Why Iraq’s Prime Minister Needs To Win The War on Graft Before Reconstruction Begins

Having put Islamic State to the sword, Iraq’s premier Haider al-Abadi has now set his sights on a new challenge – curbing the country’s endemic corruption, a struggle that must be won if his ambitious plans to revive regions devastated in the war against the insurgents are to be achieved.

The government has estimated that it needs $100 billion in reconstruction funds over the next ten years to restore Sunni cities and regions that bore the brunt of the conflict. Abadi is widely respected across Iraq’s highly sectarian political landscape, but in order to win the support of Sunni voters in elections next year he will need to demonstrate substantial progress on pledges to rebuild their heartlands.

The international community appears ready in principle to back Abadi’s rebuilding efforts though the scale of its support will likely be predicated on whether the country has the systems in place to ensure that funds are used effectively. So far, about half a billion dollars of assistance has been pledged. A donors’ conference in Kuwait early in 2018 is expected to secure more finance – however, Iraqi hopes of a Marshall Plan-like settlement for their country currently seem unrealistic.

While there is no shortage of goodwill towards Iraq, with world and regional powers acutely aware of the need to stabilise the country to avert an IS resurgence and stave off Iranian influence, there are real concerns that funds will be misspent or lost to corruption, as they were following the toppling of Saddam Hussein. A 2013 US government audit of its financing of Iraqi reconstruction over the previous decade, which came in at around $60 billion, found that nearly 15 per cent of  money had been wasted, with American military oversight of projects sharply criticised.

Iraqi leaders will be conscious that donors’ concerns over the distribution of funds may limit contributions, which is why they aim to supplement the latter with private investment. Already, Britain has earmarked $12 billion in loans available to UK companies engaged in Iraqi infrastructure projects. Baghdad is hoping that investment is directed towards public/private partnerships and the nascent small-to-medium-sized business sector, which could play a critical role in helping Iraq diversify its oil-dependent economy.

In the wake of IS’s defeat, Abadi launched what he described as a war on corruption. This has resonated strongly with many fellow Shia leaders – notably the hugely influential Muqtada al-Sadr – and Sunni politicians, whose constituencies want an end to a scourge that has blighted the country. The premier has been under pressure to act for some time. Last year Sadr supporters twice stormed the heavily fortified Green Zone, which houses government buildings and embassies, in protest over perceived government foot-dragging.  But fraud is so endemic that Abadi may struggle to make any headway. Some critics suggest that his combative pledges are little more than rhetoric aimed at boosting his electoral prospects or just a ploy to neuter political rivals.

Yet there are tangible signs that Iraq is committed to tackling fraud. In August a court jailed 26 high-ranking officials for up to 15 years after they were convicted of corruption. They included former ministers of defence, electricity and agriculture. It was a ground-breaking development as political interference in the judiciary has undermined efforts to prosecute and convict those suspected of graft.

The likes of the IMF will probably be looking for concrete state sector reforms which, even if Abadi is minded to introduce them, would meet considerable political resistance, possibly even from his own ruling Dawa Party. Cutting civil service jobs and salaries would undermine a deep-seated system of cronyism and patronage. It enables many parties to fund themselves and keep their constituencies onside – the former from kickbacks and the awarding of contracts to party-affiliated companies, the latter through the provision of public sector posts, which often furnish the incumbent with significant money-making opportunities.

Little wonder then that Abadi has warned that his battle against corruption may be more difficult than the one against IS. It might also explain why he is encouraging more private sector involvement in Iraq’s reconstruction, although overseas investors, like international lenders and foreign governments, will want to be reassured that they will not be channelling money into black holes.

So far, Abadi has been saying and doing the right things, albeit without really addressing government rent-seeking. Among headline anti-corruption measures, the courts will issue warrants against those who have allegedly smuggled money out of the country while contracts for past projects or investments that have failed will come under scrutiny. Sadr has been setting the pace by expelling dozens of people suspected of graft from his political movement.

Abadi has some time to formulate a more thoroughgoing anti-corruption strategy. His defeat of IS and retaking of the oil-rich city of Kirkuk from the Kurds has raised his stock among Iraqi Shia and Sunni communities who, for now, may feel that the jailing of officials for graft and robust pledges to tackle the latter are sufficient sign of progress. But international donors will likely want to see, at the very least, plans for substantial anti-corruption reforms as they assess how much they are prepared to commit to Iraq’s reconstruction efforts.

