ONDD, the Belgian export credit agency, has warned in its monthly report that “insecurity, instability and sectarian tensions will continue to prevail in Iraq”.

The text of their statement is shown below:

Iraq: Deteriorating security and political climate as US troops leave the country

> Event: The last US troops left Iraq after President Obama‘s declaration of the end of the Iraq war on 15 December. Only a few days later, a political crisis broke out as Iraq’s biggest parliamentary bloc, al-Iraqiya announced a boycott of the assembly in a reaction against Prime Minister al-Maliki’s efforts to remove two key government members, affiliated to al-Iraqiya: Vice-President al-Hashemi, against whom an arrest warrant was issued on terror charges, and deputy Prime Minister al-Mutlaq. This has resulted in a severe political crisis within the unity government that has only been formed end-2010. On top, during the past weeks the country has once again been hit by serious terrorist attacks, the most deadly in months.

> Impact on country risk: It emerges that, also after the withdrawal of US troops, insecurity, instability and sectarian tensions will continue to prevail in Iraq. These sectarian tensions are not only being witnessed on the political scene (as PM Maliki comes from the Shia majority and al-Iraqiya is Sunni-backed), but these divisions are also being exploited by terrorist organizations on the ground. Iraq’s Kurds, which form a third major group in the country, could intend to reconcile the Sunni and Shia blocs – thereby increasing further their own influence – but the current instability will further impact economic performance and relations with international (energy) investors. (analyst: Daan Rowies, d.rowies@ondd.be)

(Source: ONDD)

Let’s start with a little test: Can you rank the following economies in order of the expected risk of their defaulting on their sovereign debt – Ireland, Argentina, Dubai, Greece, Iraq?

The correct order, based on the cost using credit default swaps (CDS) to insure their debt against default, is: Greece (riskiest), Ireland, Argentina, Dubai, Iraq (10^th riskiest). The full top-ten is: Greece, Venezuela, Ireland, Portugal, Argentina, Ukraine, Spain, Dubai, Hungary and Iraq.

The result probably won’t surprise regular readers of Iraq Business News, who are already aware of developments such as the increases already achieved in Iraq’s oil output, the impending third round of oil licences, and the contracts signed for the construction of new power plants.

Edinburgh-based consultants Wood Mackenzie estimate that, “in Iraq, upstream investment is likely to climb rapidly to $10 billion in the next three years.”

So while the public perception of Iraq is still one of high risk, and it is admittedly far from being a developed economy, the financial markets are already beginning to recognise Iraq’s improving outlook.

If you’re considering taking advantage of these new developments in Iraq, Upper Quartile and AAIB are here to help you. For more information please contact Gavin Jones or Adrian Shaw.

Four people, including three children, were kidnapped by criminals then freed by the authorities in Iraq last week. In recent months consular warnings have continued to remind foreign nationals of the risk of abduction still present in the country. With a rise in foreigners travelling to the country it may only be a matter of time before one is abducted. Every week an average of one to two Iraqis are seized and held for ransom. However, with security gradually improving in the country the risk may no longer be as relevant as it used to be. The last foreign national to be seized was a US citizen of Iraqi origin, abducted from Karradah district in central Baghdad in early 2010.

Current Trends

Kidnaps continue to occur across the country, from Mosul to Basrah. Earlier in the year a kidnapping cell was arrested in the normally quiet district of al-Faw in the far south, while Baghdad and urbanised parts of the central provinces remain affected by the stubbornly persistent risk. Most victims are held for only a few days, and while some are freed in police operations, some are also released after their families have paid a ransom. Current settlement figures stand at around US$50,000 per person.

The Next Target

With a growing number of foreign nationals travelling to the south of the country there are fears that this may be the scene of the next big abduction, although a credible risk to foreigners also exists in the capital as well. The energy sector may be a particularly attractive target, given the perception that affected companies will be able to pay for a ransom. There are also concerns that politically motivated groups may also wish to target the sector in order to make their demands felt in both the government and international community.

Tackling the Problem

Current abduction rates are much lower than during the years prior to 2008; then Iraqis and foreigners were abducted on a much more regular basis. Nonetheless, the lingering presence of kidnap groups continues to pose a potential risk for investors and business travellers arriving in the country. One hugely positive development in the fight against kidnap has been a strong rise in the professionalism of the Iraqi police forces. Once heavily involved in the kidnap trade the police have undergone significant training. Levels of corruption have fallen and police links to underground militia groups have weakened. Over the past two years a growing number of kidnap rings have been broken up while tens of captives, including several children, have been freed. The growing capabilities of the police forces are a major asset in the fight against kidnap.

