By Shavin Muhammed Ali
This point has become the most heated economic issue between Baghdad and the KRG. The federal government’s control over the State Oil Marketing Company (SOMO) gives Baghdad significant influence over KRG oil revenues. By requiring all Kurdish oil exports to pass through SOMO, the central government effectively manages the timing and amount of payments to the KRG. This setup has been especially challenging during times of political tension, when Baghdad has delayed payments or reduced export quotas to penalize the KRG for perceived non-compliance with federal policies. The halt of Kurdish oil exports via the Iraq-Turkey pipeline from March 2023 to early 2025 highlights this complex relationship. The restart of exports under the new pricing terms illustrates both the economic need for compromise and the central government’s readiness to use oil revenue as a political tool.
Customs and Trade Restrictions
Baghdad wields another economic instrument through its control over international borders and customs revenue. The federal government’s jurisdiction over customs duties at borders managed by the Kurds, notably the significant Ibrahim Khalil crossing with Turkey, grants it influence over trade dynamics and revenue collection. Conflicts regarding the division of customs revenue have occasionally disrupted trade, impacting the economic stability and business climate of the KRG. The intricate nature of Iraq’s trade landscape, where bribery and extortion by port officials are prevalent, and the country ranks 181 out of 190 in the Trading Across Borders index, introduces further vulnerabilities that can be manipulated for political ends.
Salary and Public Sector Employment
The federal government’s control over public sector salaries in the Kurdistan Region has been used as a direct tool of political pressure, making salary payments a critical economic and political issue. Cutting or delays in federal salary payments have immediate political consequences, as they directly affect the livelihoods of a significant portion of the Kurdish population in KRI.
Infrastructure and Development Project Funding
The intentions of federal control over major infrastructure projects and development funding are clear for extending long-term economic influence in the Kurdistan region. The central government’s authority to approve or reject funding for vital infrastructure projects in the Kurdistan region, including power plants, transport networks, and water treatment facilities, creates ongoing dependency relationships. This tool is particularly effective because infrastructure development is essential for economic growth and public health, which is exactly what the central government does not want to happen.
Contemporary Challenges and Evolving Dynamics
The economic ties between Baghdad and Erbil are encountering unprecedented challenges due to a mix of global and regional influences that are altering traditional power structures. The current market instability, along with falling oil revenues and increased fiscal limitations, is creating a fragile situation that significantly impacts the strategic decisions of both governments, as noted in the IMF (2025) economic forecast for Iraq. These mounting pressures are simultaneously diminishing Baghdad’s financial influence. The economic framework of the Kurdistan Region exposes key structural issues that heighten federal pressure tactics. The region’s heavy reliance on hydrocarbon exports and its underdeveloped private sector result in a risky mono-economy that is susceptible to external disruptions. Although Iraq’s non-oil sectors make a significant contribution to the national GDP, they provide minimal fiscal income, leading to an uneven economic structure that makes both federal and regional governments vulnerable to fluctuations in commodity prices. This structural imbalance turns ordinary market changes into potential political tools, as economic downturns automatically increase the KRG’s reliance on federal transfers and diminish its ability to make independent decisions.