are coming all the time. According to recent media reports, the UK’s Standard Chartered has also gained approval to open branches in Baghdad, Basra and Erbil.

The Central Bank of Iraq says there are 15 foreign-owned banks in Iraq, alongside 23 privately owned, nine Islamic and seven state-owned institutions. Those numbers only tell half the story though, as many of the local banks have significant international shareholders.

There are some clear and powerful reasons underlying this interest in the Iraqi market. Despite the rising number of banks, the country remains under-banked. According to a report by Singapore-based Sansar Capital earlier this year, 80% of Iraqis do not have a bank account and domestic credit to the private sector is just 9% of GDP, compared to an average of 55% around the rest of the region. In addition, expectations for long-term economic growth are high as the country ramps up oil production.

“We try to go to under-banked countries,” explained Sami Haddad, general manager for international banking and investment at Lebanon’s Byblos Bank, which opened its first Iraqi branch in Erbil in 2007 and has since expanded to Baghdad and Basra. “The potential is high and the competition tends to be weaker [in those countries], so you have a first mover advantage.”

Many Gulf banks have identified the same opportunity. Qatar National Bank, which has been pursuing the most aggressive international expansion strategy of any regional bank over recent years, was a founding shareholder in Bank Mansour in 2006. It increased its stake to 51% via a capital increase in April last year. Among other Gulf Co-operation Council (GCC) investors, Bahrain’s Ahli United Bank has a 49% shareholding in Commercial Bank of Iraq, Kuwait’s Burgan Bank has a majority stake in Bank of Baghdad and National Bank of Kuwait owns 75% of Credit Bank of Iraq.

Most banks, however, enter the country by setting up new branches. Abu Dhabi Islamic Bank, Bahrain’s Arab Banking Corporation and Iran’s Bank Melli and Parsian Bank have all done so, as have five Turkish banks. Iraq is relatively unusual in being so open to foreign banks. “In most countries, central banks are not offering new licences and it is also not very common to allow foreign banks to open branches, so you end up having to buy a bank,” one banker said.

But Iraq remains a difficult place to do business, with poor infrastructure and high levels of violence and corruption. As a banker at one major US institution pointed out: “It is still a country with a lot of development needs, including in areas such as management of investment, registering companies and the tax regime. A lot of those things need to settle down.”

Adding to those problems are what Sansar Capital refers to as the uneven playing field of the banking sector. State-owned banks control around 90% of the market, not least because anyone writing a cheque to the government to settle their taxes or other bills has to do so from an account at one of the state banks, and all government entities have to put their deposits in those same institutions.

Not everyone finds the prospect of doing business in such an environment all that enticing. HSBC bought a 70% stake in Dar Es Salaam Bank in 2005 but, in June this year, said it was planning to sell its shares – though the sale has yet to be concluded.

For a lot of the Gulf banks though, Iraq is far larger than their often saturated home markets and so the potential is that much greater. “The rationale is to build and gain scale,” says one Gulf banker. “Our core market is small in size and hence growth is capped. Being in faster growing markets makes perfect sense.”

Asiacell listing sparks hopes for more Iraqi IPOs

Biggest post-crisis Middle East IPO; doubles ISX market cap Published in Euromoney, March 2013

The $1.2 billion IPO of Iraqi mobile operator Asiacell last month is bringing more interest in the Iraqi Stock Exchange (ISX) among both local companies and investors. Just days after Asiacell made its market debut on February 4 a rival telecoms group confirmed it would seek a listing too, and brokers and bankers say issuance could accelerate in the coming years.

The next big listing will be Zain Iraq, after its Kuwaiti parent company said on February 14 that it planned to go ahead with the IPO by June. Zain Iraq is the country’s largest mobile operator. The country’s third, smaller operator, Korek Telecom, could follow soon after.

Local brokers appear confident that there is enough appetite in the market for all these telecoms stocks. "The Iraqi market for securities is active and has the possibility of accommodating these companies," says Sami Hamoudi, manager of local broker Atlas Corporation Commissioner Securities. "There is no difficulty for these companies wishing to enter the stock market."

And as more companies come to the market, it should help further build up interest in the ISX, according to Dennis Flannery, managing director for Citi’s Iraq division. "The Asiacell and Zain Iraq transactions are great news for the Iraqi securities market. They show the world that Iraq has the ability to float these large equity issues. That shows there is a market there and it’s orderly and professional," he says.

The Asiacell deal was the largest IPO in Iraqi history and the largest anywhere in the Middle East for five years. It attracted interest from local and international investors, not least from Qatar Telecom (Qtel), which took the opportunity to increase its stake in the company from 53.9% to 64.1%. Gulf investors appeared particularly keen to buy shares in the deal, according to Shwan Ibrahim Taha, chairman of Rabee Securities, the sole distributor and selling agent for the IPO.

"This is something the GCC investors understand," he said in mid-January as the book-building process was under way. "The company has Qtel in it, so they’re comfortable with it. It’s an industry they like. We’re getting more and more calls from the GCC."

Looking back now he says: "The IPO process was much harder than I expected. Remember we were trailblazing with this listing, so I am sure that the next listing will be much easier." Among the problems was matching the 2,900 orders for the shares as the offer closed, something that delayed the start of trading by a day. With the deal successfully concluded, Ibrahim Taha says he now expects more companies to follow.

"I expect that businessmen would start looking at the market as a viable means to gather capital or exit some of their holdings," he says. "Iraq is still a difficult place to predict [...] but I think the genie is out of the bottle and we would have a viable market from now on."

Asiacell is the largest company on the Iraqi stock market by some margin. Its $5 billion IPO valuation was the same as the market capitalization of the entire ISX before it listed. Since trading began the shares have been slightly above the ID22 ($0.10) listing price, trading in a range of ID22.56 to ID23.48 a share.

When Zain Iraq joins the market it is likely to take over as the largest company, but the longer-term health of the ISX depends on a wider variety of companies listing their shares. Flannery says there are reasons to believe more diverse stocks will appear in the coming years. "Ultimately the market is going to be dependent on the quality of the issuers," he says.

"The two telecoms companies [Asiacell and Zain Iraq] are serious, well-managed companies and they’ve clearly done well. Iraq is in such a unique situation. It has tremendous oil wealth coming its way, combined with the need to rebuild a nation and a population that is well educated. If there is a good development outcome in the coming two to five years then there could well be a lot of companies in a diverse economy that could be listed on the stock exchange."

The IPO market in the region as a whole has had mixed fortunes in recent years. There were 22 deals in the Arab world in 2010, raising a total of $2.65 billion, according to Ernst & Young. Activity fell the following year, with 14 deals and $844 million. In 2012, the amount increased to $2 billion although the number of deals remained at just 14. Throughout this time it has been Gulf markets that have been the most active, particularly Saudi Arabia.

Between them, the Asiacell IPO and the promised Zain Iraq listing could almost match the total raised across the entire region in the past two years. Even so, there are some that still need to be convinced. "Iraq is not a priority growth market for us. It’s tiny," says a spokesman for one large international bank with a substantial presence around the region.

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