PARIS – Switzerland stunned the markets on Thursday by abandoning a crucial part of its effort to hold down the value of its currency, concluding that the strategy was too risky and too costly given the enormous forces pushing in the other direction.
The move underscores the turbulent state of the global economy. Around the world, smaller economies are grappling with how to navigate the aggressive monetary activism of major central banks like the Federal Reserve in the United States and the European Central Bank.
The Swiss central bank had been trying to cap the value of its currency, the franc, against the euro, with nervous investors fleeing the market tumult and seeking the relative safety of Switzerland. But the euro’s decline has been particularly steep – and the rout may accelerate.
The European Central Bank is expected to announce a major new stimulus program next week to pump money into the region’s troubled economy, which is creating downward pressure on the euro. That pressure is particularly marked against the dollar, which is rising in part because of a strong United States economy and plans by the Fed to raise interest rates.
If the Europeans undertake such an effort, it would make it that much more expensive for the Swiss to buy enough euros to maintain the value of the franc. So the Swiss leaders’ abandonment of its target was taken as a bet that easier money from the European Central Bank is on the way, and potentially on a vast scale.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in the announcement.
The abrupt decision on Thursday sent the value of the Swiss franc soaring, as the country’s stocks broadly plummeted. The shares of exporters, in particular, got slammed over fears that the rising currency would weigh on profit.
“Words fail me!” Nick Hayek, the chief executive of the Swiss watchmaker the Swatch Group, said in a statement distributed to news media, adding that today’s action “is a tsunami: for the export industry and for tourism, and finally for the entire country.”
The move hit some traders especially hard. FXCM, an online currency trading house based in New York City, said that the “unprecedented volatility” had led to significant losses by clients. The company said it had a negative equity balance of about $225 million. As a result, FXCM said it “may be in breach of some regulatory capital requirements.”
The Swiss policy dates to September 2011, near the height of the sovereign debt crisis in Europe.
As panic set in, investors and savers dumped euros in favor of the Swiss franc and other safe havens. The rising value of the Swiss franc, however, could contribute to pushing the country into deflation and create problems for the country’s exporters, which suddenly found their products less competitive overseas. Switzerland’s economy is heavily dependent on such companies.
So the Swiss monetary authorities instituted a policy to try to keep the euro to a floor of 1.20 francs. Only last month, it reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.
The Swiss central bank’s strategy, which involves selling francs on the open market in exchange for euros, has been controversial at home. Many exporters had welcomed the decision to hold down the franc.
But as the central bank’s balance sheet grew by several hundred billion euros, the central bank came under fire from opponents. In a December referendum, those critics tried to force the central bank to convert much of its foreign exchange holdings into gold. That initiative failed.
On Thursday, the central bank surrendered to the market dynamics, saying in a statement that it was giving up the minimum exchange rate.
“This exceptional and temporary measure protected the Swiss economy from serious harm,” the central bank said in a statement. “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”
Phyllis Papadavid, foreign exchange strategist at BNP Paribas in London, said after the Swiss central bank action that monetary authorities were “still sensitive” to the overvaluation of the franc, but that they had adapted to changed conditions – particularly the dollar’s recent rise – by changing course.
“They haven’t given up,” Ms. Papadavid said. “They’re clearly going to continue watching it.”
As it scrapped the cap, the Swiss central bank simultaneously cut interest rates, already in negative terrain, hoping to offset some of the damage in foreign exchange markets. It changed the rate on deposits to minus 0.75 percent from minus 0.25 percent, tripling what it costs lenders to park money at the central bank.
But that was too little to stop the tide, and the franc jolted 15 percent higher against the euro. Swiss stocks plummeted in value as investors hastened to sell equities priced in francs.
Shares of Swatch, the global watch brand, fell 16 percent, leading the Swiss Market Index nearly 9 percent lower. But the decline was broad-based, including Nestlé, the food manufacturer; Holcim, the giant cement maker; and the chemical company Syngenta.
“We can only guess at what was in their minds,” Carl B. Weinberg, chief global economist at High Frequency Economics, said of the Swiss central bank’s move. “Maybe they are afraid that the euro is coming on some hard times, and they didn’t want to be tied to a sinking ship.”
Mr. Weinberg said it was hard at the moment to tell what the fallout would ultimately be, but that it would mainly be “micro effects, rather than macro effects.”
