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 Where is Iraqi Kurdistanís sovereign wealth fund? 

 Opinion ó Analysis    
  The opinions expressed in this commentary are solely those of the author


Where is Iraqi Kurdistanís sovereign wealth fund?  26.6.2011 
By Michael Rubin

June 26, 2011

After years of war, oppression, and uncertainty, Iraqi Kurds have reason for optimism. Under monarchy, republic, and the Baath dictatorship, the central government in Baghdad at best ignored and more often sought to undermine Iraqi Kurdistanís development. While rumors swirled for decades about oil deposits under Iraqi Kurdistan, Iraqi policy and international sanctions prevented its exploitation.

No longer: despite disputes with Baghdad, the Kurdistan Regional Government has sold international companies rights for exploitation and development of the regionís petroleum resources. There are more than 40 different oil companies from more than a dozen countries operating in Iraqi Kurdistan. A few companies already produce oil. Many others are on the verge, having completed both exploration and the digging of test wells.

Despite the progress, however, success is not guaranteed. Kurds are cursed by geography: tension with Baghdad, Ankara, and Tehran can undercut exports at any time. Corruption remains a problem.    

Michael Rubin
Only five or six officials know the complete terms of the Kurdistan Regional Governmentís oil contracts. After hearing stories of embezzlement, extortion, and outright theft, many investors remain nervous about putting too much money into Kurdistan. Other companies take the risk or believe payments to self-described consulting firms, sometimes run by former American officials, can shake loose permits and paperwork.

While good governance advocates focus on Kurdish authoritiesí antipathy to international business norms, the Kurdish governmentís opacity undercuts the planning necessary to ensure that Kurds maximize the benefits from the sale of their resources.

The best thing the Kurdistan Regional Government can do ahead of the oil boom is to establish a fully-transparent sovereign wealth fund. The regionís oil should be a resource for generations, not an asset to be spent on jewelry, luxury cars, and ostentatious homes for the elite and politically-connected few.

Norway and Kuwait established the first sovereign wealth funds more than a half century ago in order to channel oil income into investment funds which not only would amplify revenue, but would also ensure the resources would protect the governments against declines in oil prices and the day when oil ran out. The tiny Pacific island nation of Kiribati once exported vast amounts of phosphates from bird droppings but exhausted this resource in 1979. Still, because they had invested profits wisely in a sovereign wealth fund, they immunized the government against economic collapse. Today, Kiribatiís sovereign wealth fund exceeds a half billion dollars, more than eight times the countryís gross domestic product.

The most prosperous Middle Eastern states have built huge sovereign wealth funds. In its first 30 years of existence, the United Arab Emiratesí fund grew to more than $800 billion, although, according to the Sovereign Wealth Fund Institute, it has since fallen back to $627 billion because of the global economic downturn. Saudi Arabiaís fund is rapidly approaching $500 billion, while Kuwait and Qatar have nearly $300 billion and $85 billion respectively. Kuwait deposits 10 percent of its oil proceeds into a Future Generationsí Funds, before investing the remainder in such things as automobile companies, banking, other nationís energy companies, and real estate in Europe, the United States, and China.

If Kurdistan was to follow Kuwaitís lead and create its own future generationsí fund, it might secure scholarships for generations of Kurdish students to study in any university across the globe without the need to secure scholarships or scramble for the money to rent apartments. Rather than the current system in which Kurdish university presidents must ask government officials for money whenever they seek to build a new hall or equip a laboratory,
www.ekurd.netproceeds from a Kurdish sovereign wealth fund might endow these bodies and provide the stability required to plan. While Kurdish politicians speculate on real estate in Sulaimaniyah and Erbil (often displacing Kirkuk refugees and poorer Kurds in the process), they remain too disorganized to invest the governmentsí profits in choice real estate in New York, London, and Beijing. Certainly, transparency is a prerequisite to ensure that investments are made in the fundsí name rather than their own.

Serious businessmen meet Kurdish officials on a daily basis to try to make a profit. There is nothing wrong with that: Kurdistan has something to sell, and the outside world wants to buy. But Kurdish leaders will do Kurds and Kurdistan a historical disservice if they believe profits are permanent and they believe oil makes serious planning unnecessary. Oil prices rise, but they also crash.

Kurdistan has tremendous potential, but its success is not assured. Many Kurdish officials have enriched themselves tremendously. It is time they shift focus from their own bank accounts to a collective portfolio to ensure future generations also benefit.

Michael Rubin
is a resident scholar at the American Enterprise Institute AEI. His major research area is the Middle East, with special focus on Iran, Iraq, Turkey, and Kurdish society. He also writes frequently on transformative diplomacy and governance issues. At AEI, Mr. Rubin chaired the "Dissent and Reform in the Arab World" conference series. He was the lead drafter of the Bipartisan Policy Center's 2008 report on Iran. In addition to his work at AEI, several times each month, Mr. Rubin travels to military bases across the United States and Europe to instruct senior U.S. Army and Marine officers deploying to Iraq and Afghanistan on issues relating to regional state history and politics, Shiism, the theological basis of extremism, and strategy.

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  The opinions expressed in this commentary are solely those of the author


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