The biggest cause for the meltdown is plunging oil prices. The KRG relies almost exclusively on oil revenues. Prices slumped below $30 per barrel last week and are set to weaken further with the easing of sanctions on major oil producer Iran. Iraq’s central government also depends mainly on its oil revenues to finance its budget, 17% of which is earmarked for the KRG.
But the agreement has never been properly implemented with both sides blaming the other for not honoring their respective commitments. The crisis escalated when the Kurds began exporting their oil independently through a newly built pipeline running to Turkey’s Ceyhan oil terminal on the Mediterranean.
A fresh deal mediated by the United States was reached in December 2014, whereby the Kurds were supposed to sell 550,000 barrels per day of crude through Iraq’s state marketing firm SOMO in exchange for their budget share. But this also fell through.
Rather than giving the Kurds 17% of revenues, “Iraq was simply buying our oil and not even giving us a fair market price for it,” Rahman said. Meanwhile, Baghdad has effectively halted all budgetary payments to the Kurds since February 2014. The KRG has run up an estimated total debt of $18 billion since then.
The stalemate with Baghdad shows no signs of abating. In June, the Kurds resumed selling their oil independently via Turkey. But because of the mediocre quality of its crude and the legal risks customers face over Baghdad’s claims that the sales are illicit, the Kurds are forced to sell well below market prices.
“The result is that we haven’t been able to pay civil servants salaries, including those of the peshmerga, for the past five months,” Hussein said.