“A lot of people were borrowing in Swiss francs because they were cheap,” Mr. Weinberg said. “Well, anyone who borrowed in francs now owes something like 15 percent more than they did yesterday.”
“But anyone who has Swiss assets is a little bit richer today,” he added. “Net, there are winners and losers.”
David Jolly reported from Paris and Neil Irwin from Washington.
|December 22, 2014 | 14:57 GMT|
Russian energy company Gazprom will heed the request of Russian President Vladimir Putin and will sell its foreign currency reserves on the domestic market, Reuters reported Dec. 22. The move is meant to help stabilize the ruble, which is down some 45 percent against the dollar so far this year.
|December 19, 2014 | 16:50 GMT|
Russia’s deteriorating economic situation has struck another blow to Russian President Vladimir Putin and his ability to maintain a firm hold on the country and the government. Uncertainty in the Russian economy continued for another day Dec. 17 as the Russian government was forced to step in to stabilize the ruble after the currency plummeted 20 percent the previous day. The fall in the ruble’s value came after the Central Bank of Russia raised interest rates from 10.5 percent to 17 percent — the largest interest hike since the devastating 1998 financial crisis that led to Russia’s massive defaults. These developments in what was already a weakening economy increased pressure on and within the Kremlin, spawning rumors throughout Russia about the cause of this instability and about what could come next.
Before the past few frantic days, the Russian economy was already in a sharp decline caused by several factors. Russian industrial growth and production began stagnating in 2013, and the Russian-supported conflict in Ukraine had soured investor sentiment and prompted economic sanctions from the West. Moreover, oil prices fell below the government budget’s forecast of $93 per barrel for 2014 and $80 per barrel for 2015.
Fissures and disagreements have formed within Putin’s top team on how to manage the current economic crisis, just as Putin is already losing the confidence of Russia’s security chiefs. Because of the failure to predict a change in Ukraine, Putin has already purged factions within the Federal Security Service. Moreover, in recent weeks, Nikolai Patrushev — head of the Russian Security Council and former Federal Security Service chief — has faced public criticism and allegations of corruption from opposition factions led by Alexei Navalny. This could signal even greater pressure among Russia’s security elite, one of Putin’s primary sources of power and stability. With his supporting factions in disarray, Putin is facing another test of his ability to retain the confidence of the people and those inside the Kremlin.
|December 17, 2014 | 00:54 GMT|
Tuesday marked a difficult day for Russia President Vladimir Putin on both the economic and foreign policy fronts. In the early hours of Dec. 16, the Russian Central Bank announced an increase of its benchmark interest rate from 10.5 percent to 17 percent — the largest such hike since 1998. While this decision helped the ruble strengthen for a few hours, the currency then went into a free fall, at one point losing 20 percent of its value and hitting record lows at 80 rubles to the dollar. The ruble finally stabilized in the afternoon, likely due to a Central Bank intervention, and toward the end of the day it strengthened in value, indicating a possible second monetary intervention. Though the escalating economic crisis in Russia puts Putin’s government in a precarious position, it could pose strategic challenges for the United States and Europe as well.
The ruble had been gradually weakening for months before its dramatic decline on Tuesday, with the currency losing about half its value since the beginning of the year due to Western sanctions, lower oil prices and declining market confidence. Should Tuesday’s interest rate increase fail to stabilize the currency in the short term, the Central Bank could implement additional interest rate hikes, currency interventions or even capital controls to stem the ruble’s decline.
On the surface, the Kremlin has worked to present a calm and organized reaction to the ruble’s collapse. Putin’s spokesman, Dmitry Peskov, assured the public that the Central Bank is acting independently and that Putin did not plan to hold any new or extraordinary meetings on the topic that day. Minister for Economic Development Alexei Ulyukayev — following a meeting with Prime Minister Dmitri Medvedev, Central Bank chief Elvira Nabiullina and other top policymakers — reported that Russia’s leadership is not considering capital controls to ameliorate the crisis. A video shown on Russian television, reminiscent of a Hollywood-style movie trailer, promoted an upcoming press conference by Putin on Dec. 18 highlighting Russia’s strength and defiance of the West. Russian state media also largely minimized the ruble fall. Nevertheless, the impact of the ruble’s fall could be felt as Russian banks saw increased demand for foreign currency and cash, while some businesses — such as Russia’s online Apple store — temporary stopped sales.
