Power & Politics in a Pipeline
An ongoing dispute between central Iraqi government in Bagdad, the Kurdish Regional Government (KRG), and Turkey can teach us a lot about institutional strength in the international economic order.
An ongoing dispute between central Iraqi government in Bagdad, the Kurdish Regional Government (KRG), and Turkey can teach us a lot about institutional strength in the international economic order.
The spat – which relates to the operations of the Iraq-Turkey Crude Oil Pipeline (ITP) – has been rolling since March, removing some 400,000 barrels, 0.5% of global crude production, from the world market and comes as the result of a ruling by the Paris-based International Chamber of Commerce’s (ICC) International Court of Arbitration (ICA), one of the world’s leading arbitration forums, in relation to a dispute between the three parties over whether Turkey could import oil from Iraqi Kurdistan without the sign-off and co-ordination from Bagdad.
The ICC is a private organization, but one that has for over 100 years played a key role in resolving intergovernmental business disputes – to the point that it has become a part of the official framework underpinning that order. In December 2016 the United Nations General Assembly granted it observer status, the first (and to date only) vit has done so for a private organization. The ICA is one of the world’s most important arbitration chambres today, arguably matched only by the International Centre for the Settlement of Investment Disputes (ICSID), which is formally part of the World Bank. Originally set-up by a former French Finance Minister, the court has seen its case load increase substantially in recent years and has – somewhat remarkably – largely avoided becoming a target of political ire by losing parties. Many other arbitration forums exist, but the ICA has broad support. Even as China has chafed at and ignored rulings from other such institutions – while accelerating efforts to promote its own arbitration courts – it has authorized the court to hear some elements of disputes between mainland Chinese and Hong Kong businesses despite simultaneously erasing many elements of their separate sovereignty.
ICA’s legitimacy in part derives from its expertise in the ancient Solomonic art of splitting the baby; i.e. finding solutions that acknowledge the respective merits’ of each sides’ claim and require parties to find ways to more effectively co-operate. The 23 March ruling in the Baghdad-KRG-Turkey dispute is an excellent example – though the court certainly took its time doing so, with the case first lodged nine years prior when Kurdistan began pumping oil through the Iraq-Turkey-Pipeline without Bagdad’s permission, part of the KRG’s efforts to gain control of its own oil exports and finances and distance itself from the central government in Bagdad, from which the KRG’s leaders have long sought independence.
The ruling was clearly overwhelmingly in Bagdad's favor. With the ICA finding that under the ITP's agreements (signed in 1973 and updated thrice since, most recently in 2010) that Iraq's State oil company that Iraq's State oil company SOMO is the only party authorized to manage exports through the pipeline and that the KRG and Ankara's state pipeline company BOTAS violated the agreement. However, Turkey also won part of its counter-claim that Iraq should have paid a pipeline throughput fee. The net ruling was nevertheless $1.5 billion in Bagdad's favor. Although Turkey has experienced a substantial if slow-rolling currency crisis, the fee should not be insurmountable.
Although Turkey has experienced a substantial if slow-rolling currency crisis, the fee should not be insurmountable.
But Ankara has thus far refused to pay; and even if It were to do so, that would not guarantee that oil would begin flowing again. The ruling covers the period between 2014 and 2018 and the ICA is hearing a separate dispute on subsequent Kurdish flows through the pipeline. The KRG and Bagdad also regularly spar over how oil revenues should be distributed within the country, with the former wanting to profit directly from production in territory it controls and Bagdad insisting on the formula whereby the KRG gets a share of Iraqi budget revenues (historically set at 17% though in reality often fluctuating). Agreed in 2014, that revenue sharing agreement has repeatedly been the source of substantial strife, the subsequent years were marked by much military, economic and political strife - after the Islamic State took over swathes of northern Iraq and subsequently when Kurdistan took control of territory around Kirkuk after ISIS was expelled, vastly expanding its oil holdings. The KRG built up substantial debts in doing so and in September 2017 launched an independence referendum. Although voters overwhelmingly backed breaking away from Bagdad, Iraq vociferously denied the votes legitimacy. Iraq subsequently threatened direct conflict with the KRG, and in the process took back the Kirkuk oilfields that October. In one of the more fascinating but under-appreciated bailouts of recent years, Kurdistan had to turn to Russia’s state oil company Rosneft, which had already provided prepayments to finance its oil exports, for a bailout that month. In exchange, Rosneft received a 60% stake in the Kurdistan Crude Oil Pipeline (KCP) that connects to the ITP at the border crossing with Turkey. Operations on the adjunct pipeline were also suspended as a result of the March ICA ruling.
In one of the more fascinating but under-appreciated bailouts of recent years, Kurdistan had to turn to Russia’s state oil company Rosneft, which had already provided prepayments to finance its oil exports, for a bailout that month.
The reason why Ankara reportedly refuses to pay is because it recognizes that it holds the majority of the cards in enabling both Iraq and the KRG to increase exports. When Iraq in April petitioned the US District Court for the District of Columbia to enforce the ruling, Bagdad reacted angrily, likely in part because the movie came in the heat of the run-up to Turkey’s 14 May general election.
According to reporting from Middle East Eye, "furious Turkish officials promised, in private conversations, that they would make Iraq pay" for the move, and in turn filed their own demand with the DC court to enforce the ICA ruling, presenting interest calculations that it claims mean Bagdad actually has to pay Ankara $956 million. But according to Bloomberg Ankara is primarily interested in just ensuring that it isn’t left with the bill, and believes that the KRG should pay any moneys owed under the ruling – after all, it was the KRG that benefitted. This has temporarily aligned Bagdad and the KRG, both of which do not want to pay. This June Kurdish representatives in Iraq’s parliament and its Shia’ majority agreed a new formula for distributing budget spending to the KRG,s setting at 12.6% of revenues, though the deal is tenuous and at risk of rapid collapse if oil prices again fall or a yet another political crisis emerges in the country, a none-too-unlikely prospect.
But what the subsequent machinations show is just how central the US courts are to enforcing the award. Turkey and Iraq both need access to dollars and the US financial system, and Bagdad like Ankara has faced its own shortages of late. A ruling from the US District Court for the District of Columbia could actually force action from one side or the other, something that even the ICC with its unparalleled integration into the international economic order is itself toothless to achieve.
А deal to end the dispute will have to involve an arrangement between Bagdad, the KRG, and Turkey but also must take into account the concerns of other international players, from Russia with its interest in the KCP, to the Saudi-led OPEC+ cartel for its potential to bring Iraq in excess of agreed production quotas, and Iran with its influence over Iraqi politics. But at the end of the day, when it comes down to it, although the US is not a party to the dispute, the structure of the international economic order means that it carries most of the cards.