 

Ambrose Carey is a director at Alaco, a London-based business intelligence consultancy. He has particular experience in the Middle East, and has been involved in some of the most high profile asset-tracing cases of the past few decades.

Tajikistan and Ukraine Will Put Appetites of Emerging Market Bond Investors To Test

A strong appetite for emerging markets bonds has emboldened both investors and sovereigns. But that appetite will soon be put to the test by Tajikistan.

The small central Asian country is making its international bond market debut with a 10-year dollar-denominated bond. The country, which was not even rated until as recently as the penultimate week of August 2017 is aiming to raise between $500 million to $1 billion from international investors, according to media reports.

On the other hand, the other country mentioned in the previous article in this series, Ukraine, is no stranger to international bond markets. It was recently reported that the country has appointed bookrunners to issue dollar-denominated debt. Ukraine had last tapped bond markets in 2013 with a $3 billion offering.

The countries are on different spectra as far as their respective sizes are concerned. According to World Bank data, the gross domestic product (GDP) of Tajikistan was $6.9 billion in 2016 after reaching a peak of $9.2 billion in 2014.

Meanwhile, the World Bank estimates Ukraine’s GDP at $93.3 billion in 2016, down from a 10 year peak of $183.31 billion in 2013. Its GDP in 2016 was the second lowest in the past decade with the low-point having been seen in 2015.

Even though its economy is over 13 times larger than that of Tajikistan, Ukraine will be testing appetite as much as the Central Asian nation, albeit in a different manner.

The test

Both countries intend to capitalize on investor hunger for yield, and are each going to test that appetite in their own way.

Tajikistan is the second smallest country among the five central Asian nations. It has no track record of raising money overseas, is plagued by infrastructure issues and non-performing loans, and has a severely underdeveloped financial sector.

The country is overly dependent on remittances from abroad; they account for 45% of its GDP according to data from the International Monetary Fund (IMF). Importantly, its proposed issuance will not be guaranteed by any external organization.

Its issue size and cut-off yield will be indicative of the extent to which investors are willing to stretch for returns as well as their comfort in investing in the absolute fringes of emerging and developing countries. It will also set the bar for other smaller countries from the region, specifically Kyrgyzstan and Turkmenistan, as to how the international investment community is viewing their development agenda.

On the other hand, Ukraine is coming off of a geopolitical situation which had seen Crimea being annexed by Russia in 2014. This had hit its economy hard and led it to default on its 2013 loan. The country has been on an IMF bailout program worth $17.5 billion since 2015.

The debt had to be restructured and investors had to accept a 20% write-off. Legal battles ensued and are still ongoing.

However, two things seem in favor of Ukraine: its bond yields have come down significantly; the 10-year yield is below 7.5%, and the country recently received an upgrade from Moody’s which raised its sovereign rating from Caa3 with a stable outlook to Caa2 with a positive outlook.

Unlike Tajikistan, Ukraine is not on the fringes, but its geopolitical situation and the ongoing lawsuit involving debt default will have a bearing on the yields demanded at its offering. A successful issuance may help it reduce its dependence of the IMF bailout.

The multilateral agency had envisaged the country issuing $1 billion of bonds this year with the size of the offering increasing by $1 billion in the coming two years.

Strong investor response to recent issuances by financially troubled countries Iraq and Greece, apart from Belarus, and a centennial bond issued by Argentina, can provide hope to both Tajikistan and Ukraine for similarly favorable outcomes. The latter has traditionally been an attractive destination in Eastern Europe for fixed income investors.

Comparatively affordable new issuances would indicate that the emerging markets bonds rally may still be on firm ground.

Collapse Of The Islamic State Looms, Iraq Looks To Jordan

With the looming collapse of the Islamic State in Mosul, Iraq is already taking steps to reestablish security and plans to reignite development in Anbar province. Reconstruction and economic growth along its border region with Jordan will be paramount for Iraq’s political survival.

The defeat of the so-called Islamic State (IS) in Iraq is imminent and much of the focus on Baghdad will involve its security prowess. However, the long term test will be the ability to harness and sustain relations with its surrounding Arab countries through trade and freedom of movement. To reassert itself in the post-IS environment, Baghdad depends not just on the future of the restive Anbar province, but on the Hashemite Kingdom of Jordan to ensure Iraq’s primary gateway to the world remains open.

