Iraq and America at Sudani’s Midpoint
When Prime Minister Mohammad Shia Sudani visited Washington in April, he wasn’t just looking for a handshake. He sought a profound shift in U.S.-Iraqi ties, aiming to transcend the security focus that has dominated the relationship and build a more multifaceted partnership. There are the things that Iraq wants to talk about: economic development and regional integration. Then there are the things that the United States wants to talk about: various aspects of Iraq’s relationship with Iran. And finally, there is the elephant in the room that neither side wants to talk about: the rapidly deteriorating situation in the Kurdish north. The United States can assist in all three of these areas, but it will require a defter touch than has characterized past efforts. To navigate the rapidly shifting dynamics in Iraq, the United States should foster a more empathetic relationship with Baghdad, transition its troop presence to a more advisory role, leverage its influence to assist the Kurdish region, and focus on supporting Iraq’s system rather than any individual leader. To situate these issues, I first explore Iraq’s ambitions under Sudani’s leadership, then delve into the U.S. agenda. Finally, I analyze Iraq’s struggling internal integration efforts and their geopolitical implications.
Iraq’s Agenda
Sudani came to Washington seeking — in his own words “a new kind of partnership with the United States.” From Baghdad’s perspective, the relationship with the United States has been dramatically overweighted in the security file. Iraq wishes to “transform the relationship… from a single-faceted one to a comprehensive one.” While Iraq realizes that oil and gas will be its core competency for some time to come, as Sudani’s visit to Houston to meet energy firms there demonstrates, it also realizes that it needs to use those revenues (or at least the small bit left over after the national bills are paid) as seed capital to diversify.
Specifically, regarding the United States, Iraq needs technology and expertise for “green” projects, but also seeks cooperation with U.S. firms in sectors as diverse as telecommunications, health care, and transportation.
These will be heavy lifts in the near term. While there is an undeniable improvement in Iraq’s business climate since the advent of the Sudani prime ministry — for instance, there have been substantial advances in tax reform — there are vanishingly few success stories involving U.S. firms, and plenty of tragic ones. Trust still needs be rebuilt on both sides for a more normal contractual order. Severe differences in business cultures endure. Iraq continues to use its own proprietary accounting system with significant differences in permitted expenses than those in either U.S. or international standards. Regulatory compliance can be difficult without the proper Iraqi legal counsel (using Arabic-speaking Gulf state lawyers is likely to be of little help). And Iraqi contracts are usually just a few pages, lacking the legal boilerplate common to U.S. practice, which can send corporate counsels into a panic. These issues can be worked through, but often add a layer of interface that must be accounted for in pricing. Sudani appears willing to give reasonable terms that have not been available in the past, including sovereign loan guarantees (albeit only for Iraqi partners, but a guarantee protects the whole deal).
There are numerous positive signs here. But further business ties between the United States and Iraq, especially outside the hydrocarbon industry and defense sales, will likely proceed slowly, without significant Iraqi concessions. And always with a dark cloud of corruption and lack of transparency hanging overhead — at least until Iraq makes serious strides on these issues.
But Iraq’s second priority, regional integration, appears to be moving with great speed. Sudani has put significant effort into making Iraq a good neighbor in the region. While maintaining historic ties with Iran, the prime minister has also strengthened Gulf state ties, despite long-standing tensions.
However, it is the repairing of ties with Turkey that appears most impressive. Despite longstanding tensions over very hard issues (sanctuaries for the violent Kurdistan Workers Party in Iraq and Turkish incursions to counter those sanctuaries, Turkish dams reducing water flows into the Tigris, disputes over commercial use of the Baghdad-Turkey oil pipeline by the Kurdistan Regional Government) Sudani seems to have found a tone of détente with President Recep Tayyip Erdogan that promises genuine movement on all of these issues.
The primary vehicle that appears to be advancing this regional reconciliation is called the Development Road project. This project promises to offer a bypass to the Suez Canal (and more relevantly, the Bab-el-Mandeb straits) for cargo to Europe. The basic concept is that cargo could unload at the Grand Faw port near Basra (already under construction). Containers would then be moved by rail through the length of Iraq to Turkey where a matching rail network could move the cargo onward into Europe. Unsurprisingly, Iraq and Turkey have signed agreements for this project, as it benefits them both. However, the major funding is coming from the governments of both the United Arab Emirates and its traditional rival, Qatar. All four countries conducted a signing ceremony during Erodgan’s recent visit to Baghdad.
