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Are Conditions Conducive For An RV Event?

“For me, the information that makes the most sense is to meticulously connect a narrative of what has happened and what is happening from a big picture stand point.”

October 1, 2015   oldwazhisname’s blog

September 2015 Status of Iraq – Are Conditions Conducive For An RV Event?

The collapse in the value and any subsequent revaluation of the Iraq Dinar (“IQD”) is inextricably linked to the overthrow of the Saddam Regime of Iraq and the subsequent reconstruction and restoration of the country of Iraq.

​Only the most ardent conspiracy theorists and cynical detractors of US politics assert that the invasion of Iraq was motivated by reasons other than threats to the security and the interests of the US and its allies around the world.

Those who assert that a predetermined plan for a revaluation of the IQD was a primary motivating factor of this costly and risky endeavor are blind to the obvious and numb to common sense.

In its simplest form, the invasion of Iraq occurred in a post-9/11 environment during a time when the US invaded Afghanistan to overthrow the Taliban regime (a Sunni dominated government) that provided a safe-harbor to Al-Qaeda (a Sunni militant terrorist organization).
President Bush’s Administration based its rational for the invasion of Iraq primarily on a false narrative that Weapons of Mass Destruction existed in Saddam’s Iraq (similarly, a Sunni dominated government) but correctly identified the potential threat of Iraq harboring Al-Qaeda terrorists.

Fast forward today and we see the existential presence of an Al-Qaeda offshoot (ISIL) heavily dominated by former Saddam regime loyalist (military and intelligence personnel).

The value of a given country’s currency is but one metric of that country’s overall situation.  As Iraq has had its overall political, cultural, economic, military and social structures essentially wiped out, not just from the invasion but the cumulative effects of a 25 year rule by the dictator, Saddam Hussein, the natural expected consequence would be a devaluation of the country’s currency.

In order for a concomitant rise in the value of the IQD nearly the entire infrastructure of Iraq has or must be in process of being rebuilt.  This has proven itself to be a tenuous and difficult process such that no one, including and especially those tainted by investment in a hoped for revaluation of the IQD, can predict with any certainty its final outcome.

It is my basic premise that any IQD revaluation is completely dependent upon Iraq restoring a relative level of functionality and prosperity while achieving an overall level of stability: not only politically and culturally but economically.

It is my belief that any RV event will only happen once whatever level of stability that is needed has happened and any source that asserts another “trigger” (person, circumstance, country or entity) is misinformed, misguided or is pursuing another agenda that won’t yield fruition that you and I hope for.

In this vein, I think that it is prudent for any intelligent seeker of truth in this investment to have at his/her disposal a broad historical perspective on what has happened, an honest appraisal of the current situation and some expectation of what remains to be done.

That is what I hope to accomplish with this discussion.  I want to give in very broad terms what has happened (with enough detail “color” to make a point) and an accurate representation of what actually is presently happening.

To be honest, I have also inserted certain opinions about matters where I have deemed them relevant.  I have presented them in three broad areas: political/military, Iranian influences and economic/monetary.

My hope is once I’ve addressed the political/military, Iranian and economic/monetary situation in Iraq, it should be very apparent for us truth seekers of where we are in the process and to be able to come to some logical conclusions about where we are versus what needs to happen between now and our hoped for event.  Although I will leave that final conclusion up to you (Let The Chips Fall Where They May!).

I am hoping it will also give us some idea of how close we are and therefore some sense of timing of this hoped for event.  Not wanting to draw anyone into yet another false hope/conclusion, I have included some of my own thoughts and the rationale for them for your benefit.

Caveat:  This is Just One Guy’s Honest Opinion

This piece is being written to help others to navigate through this investment and to give to you an honest and careful appraisal of what has happened, how to approach this with greater clarity, who you can trust and what to expect.

I have stitched together some of the most important articles and intelligence reports currently available to give that honest historical narrative of what has happened in Iraq since the Second Iraq Invasion.  I have offered my opinions about these matters.

By doing so, it would be my hope to help some of the less experienced and less sophisticated to make some better informed decisions about this investment and to change bad behaviors that may have you fouled up.