Al Anbar Province is the largest land area in Iraq and borders three neighboring countries, Saudi Arabia, Syria, and Jordan. The sparsely populated region paid a steep price in Baghdad’s quest to liberate the country from IS. Ramadi and Fallujah had entire districts destroyed as the Iraqi security forces and coalition targeted the militants with airstrikes and conducted siege warfare. Across the entire province a deep distrust of the Iraqi government remains high, a sentiment which drove many of Iraq’s insurgents from underground nationalist cells to the jihadist ideology of IS.

A security vacuum filled by three countries

Violence remains a threat to both Iraqi security forces and civilians in Anbar. An attack in the town of Rutba killed 10 troops at the end of April. This strategically-important town is the last major urban area before the frontier with Jordan. Rutba was captured by the extremists in May 2014 who quickly proceeded to seize the border. The latest attacks by IS are likely in response to an uptick in security maneuvers by anti-IS tribal elements north of Rutba earlier in the month.

Iraq has taken measures to enhance security along the highway connecting Baghdad to Jordan. Social media reports that the Iraqi army recently deployed more troops along the main transportation route. In March, a joint effort between the Iraqi “We Are Coming, Nineveh” Operations Command and the Iraqi East Anbar Operations unit landed the arrest of a top IS leader in Anbar province. Iraq is increasing military cooperation with the Syrian government by coordinating airstrikes against jihadist positions along the border region.

However, a spillover of violence from Syria’s civil war remains a real threat. Hundreds of Syrian government troops, bolstered by some-3,000 Iranian-backed Shia militia troops, along with tanks, have moved into the desert town of Sabaa Biyar near where the Syrian, Iraqi, and Jordanian borders meet.

The move, likely made by the Assad regime to secure the Damascus-Baghdad highway, was met with a deadly US airstrike on a pro-Assad militia convoy. This was done to prevent the regime from closing in on the US Special Forces that are based at the al Tanf border facility in Syria near the Jordanian and Iraqi border. The same US garrison had also repelled a IS attack earlier in April. It is now appears that the US intends to prevent the Syrian government from reestablishing its own land route to its ally, Iran. The high likelihood that militiamen who were killed in the airstrikes were Iraqis who were recruited by Iran to fight in Syria may complicate things for both Washington and Baghdad.

Despite wariness amongst the Jordanian security establishment of Iran’s recent activities near the border and Iraq becoming part of the “Iranian land corridor,” Jordan has taken some tentative steps towards normalizing relations with Damascus after the Syrian Civil War. Jordan’s military officials have paid visits to Damascus and Moscow along with being the only predominantly Sunni Arab country to attend peace talks in Astana.

Of course, Iraq still retains one foot in the pro-Western camp as well. Jordan hosted Iraq and several western countries during the 7th Eager Lion military exercise which was held over an eleven day period and featured a border security component. Establishing a solid trade relationship with Jordan will be paramount since the majority of the Sunni world remains apprehensive of forging a new relationship with Iraq due to the heavy presence of Iran in the country.

Diplomacy and geopolitical misgivings

The regional conflicts have taken their toll on Jordan’s economy. With a slow growth rate and an extremely high budget deficit, the Kingdom has struggled to attract tourism and to satisfy an increasingly restive youth. However, Jordan has not only remained stable, it has also successfully managed to retain its place in Washington’s foreign policy arena, especially with the arrival of the impulsive Trump Administration. King Abdullah has so far done well at maintaining the US-Jordan strategic relationship as well as guiding the new president through the nuances of Middle East politics. Baghdad will likely follow Jordan’s lead as it navigates its new relationship with the White House.

The Hashemite Kingdom has been a primary point of entry into conflict-ridden Iraq since the US occupation. Government development projects, military personnel, business travelers, and cultural exchanges programs between the West and Iraq all typically are funneled through Jordan. Due to Iraq’s conflicts, many Jordanians regard the Iraqi refugees with a strong dose of suspicion. Iraq is still heavily dependent on Jordan as a gateway to the outside world, since the long isolated country has few other options. The United States has attempted to ease Iraq’s isolation by helping Iraq to improve its relations with nearby countries, however, the success of these efforts has been mixed at best.

