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Iraq Update: March 18, 2020

Iraq Update: March 18, 2020

From ISOA Member Company Mantid International

Perfect Storm

Bottom line – Iraq is simultaneously managing 1) an extreme political crisis, 2) a pandemic disaster, 3) an impending economic collapse, and 4) fallout from an active proxy war. These problems are all distinct, but also inter-related. Companies operating in Iraq should be watching all four aspects of Iraq’s “perfect storm” to gauge risk.

Political: New Prime Minister Designate

Adnan al-Zurfi has been nominated by President Barham Salah as the new Prime Minister-designate in the wake of the failure of Mohammad Tawfiq Alaawi to form a government. Zurfi now has 30 days to form his own government, which will need to be approved by the Council of Representatives by majority vote. His candidacy has been endorsed by Sadr, Abadi, the Kurds (PUK today) and Sunni Parties. But there is already a dispute over the constitutionality of his appointment (charges that he was not nominated by the largest bloc), and with the growing opposition, including lack of support from the public whose mass protests have claimed over 550 lives in their quest to reform the government, he will have a tough road ahead.

Zurfi is a former US citizen who fled Iraq to the United States after the failed rebellion against Saddam Hussein in the aftermath of the 1991 Gulf War. Zurfi was successful as an entrepreneur in Michigan, owning first a grocery and then a string of gas stations.  Zurfi then returned to Iraq in 2003 under Paul Bremer and was eventually appointed as the governor of Najaf. He would later be appointed to that same post for two terms between 2009 and 2015. In 2018 he ran for parliament under his own party, but as part of then PM Haider al-Abadi’s coalition. Zurfi, who opposes militias, appears to be a compromise candidate whose selection is a recognition by major elements of Iraq’s political scene that repairing the US-Iraq relationship needs to be a priority in the coming months and years. However, with declared opposition from Fatah, State of Law and Hikma, his nomination may have difficulty gaining traction.

COVID-19

Iraq is deeply vulnerable to COVID-19, both due to geography—next door to Iran, one of the epicenters of the virus—and the vulnerability of its institutions. Iraq’s medical system is already on unstable ground with no accredited hospitals south of the KRG. Their ability to handle a medical crisis is dubious. One Iraqi physician noted there may be fewer than 200 respirators in the entire country, yet the government has announced that it has selected 10 hospitals throughout the country to serve as test and quarantine sites.  A top general at Interior who is managing the pandemic response alongside the Ministry of Health has confirmed that the actual number of cases has been dramatically underreported (WHO is reporting 154 cases and 11 deaths), and that tests are unreliable in determining how many people may have the virus.

As of yesterday, the entirety of Iraq is on a total curfew/lockdown until March 24 at which time there will be a re-evaluation of the situation. One specific intent of this curfew is to limit the Imam Kadham pilgrimage to the Kadhamiya shrine. The last flights out of Baghdad airport were at 6pm on March 17. As you are reading this update, Baghdad airport is closed to all traffic until at least March 24. There is also a complete lockdown with all government entities closed, banks and stores also closed and no one allowed on the streets. Kurdistan has requisitioned hotels and is using them as quarantine sites.

The COVID pandemic has also caused a halt in Iraq military training being provided by NATO and U.S. forces.

Oil prices and Iraqi budget

World oil prices now hover at or below $30/barrel, depending on the grade. Iraqi oil tends to sell for about $4 below world prices, so they are selling for near $25. Estimates are that Iraq needs an oil price in the low $30s ($31-33) just to pay salaries, so the government is almost certainly borrowing against currency reserves.

This crisis may be more serious for Iraq than the last, though ISIS no longer controls 1/3 of the country. First, it is difficult to see a rapid resolution of this oil price dip. Usually, lower oil prices serve as a stimulus for economic growth. But these low prices are compounded by lowered demand due to COVID-19, so world productivity continues to decline, despite low energy prices. Second, in Iraq’s last financial crisis, both the IMF and the United States rushed to help Baghdad bridge its budget deficit. Given Baghdad’s failure to honor the commitments it made to the Fund last time, and the state of US-Iraq relations, it is difficult to picture either Washington or the IMF spending that level of energy this time around, if they even have the funds given the pending global economic downturn.

Further, the massive protests that have plagued the country since October of 2019 and the subsequent resignation of the government have delayed action on the government budget which remains unaddressed three months into the year.

All of the above has prompted the government to ramp up efforts to collect due taxes from foreign companies and their subcontractors. With a new Director in place at the Tax Authority, existing laws allowing for the collection of advance estimated taxes against 2020 contracts is being heavily enforced not only on prime but also on subcontractors. There has also been a specific crackdown on Iraqi companies within the past two weeks. The COVID pandemic has now closed the Tax Office along with the rest of government, so even companies wanting to settle will have to wait.

Rocket Attacks

Since October of 2019, there have been 25 significant attacks on U.S. interests in Iraq including bases housing US troops, and the US Embassy. The most recent rocket strikes landed inside the IZ yesterday and in Besmaya earlier in the day.  This past week, two major rocket attacks on U.S. forces in Taji resulted in the deaths of two U.S. service members and one British medic, and the wounding of three coalition and two Iraqi soldiers.
In response to these attacks, which were claimed by a new Iranian aligned group, the U.S. has attacked a range of targets related to Kataib Hezbollah near both Jurf al Sukr/Nasr and an airbase in Karbala. These attacks were credited with killing low level employees from both MOD and MOI, and a cook/watchman which have further stoked resentment among Iraqi Parliament members who have called for the U.S. to withdraw its forces from Iraq. While the Parliament is split, it appears there is still a thin majority that support some type of U.S. presence.

In the past several days, there has been a clear reshuffling of the U.S. presence with troops departing several bases at the Syrian border and north of Baghdad to consolidate at other bases where counter measures are being instituted, or in some cases to depart the country. Getting provisions into these bases has been extremely difficult given the militia hold over land routes in the south, overall bureaucratic dysfunction brought on by mass forced retirements (anyone over 60 years of age per a new law) removals/appointments of new mid-level officials and today, the COVID curfews, government closure, and total commercial air travel lockdown.

Forward Planning

One final note, as everyone gauges the duration of impact from the COVID pandemic and awaits the new government formation attempt (April 18), there are two other important dates to note – Ramadan gets started around April 23 which will slow things down further until after May 28/Eid, and annual financial statement/tax filings are still due to the Tax Authority by May 31.

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