Meanwhile, the White House announced Tuesday that U.S. President Barack Obama will sign the Ukraine Freedom Support Act of 2014, which passed Congress over the weekend. The bill lays the groundwork for possible additional sanctions on Russia and includes provisions for military support to Ukraine later this week. The president’s move will initiate the deadlines for the separate sanction elements of the bill. The act is structured in a way that gives Obama great flexibility in whether to implement all or only some of the sanctions, but it requires the president to apply sanctions on the Russian defense and energy sectors. Sanctions on Gazprom are also possible if the company significantly decreases natural gas supplies to NATO members, Ukraine, Georgia or Moldova.
The most severe of the defense sector sanctions (depending on how many of the act’s optional elements Obama decides to implement) would still only have a limited effect on the Russian defense industry, since it does not depend on business or banking inside the United States. Meanwhile, the energy sector sanctions could have more significant effects on the activities of U.S. oil majors involved in projects inside Russia. The act may directly target their ability to conduct business if they continue their activities in Russia. Other sanctions targeting Russian energy companies that rely on equipment imported from the United States are optional.
Overall, the act gives Obama tools to target specific parts of the Russian economy, though apart from some areas of the energy sector, most of these would have only limited effects on the country. Nonetheless, the act is noteworthy because the United States has decided to move on the bill just as Russia experienced its worst financial day in several years. Washington is making a point that rather than easing tensions by relaxing existing sanctions, it has the capability to increase pressure on Moscow. The message here is clear: The United States has Putin on the edge, and it can push him over if it so desired.
However, the United States knows that it can be dangerous to push Russia too far. A collapse of the Russian economy would be felt throughout Europe’s economy and those of the rest of the former Soviet space (including countries like Ukraine that are dependent on Western financial assistance). It could have security implications as well. Indeed, Russian Foreign Minister Sergei Lavrov stated in an interview Dec. 15 that Moscow has the right to deploy nuclear weapons in Crimea. This statement came a week after a U.S. deputy secretary of defense, speaking at a U.S. Senate hearing, floated the idea of deploying tactical nuclear weapons in Europe. While both Russia and the West have escalated their rhetoric over the Ukraine crisis, the United States and the European Union certainly do not want the standoff to reach the point where action or buildups on the nuclear front become realistic, particularly at a time when Moscow feels under attack by the West.
It is still too soon to gauge the extent of the damage of Russia’s current financial crisis. But Putin is well aware of the impacts of major economic crises on past Russian governments, as it was Russia’s 1998 financial crisis that ushered in the downfall of former Russian President Boris Yeltsin and facilitated Putin’s own rise to power. At the same time, the United States and the European Union understand that a pushing a nuclear-armed country as large and powerful as Russia toward full-scale collapse can have serious unintended consequences, and such an aim ultimately may not be in their interest, despite the standoff over Ukraine. Thus, both Putin and the West will have to grapple with the dilemmas posed by Tuesday’s events in order to avoid a larger crisis.
MOSCOW – The Russian ruble faced intense selling pressure Tuesday, falling at one stage by a whopping 20 percent to historic lows despite a massive pre-dawn interest rate hike from the country’s central bank.
The surprise decision to raise the rate to 17 percent from 10.5 percent came in the middle of the night and represented a desperate attempt to prop up the troubled currency. The ruble has fallen sharply in recent weeks as a result of sliding oil prices as well as the impact of Western sanctions imposed over Russia’s involvement in Ukraine.
The collapse in the ruble, which has spurred ordinary Russians to buy imported products such as fridges and cars and is stoking inflation, is likely to heap pressure on President Vladimir Putin. Still, support for Putin appears to be holding up. State television, meanwhile, urged citizens not to panic amid Tuesday’s rout.
The Central Bank’s move on interest rates aimed to encourage currency traders to hold onto their rubles – doing so gives them potentially big returns, certainly in comparison to many other currencies, such as the dollar, where the interest rate returns are near zero percent.
The ruble traded at 72 per dollar late Tuesday afternoon. That’s a modest improvement on where it was earlier – it hit 78.5 to the dollar – but still means the currency is more than 60 percent down from where it was in January.
Timothy Ash at London-based Standard Bank described the ruble’s fall as “the most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia.”
Ash said “there is now a huge credibility gap for Russian policy makers in the eyes of the market” and that the decline is all the more astonishing given Russia’s solid foreign currency reserves and the fact that it runs a budget surplus.