Iraq’s relationship with Jordan is paramount due to the misgivings of its southern neighbor, Saudi Arabia. For instance, Iraq’s southern neighbor, Saudi Arabia, famously contracted Airbus Group to build a 600 mile border barrier along the Iraqi border. Recently, however, relations have slowly been looking up with the Saudis. Iraq was pleased that the Arar gateway to Saudi Arabia, almost 280 miles south of Ramadi, reopened in the summer of 2016. The flow of Iraqi religious pilgrims was able to continue for the first time since the start of the 2003 Iraq War. Relations are far from perfect, however. The Trump Administration’s encouragement of talks between the Saudi government and Baghdad has yielded varying degrees of success, and the resumption of direct flights and a cancellation of Iraq’s $30 billion debt still seem to be well off.

The recent release of a Qatari hunting party from the country’s royal al-Thani family, facilitated in conjunction with a population transfer deal in Syria along with ransom payments to the Iraqi Shia militia Kata’ib Hezbollah will make future dealings will the Arab Gulf States difficult. Prime Minister Haider al-Abadi expressed dismay over the incident, a sign of contention within Iraq’s ruling political elite about the status of Iran’s activities in their country.

The new frontier rises from the ashes?

For Jordan, the loss of land trade during the IS campaign has been a major economic pain, especially for a country with high unemployment and few natural resources. The Associated Press reported that trade earnings decreased from $1.16 billion in 2014 to $690 million in 2015. The situation is rapidly changing with new opportunities in sight. The two countries are working on eliminating customs fees from a long list of products aimed at improving and encouraging cross-border trade.

The two countries met in March to plan the development of regional energy resources. Jordan’s Minister of Energy and Mineral Resources Ibrahim Saif noted that the first phase of the Basra-Aqaba pipeline, set to begin construction in 2017, would stretch from the southern Iraqi city of Basra through Najaf, and eventually link to the seaport of Aqaba in Jordan.

Jordan’s Minister of Industry, Trade and Supply, Yarub Qudah, said, “Providing facilities, encouraging Iraqi investors in Jordan and expediting the construction of the Jordan-Iraqi oil pipeline topics featured prominently during the discussions.”

This would be the first pipeline to straddle Iraq and Jordan since the ill-fated Mosul-Haifa pipeline, which passed through Jordan and reached the Mediterranean Sea. During the 1930-40s, Arab militants and the Zionist Irgun group frequently targeted it until it was finally terminated as the result of Israel’s victory in 1948. Talk of bringing the Mosul-Haifa line back to life after the US’ overthrow of Saddam Hussein quickly fell to the wayside.

In April, the Jordanian-Iraqi Business Council met in Amman to hammer out plans to revive cross-border trade. Among the items discussed were potential house projects in Iraq, logistical zones in the Iraq-Jordanian border areas and the construction of land ports with the capacity to facilitate the transport of commodities between the two countries. The Council has arranged to meet again in Baghdad this October.

Iraq also signed an agreement with the US-based company Olive Group to repair roads and 36 destroyed bridges, build rest areas, gas stations, and oversee security along the roads connecting the Tebril bordering crossing. In a sure sign of the post-IS political wrangling that lies ahead, many Iranian-backed Shia Iraqi factions expressed dismay that Baghdad would enlist the help of a private US company to achieve border and transportation security. Persistent rumors that the company is connected to Blackwater have added to the negative sentiments surrounding the project. Iraqi parliamentary figures are still pushing for greater cooperation with the Syrian government for securing the border. In addition, the US airstrikes in Syria against the regime-aligned Shia militia could also increase the chance of revenge attacks against US forces by the Shia Popular Mobilization Forces in Iraq.

Anbar province was the primary hideout for al Qaeda in Iraq, the precursor organization to IS. A leading Sunni politician, Mahmoud al-Mashhadani, recently called for a “historic compromise” to prevent the country from breaking apart. Political reforms, decentralization, infrastructure development, and direct investment in Sunni areas are all key demands on the table. Baghdad has a new opportunity to heal these old wounds. To do this, it will rely on friendship with Jordan, however, events in Syria and at home may make the healing process trying and full of uncertainty.

 

Chris Solomon is the GRI Guest Post Editor and a Senior Analyst. As appears on: http://globalriskinsights.com/2017/06/iraq-looks-jordan/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.