* Baghdad funding cuts spark salary crisis in Kurdistan
* Budget row revolves around long-running oil dispute
* Compromise elusive ahead of Iraq elections
* Kurdistan seeks alternative sources of finance
By Isabel Coles
ARBIL, Iraq, March 17 Rizgar pulled one of his
wife's bracelets from his pocket and laid it on a gold
merchant's counter in Iraq's Kurdistan region at the weekend,
reluctantly selling it to cover his bills.
The electricity ministry in Kurdistan had not paid Rizgar
for two months because the Baghdad government has withheld funds
to punish the Kurds for trying to export oil via a new pipeline.
"I have to sell it, or else I'll go into debt," said Rizgar,
39. "If my salary doesn't come soon, I don't know what I'll do."
A day after he sold the gold bangle, his ministry was among
several that finally met the February payroll after the federal
government belatedly sent some money at the weekend, but
officials in Baghdad insist they will pay no more.
The region says it will pay its own way in March, but the
financial squeeze shows how reliant Kurdistan remains on Baghdad
for a slice of the OPEC producer's multi-billion dollar budget,
so long as it cannot export oil in large volumes itself.
Kurdish officials often hint they could file for divorce
from Iraq - and their differences with the central government in
Baghdad seem more irreconcilable than ever.
However this confrontation ends, the region is likely to
push even harder for economic independence, raising the stakes
in a dangerous game of political brinkmanship.
The funding crunch hitting the Kurdish economy, which has
boomed since the 2003 U.S.-led Iraq war, has been felt acutely
in the gold bazaar, which serves as an informal banking system.
"If I can't sell, I can't buy," said a gold trader in the
regional capital Arbil, opening an empty cash register after
turning away yet another customer who wanted to sell.
"How can you talk about an independent state when you can't
pay your own employees?"
More than a fifth of Kurdistan's five million people are on
a government payroll that has swollen to 840 billion dinars
($722 million) a month - 70 percent of public spending in 2013.
Formally, Baghdad is supposed to give Kurdistan 17 percent
of the national budget after sovereign expenses, flown in cash
from the central bank to Arbil, though how much is actually paid
Now the Iraqi government says payment should be contingent
on the region exporting oil solely under state auspices, which
Kurdistan objects to.
In January, it paid 566 billion dinars, less than half last
year's monthly payments. It transferred another 548 billion for
February at the weekend.
"The equation is simple: you take 17 percent of the wealth,
you hand over the oil you have," Prime Minister Nuri al-Maliki
told France-24 television last week, summarising the dispute.
Political brinkmanship has in the past brought Iraqi troops
face to face with Kurdish "peshmerga" forces in the oil-rich
band of territory along their contested internal frontier.
The Kurds have strengthened their hand by signing contracts
with oil majors and building a pipeline to Turkey in defiance of
Baghdad. One million barrels of oil have already flowed along it
into storage tanks at a Turkish port, but Ankara wants Baghdad's
blessing before exports go ahead. No compromise is yet in sight.
"We've been working on this for some time and it's come a
long way," said a U.S. diplomat of the quest for a deal between
Baghdad and Arbil. "Election season makes it harder, however."
Parliamentary elections are set for April 30 and neither
side wants be seen as weak for making concessions. But with his
own Shi'ite constituency divided and minority Sunnis hostile,
Maliki might need Kurdish backing to form a new government.
"Maliki may be creating bargaining chips to play with the
Kurds if he aims to gain their support for his third term," said
Ramzy Mardini, a nonresident fellow at the Atlantic Council.
"All this is pre-election jockeying. Once the dust settles
and the government formation dynamics are under way, it will be
clearer who has the advantage."
Ayham Kamel, director of Middle East and North Africa at
political risk consultancy Eurasia Group, said the Kurdistan
government was not without leverage, but was still dependent on
funds from the centre. "Baghdad's ability to cut or curtail such
financing is a trump card in the relationship," he said.
Wrongfooted by the budget cut, the Kurds are weighing their
options. A cartoon in the Iraqi press shows a fiendish-looking
Kurdish President Masoud Barzani standing astride a dam,
illustrating fears the Kurds could cut off water to the rest of
"We are still hoping Baghdad will act responsibly," the
Kurdish Regional Government's Planning Minister Ali Sindi told
Reuters. "Definitely there are cards that the KRG can also play,
but we don't want to talk about them now."
For now, the battle is unfolding in parliament, which
mustered a narrow quorum for the first reading of Iraq's draft
2014 budget on Sunday, despite a boycott by Kurdish lawmakers.
If it passes, the budget will make Kurdistan's allocation
conditional on its exporting 400,000 bpd of crude via Iraq's
State Oil Marketing Organisation. Any shortfall would be
deducted from the region's 17 percent entitlement.
"This is punishment," said Abdulkhaliq Rafiq, a KRG Finance
Ministry adviser, brandishing a copy of the draft budget with
the offending articles highlighted in pink.
It is not clear how much income Kurdistan generates itself,
but Planning Minister Sindi said it does not cover government
salaries, let alone other operational costs and some 2,900
investment projects in progress.
The region is seeking ways to raise more revenue and cut
spending, as well as alternative sources of financing abroad.
"We have started looking at different finance models such as
loans and public private partnerships," said Sindi, adding that
the KRG had been in talks with foreign banks even before Baghdad
slashed the budget.
SAVING OR STEALING?
In the meanwhile, Kurdish tycoons have chipped in to help
improve liquidity. Among others, the founder of mobile operator
Asiacell lent 15 billion dinars to banks in Suleimaniyah city.
Some hope the crisis will spur the KRG to change its
spending habits and reform employment practices.
Barzani's Kurdish Democratic Party and its rival, the
Patriotic Union of Kurdistan, have dominated power since the
region won autonomy in 1991, hiring thousands of people into an
increasingly bloated public sector to tighten their grip.
Bilal Wahab, research fellow at the American University of
Iraq, Sulaimani, said the status quo was unsustainable. "Unless
the KRG diversifies its economy and employment, it could face
economic instability and public unrest".
Kurdish nationalism fuelled by past mass killings under
Saddam Hussein remains a potent rallying cry, as was evident at
the reburial this month of 93 Kurds unearthed in a mass grave in
the desert in southern Iraq last year. Most had been killed by
firing squad as part of Saddam's campaign to quell the Kurds.
"The Kurdish people did not make all these sacrifices in
order to be subjected to oppression and despotic rule once
again," Barzani said at the ceremony, declaring that the time
had come to reconsider relations with Iraq.
"If the authorities in Baghdad continue to treat us in this
way... we will take a stance no one can anticipate."
A small crowd gathered outside the Kurdish region's
parliament last week shouting "Maliki is a dictator".
But many Kurds say their own leaders are partly to blame for
the budget crisis, which has re-focused attention on opaque
dealings and corruption in Kurdistan, described as "widespread
and pervasive" in a recent U.S. State Department report.
"Where is the money? Nobody knows," said a gold trader in
Arbil, who asked not to be named. "Either they are saving it for
independence day, or they are stealing it".
($1 = 1164.0000 Iraqi dinars)
(Additional reporting by Ned Parker and Raheem Salman in
Baghdad; Editing by Ned Parker and Alistair Lyon)