This road stands in direct competition to the U.S.-preferred and sponsored Dubai-to-Haifa land bridge, but appears far more feasible, for obvious political and geographic reasons. Is it notable that the United Arab Emirates appears to be “betting on both horses,” as a winner in either scenario. But the Development Road promises numerous advantages. In addition to the political feasibility above, the financing and agreements are already in place. In short, it is in progress while other projects are not. Further, the Dubai-to-Haifa route would be a more expensive one, requiring a reloading of cargo onto a ship at Haifa, while the Development Road could carry cargo all the way into Europe — essentially re-creating the old Berlin-Baghdad express, with an extension to the Basra port.
Iraq is much focused on its economic future and its place in the region. The Development Road is a project that links both economics and politics, but other distinct projects, particularly with the United States, are also part of this plan. Sudani’s backers in the Shi’a Coordination Framework seem to have endorsed this plan, including the stronger economic ties with the United States.
The U.S. Agenda
When the United States meets with Iraq it usually wants to talk, at least indirectly, about Iran. This is a lamentable, but understandable fact. At the present moment, the dialogue involves two major themes. First, the presence of the coalition military troops (formally, Command and Joint Task Force Operation Inherent Resolve) and the Iranian-sympathetic Iraqi forces that conduct periodic campaigns attacking its presence. And secondly, Iraq’s role in providing economic relief to a deeply sanctioned Iran, whether via money laundering through Iraq banks, or via Iraqi purchase of Iranian fuel and electricity.
On the economic front, U.S. responses vary between a slow, patient weaning of Iraq from Iranian ties and draconian measures to enforce sanctions. With respect to banking, this has taken the form of sanctioning or at least banning from the use of dollar transactions (depending on the severity of the offense) as the “stick,” while slowly changing the way Iraqi financial institutions access the dollar to promote efficiency as the carrot. So, for example, the Al Huda Bank and its owner, Hamad al-Moussawi, were designated in January of this year by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network and Office of Foreign Assets Control, respectively, for the facilitation of terrorist financing of the Iranian Revolutionary Guards Corps and Kataib Hizballah. And last year, in July, 14 banks were banned from use of the dollar, though not designated. All these actions give shocks to the Iraqi financial system and ratchet up pressure on the government.
The changes to the system by which dollars are accessed, however, is providing opportunity for entrepreneurial Iraqis. By the end of this year, Iraqi banks will have to have put processes in place that give them a corresponding Western bank in order to access dollars. The dollar-denominated corresponding banks, (or perhaps Euro-denominated, but under similar compliance policies) will have to make stringent demands of the Iraqi banks in order to ensure compliance with U.S. Treasury regulations on Know Your Customer and Anti-Money Laundering. In short, compliance with U.S. law will be outsourced to the private sector, to the partnership between the Iraqi banks and US banks. Several U.S. consulting firms with strong ties to the U.S. Treasury are working diligently to ensure compliance on both ends of the relationship.
With respect to energy, the dynamic is similar, but has the same end state. Iraqi purchases of Iranian gas and electricity are sanctioned, but Iraq has regularly been given a waiver to those sanctions, contingent on its progress towards energy independence via gas flaring, development of gas fields, and progress on electricity generation and distribution. So, the stick of the sanctions is regularly given the carrot of a waiver. But the stick is always present and hanging like the Sword of Damocles.
The United States continues to attempt to prevent Iraq from contributing to Iran’s economy generally and from giving it access to dollars specifically. How Iraq is to develop a non-oil economy while isolated from its larger eastern neighbor (and Syria to the west as well) is left unspecified, as Iraq effectively has to breath with one (non-domestic) economic lung: Turkey.
With respect to the presence of the coalition, the official Iraqi position is clear (though various sub-groups may have dissenting opinions): It needs to leave.
Iraqis recognize that while lots of “normal” countries have a U.S. troop presence (the United Kingdom, Italy, Japan, Germany, etc), no normal country has a combined joint task force on a named operation. As I’ve written elsewhere, the task force’s existence is likely nearing its end. However, even anti-American Iraqi militants may be willing to tolerate a more limited U.S. presence focused on diplomatic facilities and airports.
A long-term U.S. presence in Iraq can be negotiated if — and I suspect only if — the United States is able to contain its desires to areas that are in the mutual interests of both countries. Iraq is interested in continuing coordination for U.S. weapons sales. It is interested in ministerial advisors to continue its reform efforts. It is interested in the Iraqi Counterterrorism Service and other special operations forces-like units having partnerships with similar U.S. units. But Iraq is remarkably uninterested in being a platform for anti-Iranian operations or anti-Islamic “resistance” operations, inside Iraq or elsewhere. In other words, the continuing presence requires an appetite suppressant on the part of the U.S. military’s mission set in Iraq.
