Iraq – Impasse Broken, but Risks Remain

Fully eight months after securing confirmation as prime minister, Adel Abdul Mahdi has still not managed to completely fill out his Cabinet. However, he did finally secure approval of his nominees to head the ministries of Interior, Defense, and Justice, thereby at least temporarily averting a political crisis that threatened to topple his government.

The impasse was broken after Moqtada al-Sadr announced that Sairoon, the largest bloc in the Parliament, would withdraw its support from the government and organize public protests against Abdul Mahdi’s administration if the key vacancies were not filled within three days. Amid a rising threat of a renewed breakdown of domestic order (including a series of rocket and mortar attacks targeting locations near military bases housing US troops and the operational headquarters of ExxonMobil in the south), rising tensions between the US and Iran that have contributed to a growing risk of Iraq becoming embroiled in an international armed conflict, and separatist rumblings in the southern region of Basra, which is home to some 80% of Iraq’s oil production, the various political blocs decided that the country could not afford a governance crisis.

While that is clearly a positive development, the prolonged delay in securing approval of nominees for key Cabinet posts, which is after all the most basic requirement for forming a government, and the fact that breaking the impasse required a threat by the largest political bloc threatened to resort to extra-parliamentary measures to destabilize the government, does not bode well for either the longevity or the effectiveness of the administration. And while the achievement of agreement on the Cabinet picks is important, all of the risks mentioned above are still very present.

Despite the political obstacles he has faced, Abdul Mahdi has enjoyed some success in his effort to attract oil-and-gas investment. In May, the government announced that it was close to finalizing a deal with ExxonMobil and PetroChina for a megaproject in the oil sector with an estimated price tag of $53 billion. However, negotiations on the final details have hit an impasse, reportedly over ExxonMobil’s demand for a production-sharing agreement, a proposal flatly rejected by the government, which insists on state retention of the ownership of Iraq’s oil.

Even if security risks do not derail the project, it is unclear whether the contractual dispute can be resolved. The Oil Ministry has expressed optimism that the two sides are close to a final agreement, but progress will stall if neither is prepared to budge. Given the many other weaknesses of the Iraqi business climate, the increased security risk is unlikely to foster a spirit of compromise on the part of ExxonMobil, and it is doubtful that Abdul Mahdi might test the unity of his legislative majority by conceding on such a politically sensitive point.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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