But the message from state television is that there is no need to panic and a weak ruble is actually good for the economy because it will stimulate domestic production and make exports cheaper. So far, Russians appear to trust that the government is able to control the situation. If anything, many see the West as to blame.
Central Bank chairwoman Elvira Nabiullina said the rate hike should stem inflation – higher borrowing costs effectively choke economic activity, dampening down price pressures. However, she conceded that the ruble’s value will not be immediately influenced by the rate hike and added that it will take the ruble “some time” before it finds a fair value.
Other options available to the Russian authorities to stem the selling tide could be imposing capital controls or actual intervention in the markets – buying rubles, for example. The Central Bank has intervened directly in the past few months.
Higher interest rates may eventually offer support to the ruble, but it’s likely to cause much hardship in an economy that’s already heading for recession. Russian stocks were solid on Tuesday, though, with the MICEX benchmark 2 percent up late afternoon.
Neil Shearing, chief economist for emerging markets at London-based Capital Economics, said the rate hike will cause “a further tightening of credit conditions for households and businesses and a deeper downturn in the real economy in 2015.”
Given Russia’s huge dependence on oil revenues, the recent sharp falls in the price of oil have hit the Russian economy hard. That’s exacerbated by the fact that the Russian economy isn’t diversified enough to withstand the shock.
The average price of a barrel of oil has dropped below $56 from a summer high of $107. The government recently downgraded its forecast for next year, predicting that the economy will sink into recession. Most international forecasters think the Russian economy is set to contract next year.
Alexei Kudrin, Russia’s finance minister in 2000-2011, said on Twitter following the rate hike that “the fall of the ruble and the stock market is not just a reaction to low oil prices and the sanctions but also (a show of) distrust to economic policies of the government.”
Kudrin added that the rate hike “should be followed by government measures to raise investor confidence in the Russian economy.” He did not say what steps he advocated.
|December 16, 2014 | 16:04 GMT|
The rapid decline of the ruble — about 13 percent in one day — is a critical situation and the central bank of Russia will react with additional measures soon, the bank’s first deputy chairman Sergei Shvetsov said Dec. 16. “We could not imagine this in our worst nightmare a year ago,” Shvetsov told Interfax. The bank hiked its key interest rate to 17 percent overnight, but despite the rate increase, the ruble continued to fall sharply throughout the day, declining by 20 percent in the span of only a few hours before stabilizing a bit. Shvetsov expressed optimism that the country would survive the crisis but said the situation would be comparable to the worst period of 2008.
|December 11, 2014 | 17:02 GMT|
Turkey’s sole oil refiner Tupras has started purchasing Iraqi crude oil, Turkish Energy Minister Taner Yildiz said, Reuters reported Dec. 11. Yildiz added that a combined 550,000 barrels of oil per day will flow to Turkey from Iraq’s national government and from the Kurdistan Regional Government. The KRG reached an agreement with Iraq’s federal government in early December on oil exports.
Economic expert is expected to increase the purchasing value of the Iraqi dinar
taking advantage of the economic strength of the dollar
Economic expert is expected to increase the purchasing value of the Iraqi dinar taking advantage of the economic strength of the dollar
The Iraqi Economic Information Center, said thegrowth in dollar prices of natural and foreseeable result of lower oil prices, a result of the strengthening of the US economy and growth of the market as the largest consumer of oil in the world, which determines the growth path in the direction of the oil market. The US dollar rose to its highest level in the world five years against a basket of currencies supported by the growth of American jobs. Jumped dollar index, which tracks the US currency’s value against a basket of six major currencies to its highest level since March 2009.
The head of the Center lion Muhammad Ali in a press statement I followed (news agency, media / INA), said that “the Iraqi currency pegged to benefit relatively from the economic strength of the dollar and the rising value of purchasing, but the losses resulting from the decline in oil prices is much greater than the gains of the Iraqi economy Limited, which earned its currency strengthened this partial growth rates the dollar. ” He noted that “growth indicators this will not last long in the light of the current swing in oil prices and the prospect of rising from their lows currently registered,” stressing the need to take advantage of this relatively high dollar contract prices relatively less, especially with countries that dropped their currencies relative to the dollar.