To not be involved in anti-resistance operations is complicated by the fact that U.S. and coalition forces have been recently targeted by these resistance forces, putting the Iraqi government in an awkward position as the nominally sovereign hosting country. Leaving aside earlier attacks in 2020 that culminated in the deaths of Qasim Suleimani and Abu Madhi Muhandis, since last year’s Hamas attacks of October 7, resistance forces conducted approximately 165attacks against U.S. and coalition forces in Iraq, Syria, and Jordan. These attacks culminated in the deaths of three U.S. servicemembers and resulted in several retaliatory U.S. strikes.
The anti-American resistance targeting and U.S. responses put the Iraqi government in an unenviable position. Largely helpless to impact the actions of either side, the government can merely bemoan the “terrorist crimes” of the resistance and the “violations of sovereignty” by the Americans. Since the deaths of the U.S. servicemembers, there has been an informal truce, but it is unclear if it will hold. The “truce” has been declared null by Iraq’s resistance groups, but their next steps are unclear and as of now there have been no renewed attacks.
The coming months will almost certainly see a retrenchment of the U.S. military presence in Iraq. What is not clear is whether the Pentagon will be able to control both the narrative and facts on the ground to conduct this repositioning on their own terms. It will be very awkward for the United States if a major withdrawal appears to have been compelled by force of arms. But should casualties begin to mount, it is unclear that any objective analysis will support keeping a presence in place. A withdrawal under these circumstances would be deeply toxic for the U.S.-Iraqi relationship.
The Kurdistan Region of Iraq
The elephant in the room is the status of the Kurdish region, which is in deep crisis politically, economically, and socially. This reality has been slow to penetrate Washington circles. The region has been quite adept in perpetuating its image as “the other Iraq,” in contrast to the war-striven and hostile Arab south. But the facts today are reversed: It is the Arab regions that are more secure and prosperous, while the Kurdish region struggles.
The first contest is political. And the political contest is occurring at three levels. First, there is conflict inside the two major political parties, the Kurdistan Democratic Party, which dominates in the northwest provinces of Irbil and Dohuk, and the Patriotic Union of Kurdistan, which dominates the northeast in Sulaymaniyah and, to a lesser extent, the Kurds of Kirkuk.
In both cases, these internal conflicts can be summarized as the son (or sons) versus the nephew. In the Patriotic Union of Kurdistan, the inseparable brothers Bafel and Qubad Talabani — sons of the late Mam Jalal Talabani – either put down or executed a coup (depending on whose account you believe) on their cousin Lahur Talabani. Bafel’s control over the party is now nearly complete, though other power centers remain if diminished. Lahur has created a new party list and intends to run in the next regional elections (more on which shortly), but his personal brand may carry little weight outside the party umbrella.
Meanwhile in the Kurdistan Democratic Party, there is a slow boiling tension between Masrour Barzani, the son of the current political patriarch Masoud Barzani, and his cousin (and Masoud’s nephew), Nechrivan Barzani. While open internecine conflict is nearly unthinkable so long as Masoud draws breath, the preparations by the two sides is clear. Nechrivan is strongly favored by the business community and international capitals, while Masrour has the party security services and his father’s backing. The Kurdistan Democratic Party is far more monolithic than the Patriotic Union of Kurdistan, so there is only room for one major figure, and it is far from clear what might happen to the loser of a power struggle, once Masoud is no longer a factor.
Again, open conflict so long as Masoud is extant is unthinkable, so this conflict is very much a cold war.
This is the first level of conflict inside the two major parties. But next we have conflict between the two major parties, the Kurdistan Democratic Party and the Patriotic Union of Kurdistan. While the public rhetoric is that armed conflict between the two parties could never happen again, the history of the Kurdish civil war in the 1990s always stands as a reminder of what is possible.
The civil war of the 1990s was ended by a power-sharing agreement. The two parties essentially agreed to divide all offices in the unified Kurdish government “50-50.” While the Kurdistan Democratic Party was always acknowledged as the senior partner in this arrangement (at the very least by controlling Irbil, the capital), the division of power kept the peace.
In 2018, the Kurdistan Democratic Party repudiated the traditional 50-50 arrangement in the wake of overwhelming success in the provincial elections which gave them 45 seats to its opponent’s mere 21. This has resulted in differential funding. The conditions in each party’s capital reflects this difference, with Irbil having shiny construction everywhere (at least until recently), while Sulaymaniyah’s depression is almost tangible.
