In recent years, a hard earned record for security and stability had gained the Kurdistan region of northern Iraq a reputation as a booming business center. Headlines splashed across magazines and newspapers comparing the growth of Erbil, the Kurdish region’s capital, to Dubai’s meteoric expansion. However, the summer of 2014 challenged that idea as a new phase of turbulence gripped the whole country. The onslaught of Islamic State of Iraq and Syria (ISIS) militants, who have taken control of large swathes of the country and carved a bloody path towards Erbil and Baghdad, was a stark reminder to all that Kurdistan is not immune to trouble in the neighborhood. But like the glittering hyperbole surrounding the rise of Erbil, the doom and gloom painted since the rise of ISIS may also be overstated. The situation is far from stable, but investors, analysts and business people focusing on the area say it won’t push them out, and it certainly won’t derail Kurdish development.
[pullquote]This growth was mainly led by the oil industry, which dominates the economy of the region[/pullquote]
Kurdistan on the rise
With its population of a little over 8 million, Iraqi Kurdistan has been growing rapidly since US-led forces ousted Iraqi President Saddam Hussein in 2003. This growth was mainly led by the oil industry, which dominates the economy of the region and funded massive investment in infrastructure. According to Conor Griffin of the Economist Intelligence Unit, foreign investment in Kurdistan really started with energy and construction. “In energy, you have many small ‘cowboy’, frontier style players,” Griffin says. “Now you see big western companies coming in like ExxonMobil. The big choice for them was to stay in [southern] Iraq or go to [the] Kurdistan [region], and they have gone to Kurdistan, which I think shows that there is a lot of potential [there].”
In the wake of the oil industry’s expansion, small and medium sized foreign investors also flooded to Kurdistan, attracted by the relative security and social cohesion. Indeed, Chakib Chehab, head of Iraq Operations at Malia Group, a Lebanese conglomerate of companies that have large operations in Iraq, including in the Kurdistan region, cited this lack of sectarian tension within the Kurdish region as a contributing factor to their increased investment in the region since 2003.
Fast forward to 2014. Glittering highrises tower over Erbil’s department stores, shopping malls and forecourts full of fleets of white or orange tan cars. This very visible expansion of wealth and prosperity contributed to the ubiquitous newspaper hype, but the massive growth was undeniably real.
The region is now home to around 3,000 foreign businesses, more than two thirds of which are Turkish and a substantial number of the others are Iranian. “Turkey has the advantage of proximity. Whenever you have low value goods where the proportion of cost of transportation is high, then Turkey has an advantage,” says Chehab. This is changing as more Middle Eastern and Western firms move into the market, filling in Kurdistan’s gap in domestic light industry or consumer good production.
As part of this rush of foreign firms, Lebanon contributed to the establishment of some very important industries. Byblos Bank was the first Lebanese bank to start operating in the region, which was marked by a distinct lack of local financial institutions, while Lebanese hospitality, consumer goods and logistics companies also flocked to the area.
[pullquote]With the region’s borders no longer under attack and Western support materializing, investors are confident that things are already back on track[/pullquote]
The ISIS Crisis
In June 2014, ISIS’ rapid sweep across northwestern Iraq sent the international community into shock. After taking over Fallujah earlier this year, militants made speedy progress through the Nineveh province. The armed forces of the Kurdistan Regional Government (KRG), known as the Peshmerga, began clashing with ISIS, who had reached within 40 kilometers of Erbil. Suddenly, the very existence of Kurdistan seemed under threat.
As Kurdish borders and cities came under attack, the economy experienced a freeze. “People are really worried,” said Shwan Zulal, an energy and risk analyst at Carduchi Consulting, who spoke to Executive in August. Crucially, Kurdistan’s oil sector was immediately affected as Chevron, Afren, Austrian energy group OMV, and Genel Energy evacuated some of their staff and halted production at their fields. Zulal observed that various telecommunications companies had pulled staff out of Erbil and that businesses were generally suffering.
But even as ISIS and its allies were marching toward the Kurdish region, analysts and residents didn’t expect the economic freeze to last. “Things will settle down again,” Zulal said. “At the moment, people are just carrying on.” Despite the recent Eid celebrations being quieter than usual, economic activity in the Kurdish capital was normal, said Erbil based marketing professional Marwan Wiswasee. “I highly doubt any of this will be permanent or long term,” he said. Malia’s Chehab, too, said he believed most of the businesses that had pulled out staff or halted operations had been dealing with other challenges unrelated to the instability. Malia itself, he said, had neither slowed nor halted any projects.
Indeed, oil companies are already bringing their staff back to the region and revamping oil production. Many of the investors, it seems, had seen Western support for Kurdistan as a given and that the risk of it being overrun would represent a red line for the US. With the region’s borders no longer under attack and Western support materializing, investors are confident that things are already back on track.
