The Explosive Reality Awaiting Biden in Iraq

In 2003, the plan was for the U.S. to profit from Iraq’s post-war reconstruction. Now, the resource-rich, bankrupt and corrupt country has become an economic playground for China, Russia and Iran

A bombed out oil field in Iraqi Kurdistan last year.
A bombed out oil field in Iraqi Kurdistan last year.Credit: AKO RASHEED / Reuters
A photo of Dr. Zvi Bar'el.
Zvi Bar'el
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

Thousands of carpets spread across the halls, sacks and jars of spices on display: The trade fair held last month in Duhok, in Iraq’s Kurdistan region, bustled with the noise of hundreds of Iranian traders and Iraqi customers people bargaining and striking deals.

Until now, it was the Kurdish city of Sulaymaniyah that served as commercial center for Iranian goods. The invasion of Duhok, near the border with Turkey, demonstrates Iran’s dependence on Iraq as a channel to evade economic sanctions. Huge deals are still not being signed between the two countries, but the route is already serving as a life preserver for the small traders plagued by Iran’s severe economic crisis.

Why Bibi could play ball with Biden over Iran. Listen to Alon Pinkas

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Prices are low: Striking carpets are selling for $200 to $300, while their prices can reach thousands of dollars in Europe. But for most Iraqi visitors, these prices are still very high. Even though Iraq is the fourth largest producer of oil in the world, it remains a poor and bankrupt country. Baghdad is currently knocking on the door of the International Monetary Fund to receive an urgent $6 billion loan to finance its current spending.

The contrast between the wealth buried underground and the government’s bankruptcy should be hard to fathom; but the causes are well-known, and they have become firmly entrenched in the 18 years that have passed since Iraq was freed from the rule of Saddam Hussein.

An army of ghost workers

The official statistics are worrying. The state budget for 2021 totals $113 billion, half of it from a growing deficit. The official unemployment rate is estimated to be 36 percent, but among young people – who make up a majority of the country – it is much higher, almost 50 percent. About 30 percent of Iraqis live under the poverty line.

The banking system is falling apart: The banks’ level of liquidity is dangerously low, credit for opening new businesses is almost completely unavailable, and government debts to the banks are enormous – and it is not at all clear how they will ever be paid back and where the money would come from. Foreign investors are in no rush to visit Iraq and the onerous and corrupt to the bone bureaucracy blocks any possibility of development. The public debt totals $69 billion and it is expected to climb to $99 billion this year.

A woman peers out the door of her house in Fadhil, one of the oldest neighborhoods of Baghdad, this month.Credit: Hadi Mizban,AP

Tens of billions of dollars that Iraq received from the United States and European countries since the end of the war have flowed into private hands. The government and its state-owned companies are the largest employers in the country. They pay salaries to over 7 million people – but about 20 percent of them are “ghost workers,” who show up only to collect their paychecks.

These fictitious employees can be found in every government company and ministry, and in the military too, where commanders register as soldiers people who don’t exist – collect their salaries, and divide the money up between their own supporters. No one knows how many ghost workers there really are, because there is no proper official registry of government employees. Oversight and supervisory mechanisms exist only on paper, and any effort made in the past to uproot this plague – which costs the government billions a year – has run into a brick wall of mafia-like protection mechanisms from political leaders, who have been benefiting from the present arrangement for years.

The chain of bribery payments

In October, Prime Minister Mustafa al-Kadhimi presented a new set of economic reforms meant to overcome the deep budget deficit. His plan includes reducing the number of government employees, imposing an income tax on government workers of 30 percent to 40 percent, a 10 percent tax on pension payments and an effort to promote the private sector.

On paper, this plan looks like a promising start. But implementation will be difficult. Reducing the number of government employees, for example, is a political minefield, because almost every such worker carries a “membership card” for political parties, and their continued employment underlies the factions’ political power by providing benefits to their supporters.

Iraqi PM Mustafa al-Kadhimi during a ceremony to mark the Iraqi armed forces century anniversary in Baghdad, last month.Credit: Iraqi Prime Minister Media Office/Handout via REUTERS

Improving the bureaucracy and making it more efficient means moving the government onto a computerized system – which requires hiring skilled professionals, of which there is a chronic shortage in Iraq. Business owners and foreign companies know this well from all the obstacles they must overcome to receive a license. Such a process can take two years and it requires paying bribes to the dozens of officials who handle the licensing process. A number of local officials have given up on waiting for government permits and have begun to sign contracts independently for reconstruction and building with private companies. They hope to extract the funding for the projects from the government at a later stage, or to grant the companies revenue and other benefits from the projects they build.

George Bush’s mistake

The state budget has not yet been passed either, because the politicians are busy dividing up the shares for each ministry – which are allocated based on an ethnic and political basis – and the budget for the Kurdish region of Iraq is still up in the air. The Kurds, who run their territory semi-independently, are entitled to about 12 percent of the state budget. In return, they must sell 250,000 barrels of oil a day, which are produced in the area of Kirkuk in the Kurdistan region, and hand over the revenue to the government, along with customs duties the region collects at border crossings with Turkey and Iran.

The Kurds are asking the central government to pay the salaries of government employees, including the Peshmerga soldiers – the Kurds’ private army – as well as debts they say the Iraqi government owes them for violating previous agreements.

Kurdish Peshmerga fighters celebrate Nowruz in 2017.Credit: AKO RASHEED/ REUTERS

A compromise has not yet been reached. For now, the Kurds have prepared two drafts of their own budget. One includes the share they expect to receive from the state budget, while the second is an independent budget based on the sale of their oil, without depending on the Iraqi government. This means that if no agreement is reached between the sides, the Kurdish region could very well separate from Iraq economically – with potential political ramifications.

When a referendum on Kurdish independence was held in 2017, a clear majority of the Kurdish population supported independence, and only U.S., Turkish and Iraqi pressure made them give up on the idea. The Kurds felt this was a betrayal of their special partnership with the United States, which made it easier for Russian oil and gas companies to take over most of the Kurdish oil fields and more than 60 percent of the oil pipeline from the Kurdish region to Turkey.

In 2003, U.S. President George Bush planned for Iraq to pay for its own reconstruction, and for American companies to earn enormous revenues from Iraqi oil fields.

Vladimir Putin and George W. Bush at Camp David in 2003.Credit: REUTERS

Today, Washington does not only have to worry with Russia’s presence in the northern regions. In the east, Iran is the main supplier of gas, gasoline and electricity. Its involvement could increase if the United States returns to the nuclear agreement and lifts the economic sanctions.

In the rest of the country, global rival China already plays an important economic role. It is only likely to gain in strength when the 2019 economic agreement between Baghdad and Beijing, which includes billions of dollars in investments in Iraq’s infrastructure, starts being implemented.

This is the package waiting in Iraq for the brand-new American president, Joe Biden, and it is not filled with candy.