AKE Recommendations

For now, it remains unsafe to travel out into the Iraqi streets without a degree of protection. Adequate insurance should also be considered, with an inclusion of K&R (Kidnap and Ransom) cover. Companies sending employees to Iraq should also consider crisis management training. Travel planners, administrative personnel and health and safety officers should be prepared and well briefed on what to do in the event of an abduction. The likelihood of being kidnapped in Iraq is statistically very low, but companies and their employees still need to prepare themselves or they will present an opportunity to the criminal and militant groups still present in the country.

Further Analysis

AKE has recently produced a worldwide kidnap and ransom report. If you would like to obtain a copy please contact the AKE intelligence department at intel@akegroup.com or call +44 (0) 207 816 5454.

AKE Ltd

John F Drake is a senior risk consultant with AKE Group, a British private security firm working in Iraq from before 2003. Further details on the company can be found at www.akegroup.com/iraq

You can also follow John on twitter at www.twitter.com/johnfdrake

Markets hate uncertainty, but history has shown us that times of uncertainty create the greatest opportunities.

Warren Buffett’s famous saying, “be fearful when others are greedy, and be greedy when others are fearful”, is true whether referring to the stock market or to risk-taking in general.

And Iraq is giving us plenty of risk and uncertainty at the moment:

• Security: What will happen when US combat forces are withdrawn?
• Government: Who will eventually win this titanic battle? Did Tuesday’s meeting in Damascus between the secular Ayad Allawi and anti-U.S. Shia’ite Muslim cleric Moqtada al-Sadr bring us any closer to a resolution?
• Hydrocarbon law: As we’ve reported, both al-Maliki and Allawi are committed to honouring the existing contracts, but will the Supreme Court uphold them as valid? We’ll update you on this as soon as the Court makes a ruling.

But the fact that these issues are coming to a head now means that they will be resolved sooner rather than later. Companies like ExxonMobil and BP are not letting these factors delay their plans, while others are seeing this as exactly the right time to get into Iraq.

Instead of waiting for everything to be resolved, the French government, for example, is building a heavily fortified business centre and boutique hotel where businessmen can sleep, eat and work in safety. They’re not ignoring the risks, but they’re seizing the opportunities while they are still available.

If you’re considering taking that step into the Iraqi market, AAIB and Upper Quartile are the perfect team to help you manage the risks and grasp the opportunities. For more information please contact Gavin Jones or Adrian Shaw.

The visit to Iraq last weekend by US Vice-President, Joseph Biden, may help to accelerate the process of forming the next government, but the frustrating delays in reaching an agreement highlight the risks of doing business in ‘frontier’ countries.

Often, though, our perception of risk can be out of step with reality, and what appears to be a safe blue-chip investment may be much more dangerous than was thought. So it was with many banks in developed economies over the past three years, for example.

As our regular contributor Mark DeWeaver points out, Iraqi banks may in fact be more secure than their counterparts in much of the rest of the world, as they have such low levels of lending. This lack of lending also has the effect of making the Iraqi economy less sensitive to interest rates, and more robust in the face of any tightening of liquidity.

Taking advantage of the huge opportunities afforded by the development of Iraq is not always easy, however. While funds are flowing into the country from all over the world, it ranks just 175th out of 183 countries surveyed by the World Bank for ease of starting a business.

For that reason, it’s vital to get the best advice on risk management and business development. AAIB and Upper Quartile have all the experience you need to assist your business in Iraq – for more information please contact Adrian Shaw or Gavin Jones.

By Dr Mike Knights

Is Iraq getting more secure or is it stuck in a violent rut or even slipping backwards?   Getting a straight answer to this question is one of the biggest frustrations for those who are considering visiting Iraq or investing in the country. US and Iraqi leaders cite ongoing improvements in security yet security incident metrics seem to be stuck month after month at around 600 events of various kinds per month. Of course, the strongest impressions are always left by the mass casualty bombings, which may be relegated to the tail end of the news or plastered across the front page depending on whether they contain a new sensational aspect or just coincide with a quiet news day in the West. So how can you tell what is really going on and whether you need to adjust your business plans as a result?