The break of the power sharing arrangement has broken traditional Kurdish unity. In the government formation efforts after the 2021 national elections, the Kurdish Democratic Party banded with the Sadrists, and the Anbar based Sunni Taqqadum party to attempt to form a majority government. The Patriotic Union of Kurdistan notably refused to join this effort, which resulted in the eventual triumph of the Shi’a Coordination Framework as the core of the government, with the Patriotic Union of Kurdistan as one of their very close partners. While the Kurdistan Democratic Party eventually joined the government, it is the Patriot Union of Kurdistan that has a close relationship with Baghdad. One result of this close relationship is a clause in the budget law that permits any Kurdish province (read: Sulaymaniyah) to request its budget share directly from Baghdad, rather than having it pass through Irbil. While this clause has not been activated, it does give the Patriotic Union of Kurdistan a “nuclear option.”
Finally, there is increasing conflict between Irbil and Baghdad over exactly what “federalism” means. And undeniably, a series of events have tightened Baghdad’s control over events in the Kurdish north. As with most elements of control, it’s about money.
The Kurdish region was hit with an effective one-two-punch in the past years, as two decisions about its oil industry impacted in rapid succession. The first, by the Iraqi Supreme Court in February of 2022, essentially declared the entire setup of the Kurdistan region’s oil industry to be unconstitutional. It further declared all existing contracts signed by the Kurdistan Regional Government without the Federal Oil Ministry’s approval (meaning all of them) to be nullified. Finally, it mandated that all future sales must go through the Federal Oil Ministry’s sales entity, the State Organization for the Marketing of Oil.
Before the Iraqi Kurds could effectively absorb the implications of this decision, a second followed. The International Chamber of Commerce in March 2023 in Paris completed an arbitration case between Iraq and Turkey on the transport of Kurdish oil in the pipeline between the two countries. The decision concluded that Turkey permitting the transport of oil from the Kurdish region without federal supervision violated the terms of the contract governing the pipeline. Turkey immediately shut down the pipeline, ending all exports from northern Iraq. It is unclear, over a year later, what steps must still be taken to renew these exports.
Part of the problem, as I’ve written elsewhere, is that the northern oil fields are effectively — from Baghdad’s perspective — a stranded asset. Baghdad is already in slight violation of its Organization of Petreoleum Exporting Countries commitments, producing an additional 100,000 to 200,000 barrels per day in excess of their quota. Should northern exports resume, under federal supervision, as the 2022 court decision mandates, then those ~400,000 barrels per day would constitute a non-trivial violation.
Baghdad would then be faced with two unattractive options. Baghdad could just ignore its quota and export what it produces. But this is when Baghdad has just won favor with its Gulf state neighbors, whom Baghdad needs for its planned infrastructure boom. So, this is not a realistic option. The second would be to reduce the production of the higher quality, cheap production oil in the south to accommodate the lower quality, high production cost oil in the north. This would seem nonsensical. It is easy to see why Baghdad appears to be in no hurry to have the northern exports restarted.
All this together leaves the Kurdistan region with a very tenuous financial future, and one entirely dependent on Baghdad. While it is possible that Baghdad might make a political decision to restore Kurdish production, the obstacles are substantial, and it is arguably not in Iraq’s greater interest. One suspects that Baghdad might be willing to buy out international investors in the northern oil infrastructure to reduce political tensions and reinforce Iraq’s investment climate.
Finally, the Kurdistan region of Iraq is today risking political legitimacy by once again delaying parliamentary elections. The region currently has no parliament, as their terms are long-expired, so the government is operating without any supervising political body. Elections, originally scheduled for 2022 and then delayed, were rescheduled for June of this year. However, in the wake of a dispute over allocation of seats for ethnic minorities, the Kurdistan Democratic Party announced first that it would boycott the elections, and then successfully sue to prevent preparations for the elections to continue. With the June window for elections blown through, the recently declared date of October 20 is Iraqi Kurdistan’s last chance to revitalize democratic legitimacy. Should this date again slip, it is conceivable that there might not be a viable opportunity for these elections until after the federal elections in fall of 2025.
Sudani has gone out of his way to placate Kurdish concerns. While he cannot just wish away the multi-faceted issue of Kurdish oil, he has come forward to make payments to the Kurdistan Regional Government so that they can pay salaries to government workers. The fundamental constitutional issues between Baghdad and Irbil are beyond Sudani’s ability to resolve in the short term, but he has taken every opportunity to find “workarounds.” These gestures are keeping all parties on board with Sudani’s government and making Sudani a very popular figure among the Kurds.