The number of US jobs in November rose to the highest pace in nearly three years and increased wages, which could enhance the motives of the Federal Reserve (the US central bank) to raise interest rates. The US Department of Labor last Friday, said that the number of jobs in non-agricultural sectors increased 321 thousand jobs last month, the highest increase since January 2012. The unemployment rate unchanged at 5.8 percent, its lowest level in six years, also participate in the labor force – or percentage of Americans rate settled in the working age who have a job or looking for a job – at 62 percent.
Thursday, December 4, 2014
BAGHDAD (AP) – Washington has an agreement with Baghdad on privileges and immunities for the growing number of troops based in Iraq who are helping in the fight against the Islamic State group, the new US ambassador said Thursday.
In an exclusive interview with The Associated Press, Stuart Jones said Prime Minister Haider al-Abadi has given assurances that US troops will receive immunity from prosecution. Under Iraq’s former Prime Minister Nouri al-Maliki, that issue was a major sticking point, ultimately leading to the decision to withdraw all remaining US troops in late 2011.
“That was a different situation and those troops would have had a different role,” Jones said.
“We have the assurances that we need from the government of Iraq on privileges and immunities,” he said. “It’s in the basis of our formal written communications between our governments and also based on the strategic framework agreement that is the legal basis of our partnership.”
The House was expected to vote Thursday on a proposed $ 5 billion expansion of US military operations against the Islamic State group in Iraq, part of a broader $ 585 billion defense policy bill for Iraq and Syria. Last month, Obama authorized the deployment of up to 1,500 more American troops to bolster Iraqi forces, which could more than double the total number of US forces to 3,100. That’s in addition to the 5,000 people working for the US mission in Iraq.
The US-trained and equipped Iraqi military has struggled to recover from its collapse in June, when the Islamic State group captured the country’s second largest city, Mosul, and swept over much of northern and western Iraq. Iraqi commanders fled, pleas for more ammunition went unanswered, and in some cases soldiers stripped off their uniforms and ran. The US began launching airstrikes in Iraq on Aug. 8, and now heads a coalition backing Iraqi and Kurdish ground forces from the air.
US advisory teams, which were previously based in Baghdad and the Kurdish regional capital Irbil, are now fanning out to other locations in the country, including the highly volatile Anbar province in western Iraq, where US troops fought some of the heaviest battles of the eight -year conflict.
This time the troops are operating far from the front lines. “What we’re doing is airstrikes,” Jones said. “What we’re doing is sharing intelligence. We’re doing advise and assist and we’re doing training – and that’s all we’re doing. “
Part of the plan to boost Iraqi forces includes training, equipping and paying Sunni tribesmen to join in the fight against the Islamic State group, reminiscent of the Sunni Sahwa, or Awakening movement, which confronted al-Qaeda in Iraq starting in 2006. The Pentagon plans to buy a range of arms for Iraq’s tribesmen, including 5,000 AK-47s, 50 rocket-propelled grenade launchers, 12,000 grenades and 50 82-mm mortars. The arms supply, described in a document that will be sent to Congress for its approval, said the estimated cost to equip an initial Anbar-based force of tribal fighters is $ 18.5 million, part of a $ 1.6 billion request to Congress that includes arming and training Iraqi and Kurdish forces.
However, recruiting the tribes has been a challenging process since many of the Sunni tribes involved in the Sahwa campaign felt a breach of trust after the American and Iraqi governments’ commitment to the program waned.
“What I say to the tribes is you’ve got to be integrated with security forces to get the benefit of the airstrikes,” Jones said. “We can play a facilitating role but it’s only that.”
He declined to address whether US ground troops will be needed to defeat the Islamic State group, instead pointing to recent successes by Iraqi security forces in retaking territory, including the town of Beiji and the country’s largest oil refinery, as well as Jurf al-Sakher , south of Baghdad.
Iraq’s Shiite militias, or Popular Mobilization Forces, played a central role in those victories. They have also been accused by rights groups of abducting, torturing and killing scores of Sunni civilians in reprisal attacks.
“Let’s be frank: they play an important role in the security of Iraq,” Jones said of the Iran-supported militias. “They have been an effective fighting force and they have greatly assisted Iraqi security forces in some of these military victories … .Now, they need to really be brought under the supervision and control of the armed forces.”
The ambassador did not address reports by Pentagon officials this week that Iran has launched airstrikes against the Sunni militant group in eastern Iraq, but acknowledged the important role Iran plays independently in the fight against the Islamic State group.
|December 2, 2014 | 2232 GMT|
Following negotiations in Baghdad, Iraq’s central government and the Kurdistan Regional Government have broadened an agreement to stabilize northern oil exports and to distribute the revenue from those exports.