I don’t intend to tackle the issue comprehensively in this inaugural blog entry, but this quest for clarity will be a thread running through all the entries on this page. Put simply, is Iraq becoming riskier, less risky or staying the same? An important first step is to put the large bombings into perspective. Taking Baghdad as an example, throughout the last six months there have been an average of six to seven mass casualty attacks undertaken each month. About a third of attacks typically take place at high-visibility locations like ministries and hotels, and are intended to command international attention and discredit claims that Iraq is stabilizing. Every new headline, every image of a bombing, shakes investor confidence in Iraq and makes businesses second-guess their decision to enter the Iraqi market.

This is a natural reaction but not a particularly useful one. I’ll put my cards on the table by stating that I have only seen one major bombing cause strategic effects in over seven years of consecutive monitoring of daily security trends in Iraq (that occasion being in February 2006, see next paragraph).  The sad truth is that there will continue to be a sprinkling of bombings in Iraq’s main cities for years to come, in part because such attacks are the easiest way for collapsing militant groups to maintain their profile and appear relevant. Yet the vast majority of bombings have no tangible effect on the international investor or the business traveler visiting Iraq.  The chances of being present at a targeted location during such an attack are infinitesimally small and the presence of a professional security company can greatly reduce the impact of an event if you are near the affected area. Iraqis continue to go about their business in spite of a handful of bombings spread across a city of seven million people each month; so can you.

Setting aside the high-visibility bombings, most mass casualty attacks take place at markets, public gatherings and security checkpoints in residential areas where no foreign enterprise or business traveler will ever visit. Yet the fear is that such bombings could re-spark sectarian tensions that might result in a general breakdown of security, including sectarian cleansing, disruption of government, and unworkable security restrictions on travel and business operations. The 22 February 2006 bombings of the al-Askariya shrine in Samarra sparked just such a civil war at a moment when government formation was stalled after the January 2005 elections. Couldn’t it happen again?

Whenever Western analysts believe that Iraq is on a “glide path” to stability, the conservative observers amongst us are quick to point out how such assessments have been wrong before (notably at the start of 2006). They usefully point out that even an improving situation will be strewn with potholes that will give Iraq and its international partners a bumpy ride. Even so, most of those who have watched Iraq every day since 2003 are skeptical that mass casualty bombings can take the country back to the abyss of 2006-2008. Many analysts believe that the 2006-2008 sectarian clashes released pent-up energy and saw all sides emerge exhausted and sickened. Others believe that the power of the Iraqi state and particularly the Iraqi security forces are now a far more effective brake on destabilization than the United States military, which is fast ebbing out of Iraq.

To avoid being complacent we need to ask: how would we know if something were going badly wrong in Iraq’s security?  At Olive’s Analysis and Assessments (A2) unit, we try to focus not only on the inputs (the bombings) but also, principally, on the outputs (reaction to the bombings). What matters most in Iraq at this juncture is the effectiveness of the security forces; their ability to mostly maintain a monopoly of force; and their commitment to the broad federal government rather than to any single faction. From our perspective, one of the key indicators of a switch back to 2006 would be the presence of armed Iraqi civilians, openly carrying weapons on the street, with the tacit approval of nearby Iraqi security forces. If we routinely see this kind of militia activity, we will know that Iraq has taken a major step backwards. Until we see such a step, we need to tread carefully in our analyses, pay attention to underlying trends as well as today’s headlines, and greet each new act of violence with a critical eye.

Until next time,

Mike

Profile

Dr Michael Knights is Vice President and lead Iraq analyst at Olive Group, the  first security company to operate in Iraq.  He has  worked on Iraqi political and security risks since the mid-1990s, first as an oil and gas journalist and later as an academic, receiving his PhD on Iraq at the Department of War Studies, King’s College London.  Since 2003, Dr Knights has run the Washington Institute for Near East Policy’s Iraq programme, advising US government agencies on Iraq policy and publishing a series of books on local politics and security in Basrah, Maysan, Dhi Qar and the northern provinces including Kirkuk.  Since joining Olive Group in 2006, he has produced in-depth social and political analysis of 26 of Iraq’s major oil and gas fields and keeps a close eye on national security and politics.

He can be contacted at mknights@olivegroup.com