A senior Kurdish official recently described to me, in confidence, the Kurdistan Region of Iraq as metaphorically teetering on the edge of a cliff, while flailing its arms for balance. There is acknowledgment that this moment is one of real crisis for the Kurdish region. It is as if there must be a certain level of dysfunction in Iraq, and as Baghdad sheds this dysfunction, Kurdistan is required to take it on. But again, thanks to the Kurds successfully lobbying in Washington since Barham Salih served as a Kurdish representative in the 1990s, Washington is simply unprepared to hear this message, outside of the small cell of serious Iraq watchers.
Conclusion
Iraq is shifting rapidly, and those not watching the account closely can easily get trapped in the realities of yesteryear. The old formula of Sunni-Shia-Kurd is rapidly giving way to concerns about demographics and the youth bulge as well as climate change and water shortages.
But politics will continue to be a concern and the Iranians ever-present. The latest rumbling in Iraqi politics is of the return of Muqtada al-Sadr, forming a new party (with the same constituency) called the National Shiite Movement. There are further reports that Sadr is coordinating with his old nemesis Nouri al-Maliki about banding together to limit Prime Minister Sudani. While alliances inside Iraq are ever shifting, it is hard to picture Sadr and Maliki meeting without Iranian mediation. It is entirely possible that Iran feels threatened by the relative successes of the Sudani government, as Iran’s leadership want Iraq to be kept in a place where it is neither in chaos, nor fully functional. While these reports are early and sourcing appears thin,Iran cannot be happy with the relative prosperity of Iraq, let alone the increasing ties with Turkey and the Sunni gulf states. While a Sadr-Maliki alliance may not be the final form that Iran chooses to complicate Iraqi politics, observers should be watching for Tehran’s attempts to throw Iraqi politics off balance.
How should the United States respond to all these rapidly shifting winds? First, Washington should have more empathy in its relationship with Baghdad, accepting Iraq’s promise and limitations. Iraq wishes to have a robust relationship with the United States and recognizes that its economic future is tied to access to U.S. financial institutions and technologies. At the same time, Iraq will never see the world, and in particular the role of Iran, Russia, and China, as America does. That said, a strong stable Iraq that continues to strengthen its institutions and integration is a clear step towards a more stable Middle East, which is a long-held U.S. interest. The relationship can be strong but bounded — analogous to the U.S.-Indian relationship. Second, the U.S. troop presence as currently constituted—again, having a combat-oriented headquarters rather than an advisory presence more suited to Iraq’s current state–remains a genuine obstacle to normalized relations. The United States should move quickly to set the terms of the new relationship, creating the advisory presence it would like to see for the long term, rather than letting events dictate it. Third, the United States should use both its limited influence and its considerable convening power to assist the Kurdish region through its crisis, primarily internally but also with respect to Baghdad. Doing so may require a degree of “tough love” that has been largely absent in Washington’s dealings with Irbil. Finally, all these policies should be executed without personalizing them into support for the current prime minister. Despite Sudani’s successes, the United States needs to be supporting the system, and not any one leader. Washington has often fallen into this trap in the past and ought to avoid it moving forward.
Sudani has set about executing the priorities that numerous analysts have proposed for some years. He has taken important steps to build confidence in Iraq’s future. And particularly if Iraq can transform its banking sector in the coming year (spurred by the U.S. Treasury), there will be important steps towards normality. But Iraq still lives in a difficult neighborhood and is burdened by a difficult past. Despite these steps, Iraq will lag the region for some time — but not by as much.
Douglas A. Ollivant is a former National Security Council director for Iraq. He is a senior fellow at both New America and the Foreign Policy Research Institute. He is a managing partner at Mantid International, which has U.S. and Western clients in Iraq. Follow him on Twitter at @DouglasOllivant.
Image: U.S. State Department
CORRECTION: A previous version of this article said that President Mohammad Shia Sudani visited President Recep Tayyip Erdogan in Turkey. In fact, President Erdogan visited President Sudani in Baghdad.
CORRECTION: A previous version of this article failed to note that the U.S. Treasury’s Financial Crimes Enforcement Network, as well as the Office of Foreign Assets Control, designated Al Huda Bank and its owner for the facilitation of terrorist financing of the Iranian Revolutionary Guards Corps and Kataib Hizballah.