The agreement stipulates that the Kurdistan Regional Government, known as the KRG, will export 250,000 barrels of oil per day from the Kurdish region, as well as 300,000 barrels per day from disputed Kirkuk oil fields using a pipeline running through KRG territory into Turkey. Rather than build a pipeline to unilaterally export this oil, as the KRG had originally hoped, the central government in Baghdad will sell the oil through its State Oil Marketing Organization, and Baghdad will be in charge of distributing revenue from those exports. In return, Baghdad has pledged to distribute 17 percent of its federal budget to the KRG in addition to an annual sum of $1 billion for peshmerga salaries. The peshmerga funds will be drawn from the Iraqi Ministry of Defense’s budget and will be critical to ensuring Kurdish support for Baghdad’s ongoing fight against Islamic State militants.
As Stratfor anticipated, the deal means the KRG has to abandon its earlier goal of establishing a unilateral export policy aided by Turkey. The plan failed because of the KRG’s heavy financial constraints and Ankara’s concerns that any Kurdish independence could influence separatist factions within Turkey’s borders. When Arbil and Baghdad signed a preliminary agreement in November, Stratfor forecasted that the central government would not make a final deal unless the KRG agreed to sell Kurdish oil through the State Oil Marketing Organization and allow Baghdad to control the funds from exports. Under these constraints, the burden of compromise lay on the KRG.
The status of Kirkuk was a critical aspect of these negotiations. Its vulnerability has both facilitated the current arrangement and will likely threaten it in the future. The KRG, led by President Massoud Barzani’s Kurdistan Democratic Party, took advantage of the Islamic State’s summer siege by deploying Kurdish peshmerga to occupy the Kirkuk fields, specifically the Baba and Avana domes of Kirkuk field and the nearby Bai Hassan field. The Kurdistan Democratic Party’s leaders have since attempted to politically integrate these areas into the KRG so they can export from these fields and effectively claim them as their own. The KRG, however, does not have exclusive control over Kirkuk. In striking this agreement, the KRG has tacitly acknowledged this by consenting to allow the State Oil Marketing Organization to sell the oil.
This role for the State Oil Marketing Organization has been a key demand for Baghdad, which needs to maintain the power of the purse and its authority over Kirkuk, even if it is not physically in control of the fields at this time. Baghdad would also benefit from increased production out of the north given that oil prices are now depressed and the central government is spending heavily on its military campaign against the Islamic State.
The KRG pipeline to Turkey has been operating at a capacity of close to 300,000 barrels per day, but the government is working to increase pipeline capacity to 400,000 barrels per day by the end of year. This, however, will most likely occur in a couple of months. To fulfill the agreement’s targeted output of 550,000 barrels per day from the north, Kirkuk production would also have to increase from the roughly 120,000 barrels per day coming from the Avana dome and Bai Hassan field. The Kurdish occupation of Kirkuk fields may have given Baghdad more incentive to negotiate, but the shaky status of Kirkuk could also seriously hamper this arrangement down the line.
Baghdad will seek to undermine Kurdish political influence in Kirkuk through Arab and Turkmen resistance to the KRG. It will also do so by using pending contracts with international oil companies such as BP to raise production in the Kirkuk fields. The blurry line between what the KRG has authority over in Kirkuk versus what Baghdad has authority over — from deciding political rights of local Kirkuk officials to energy contracts with international oil companies — will create a more ambiguous political and legal environment for companies operating in the disputed territories.
The current arrangement also lacks an enforcement mechanism. Baghdad will have the right to restrict budget allocations at any time, using any shortfall in production or output to justify cuts, and the KRG will retain the option to divert crude flows through a pumping and metering station it controls on the border with Turkey. These options leave the agreement vulnerable to future disruptions, especially as the Kirkuk fault line remains wide open.
For now, both sides will play nice. So long as the arrangement remains in place, buyers of KRG crude have legal cover to buy Iraqi crude exported through the Turkish port of Ceyhan and will be expected to send payments through Baghdad. The security environment will also underpin the arrangement because the Iraqi army will have to rely on the Kurdish peshmerga to uproot Islamic State militants from key urban areas such as Mosul. These situations are not static, however. The fight over Kirkuk and both governments’ lack of ability to enforce this energy compromise means Stratfor will closely watch for the inevitable ruptures to come.