[pullquote]“Lebanese businesses have stuck around because they are used to conflict”[/pullquote]
“The investors are serious”
When asked why Iraqi Kurdistan had managed to bounce back so quickly, analysts and investors had one answer: businesspeople do their homework. “From the very beginning, when you invest in Iraq or Lebanon or Syria or the Levant, the investors are serious,” says Chehab. Firms seriously looking to invest in conflict prone regions like Iraq are not doing so blindly: they know Kurdistan won’t afford them the same stability as the Gulf. “The big companies that rate countries are very clear about the risk factors, so the investors that are there have taken [that] into consideration,” Chehab said.
And Lebanese investors in particular, analysts and businesspeople say, are here to stay. “Lebanese businesses have stuck around because they are used to conflict,” says economic analyst Riad al Khouri. Danny Geadaa, Lebanese expat and general manager of the Lebanese owned Avenue Hotel in Kurdistan’s eastern city of Suleimaniyah, chalks it up to good business acumen: “When international investors see that the groundwork has been laid successfully by Lebanese, it’s encouraging them to do more.”
Investors, in fact, are looking for something different. “Kurdistan is a virgin area, [whereas] Dubai is full of investors — the investments get lost,” said Geadaa. To a degree, Kurdistan’s instability has driven potentially less dedicated would be investors away, leaving fewer competitors. Malia’s Chehab noted that if the situation were as stable as the Gulf, huge multinationals would be able to squeeze out small and midsized firms. Malia built and owns Erbil’s only five star hotel, the Rotana, but now many of the big international hotel chains have plans to open their doors in Kurdistan by 2017. Chehab added that the logistics of legally registering a company in the Kurdish region are simple: without the need for a local partner, entrepreneurs can set up businesses within three weeks and easily liquidate or sell them. Most importantly, the repatriation of profit is straightforward. And with soaring advertising and marketing costs in places like Dubai, investors are keen to set up shop where “everyone is lined up outside waiting for you to open,” Geadaa says.
The real Erbil
None of the investors who spoke to Executive said that they had ever held the idealized, sparkling image of Erbil or anywhere in Kurdistan becoming the next Dubai. This version of the region, it seems, only ever existed in the pages of the press. Likewise, the established, long term foreign businesses were never under the illusion that the situation on the ground was certain, knowing full well that the exuberance of these articles didn’t accurately reflect the business environment they were dealing with.
“Kurdistan is not an island out of this region and what is happening, and it is a mistake to consider this an oasis,” says Chehab.
Once you move past the security situation, there are other major challenges that put pressure on investors. The reality in Kurdistan, says Griffin, is that there are several key challenges ahead for the region.
[pullquote]A major challenge for the KRG is to develop the private sector and build a flexible skilled workforce to service it[/pullquote]
“We need to see the energy sector develop, but also tourism, agriculture and light industry. The big question for Kurdistan as a big economy is whether they can do that,” says Griffin. The first major challenge to this is that the public sector dominates the market as almost everyone officially or unofficially works for the KRG. This creates issues in the labor supply and causes flexibility issues for employers. Therefore a major challenge for the KRG is to develop the private sector and build a flexible skilled workforce to service it — also a major requirement for large scale Western investment. Secondly, as there is almost no domestic production and even agriculture is no longer supporting domestic need, virtually everything is imported and paid for with oil money. While leaders of the region do recognize this, there are other huge stumbling blocks to resolving the issue — such as the ongoing budget dispute with the central government.
Over the last 18 months, the argument over federal funding between Erbil and Baghdad has intensified. The KRG believes it is not receiving its fair share of the budget and Baghdad suspended payment in February 2014 over the move by the KRG to exploit and export its own oil supplies. This suspension of payments prevented salaries being given to many government employees across Kurdistan — not a reassuring sign for ratings agencies or investors.
At the present level of oil extraction and export capacity, Kurdistan would lose money if it tried to support itself without federal funding, or made a bid for independence. However, Griffin points out that what the region wants is independence and security of funding. The solution proposed by the KRG is to take its allowance from its own oil exports, and then either receive the shortfall or give any additional income to Baghdad. This would give them autonomy over their income and protect them from federal disputes. Independently exploiting oil reserves is something that Baghdad, however, says is unconstitutional.
It is too early to tell how the summer’s crisis will impact these long term challenges for the Kurdish region, but one positive result has already emerged: the dispelling of the mirage of an unrealistic path for Kurdistan. The region will continue on its long term track toward becoming a regional powerhouse, and removing the glittering hyperbole is a promising first step for investors.