Surging Bloodshed Undercut Iraq’s Oil-Fueled Economy

Surging sectarian bloodshed in Iraq and an escalating regional war are undercutting one of the world’s fastest-growing economies and undermining U.S. aspirations for making Iraq a model for Middle East democracy.

Two years after U.S. forces withdrew, almost-daily bombings and suicide attacks scar weddings, funerals and cafes, as al-Qaeda-linked groups attack Shiite targets. The assaults have killed more than 5,000 people this year, levels that haven’t been seen since 2008 and almost double 2010’s toll, according to the United Nations.

Barclays Plc’s investment-banking unit cited the violence when it cut forecasts for Iraq’s gross domestic product, oil output and exports, a decade after the 2003 U.S.-led invasion ousted Saddam Hussein. Underpinned by revived oil production, Iraq’s 8.4 percent GDP growth in 2012 was among the world’s best. Barclays this month reduced its 2013 projection to 9.1 percent from 10.1 percent, and cut 2014’s estimate to 9.3 percent from 10.2 percent.

“It’s striking how different the outlook for Iraq is today than what it was as late as June, when the question was who would make room for growing Iraqi production in the marketplace,” said Daniel Yergin, author of “The Quest: Energy, Security and the Remaking of the Modern World.” “Everyone is bringing down their forecast in light of what’s actually happening on the ground.”

“It’s hard for companies to operate in Iraq,” Yergin, vice chairman of Englewood, Colorado-based research company IHS Inc., said in a phone interview. “The cost of operating there is higher because the cost of assuring security adds significantly to the overall costs.”

Syria Spillover

Prime Minister Nouri al-Maliki, who leads a Shiite-dominated government, blames Sunnis for the violence. Larger forces are at work, with spillover from neighboring Syria, where the revolt against President Bashar al-Assad is a magnet for Sunni extremists funded by Gulf nations intent on reversing Shiite Iran’s influence in Iraq, Syria and Lebanon.

“Iraq and Syria are the battlefields of a proxy war between Iran and Saudi Arabia,” said Harith Hasan, an Iraqi political scientist and author of “Imagining the Nation, Nationalism, Sectarianism and Socio-Political Conflict in Iraq.”

“Mounting violence has frightened investors, physically damaged a large number of businesses, and discouraged the exploitation of substantial hydrocarbon reserves known to lay under central Iraq,” said Wayne White, a former deputy director of the State Department’s Near East intelligence office.

‘Frightened Investors’

Barclays lowered forecasts for Iraq’s 2014 oil production forecasts to 3.6 million barrels a day from 3.9 million barrels. The country was producing about 3.3 million barrels a day as of Sept. 30, according to Bloomberg OPEC Crude Oil Production data.

Chaos in Syria and the growing instability in Iraq put U.S. strategic interests at stake, including the security of Israel and Jordan, and the safety of U.S. civilians, businesses and facilities in the Middle East.

Representative Mike Rogers, a Michigan Republican who leads the House Permanent Select Committee on Intelligence, sees threats spreading beyond the region.

Al-Qaeda affiliated terrorists “have a safe haven developing in the east of Syria, along the Iraqi border, where they’re talking about conducting external operations,” Rogers said at a foreign policy forum in Washington on Oct. 21. That’s “exactly what happened in Afghanistan,” where terrorists organized for the Sept. 11 attacks, he said.

Export Earnings

Oil revenue accounts for about 99 percent of Iraq’s export earnings and more than 90 percent of its budget revenue, according to the Economist Intelligence Unit. That dependence makes the government vulnerable to disruptions in crude production and disputes over energy resources in Kurdish areas of the country, White said. The potential for weaker global demand in 2014 is also raising concerns for oil producers.

While Iraq “has the highest growth rate in the region, and probably in the world,” Hasan said the economic statistics aren’t “related to real improvement on the ground.”

The U.S. departure from Iraq is a significant factor behind the rising violence, said Paul Bremer, who was former President George W. Bush’s envoy to the country during the American occupation.

“What happened in Iraq is emblematic of what happens in the region” when the U.S. pulls back, Bremer said. “You have the violence now working its way back” to 2008 levels.

Resuming Struggle

“I think it’s predictable that once there was a vacuum that the Iranians on one side and al-Qaeda on the other would resume their struggle,” Bremer said.

Maliki, a Shiite, has pursued discriminatory policies against Sunnis -- many have been purged from jobs, others jailed for long periods of time without charge -- helping fuel anti-government and anti-Shiite attacks, White said.

Local groups and al-Qaeda affiliates such as the Islamic State of Iraq and Greater Syria, are behind the attacks, said Ramzy Mardini, an adjunct fellow at the Iraq Institute for Strategic Studies in Beirut.

“What has been happening over the past year is the effort to merge Iraq and Syria into one sectarian theater whereby Iraqi militants piggyback off the Syrian revolution,” Mardini said.

The upheaval hasn’t yet risen to the level of civil war, Mardini said.

“The increasing violence is still al-Qaeda driven, it’s not communal” Sunni-Shiite violence, Mardini said.

“The Sunnis haven’t opted out of the political process and chosen to fight again,” Mardini said. “The Shiites aren’t reactivating their death squads.”

Bolstering Capabilities

Even so, he warns things could get worse. The “Sunni militant-dominated insurgency in neighboring Syria is breathing new life into al-Qaeda in Iraq, bolstering its confidence, capabilities and cause in Iraq,” Mardini said.

White said the two conflicts are feeding off one another. “The rebellion in Syria is creating a lot of veteran fighters drifting back and being emboldened by Maliki’s seemingly unrelenting anti-Sunni policies,” he said.

Assad, an adherent of the Alawite branch of Shiite Islam, is backed by Iran, which supplies him with weapons, funding and intelligence advisers, and the Syrian president supports Iranian interests in Lebanon and elsewhere.

For Saudi Arabia, the war in Syria presents an opportunity to sever Iran’s land line to Lebanon, weaken its hold in Iraq, and end Assad’s support for the mullahs in Tehran. Iran, for its part, is intent on protecting its bridge to Lebanon and the militant Shiite group Hezbollah, which the U.S. and Israel consider a terrorist organization.

Mardini sees a worst-case scenario if the Saudi- and Gulf-backed rebels overthrow the Syrian regime and, doing so, embolden the Sunni insurgency in Iraq.

Yet if groups such as the al-Qaeda affiliated Islamic State of Iraq and Greater Syria are defeated and go underground, they may “wage war by terrorism against Western targets” in Jordan or Lebanon, Wayne said. “What are the limits for an organization with that name?”

Before it's here, it's on the Bloomberg Terminal.