If I am able to help some escape from the grip of the unrealistic expectations and get to solid ground from where you can decide for yourself how to move forward; such would be the best I could hope for.  (Although with no disrespect intended, I have listened to enough Q&A calls and been on enough chat rooms to know there is a vast number in Dinarland who don’t have a clue and will never have a clue – it’s really sad.)

I will share with you some of my mistakes so you can understand that I have been where many of you are.  If you want to better understand about the IQD investment, I invite you to read this and see what it does for you.


I bought my first dinar in 2011, but the story of my involvement in this investment begins before that.  I am and have been a banker for 35 years.  I had heard of this investment before 2011.  I thought people who invested in it were being scammed and I used to say as much when I needed an example of a financial scam.

One day, when I said that in a meeting with a client, and made a disparaging remark about people who hold IQD, another banker and long-time friend of mine later asked me why I said that and I told him it was just another example of people who lacked sophistication in financial matters who had been talked into a bad investment scheme.

When he told me he was invested, I was very surprised.  Within a few months I found out several other friends were also invested.  One of them told me why he had invested and told me why an RV (the term most often used to denote a change in monetary value of the IQD, as in ReValuation”) would happen (much of it now I suspect as not true) and I decided, “what the heck”, and bought a very small amount in early 2011.

He would periodically tell me about how it was about to revalue and once in a while I would piggyback on his purchase and buy a little more.  Coming into the end of 2011 (when the exit of US troops from Iraq was happening) there was a lot of hype as to why this was about to revalue and I bought more.

I had heard all of the reasons why this was going to happen during this time and I am afraid I got sucked into it.  I was listening to PTR and a handful of other hype-gurus during that time and bought into the stories every week or two that it was going to happen and would get really excited about every big event that was about to happen trusting the guru-intel that this would surely usher in the event.

Finally in the later part of 2012, I decided to do a better job of finding sources for my insight and began to try different web-sites and call-in conferences.  BGG, Randy Koonce, Wang Dang, Dinar Alerts and others were my regulars.

I began to read carefully articles and read some of the source documents (the Future Of Iraq Project document and others). Slowly I became more educated and took the time to know the players and the events.  I paid attention to certain key articles and became more thoughtful about what the news was really saying.

I studied US government assessment documents and tried to piece together a better understanding of how events had unfolded to gain better perspectives.  (In business, I learned one of the most valuable things you can have is a good perspective on matters.  It really helps to make better decisions.)

I learned to turn the BS sifter way up and discern what an “expert” may really be saying.  I learned which guru-types to completely disregard as liars and con-men, which ones to listen to for perspective and which ones were honest information brokers.

The Straight Scoop On What Has Taken Place In Iraq

The following is a brief history (the next section extends for many  pages) of what has happen inside of Iraq over the last 10 years and is vital to understanding where we are and where we are going.  It dispels so many of the false narratives out there that have become the source of frequent false pronouncements of what will happen.

If you are like me and have followed this for a few years and went through those days when we were told that the RV would happen imminently when certain things happened:

like it would happen when the US military exited Iraq;

that it would happen very shortly because Maliki was going to complete his government;

that it would happen during a GCC Conference held in Iraq or a banking conference held in London;

that it would happen when Abadi came into office and so many others.

We also were fed many false narratives that were to be milestone events, like the false narrative in 2012 that Talibanni was going to call for a vote of no confidence to remove Maliki, that certain neccesary laws were going to be shortly passed, etc.

Now we know that most of those storylines were false, the basic understanding of them was deeply flawed, and we were continually fed a false hope for our hoped for RV.  Read and see what I mean.  I can support nearly all of this with documentation from solid sources.

The Government and Military Situation in Iraq

Lead up to and Initial Post-War Reconstruction Efforts

Saddam Hussein was an iron fisted “secular” dictator of Iraq until 2003 when a Coalition Force routed him in a lightning fast 20 day operation from invasion until the fall of Baghdad.

This was partially paved ahead of time by secret CIA efforts to arm and organize the Peshmerga forces in the north and pre-negotiated surrender terms with Iraqi military leaders rather than fight (sound familiar?).

Although Saddam was “secular” in his religious stance, he was a Sunni and his Baathist Party was the political elite ruling Iraq for years.  Saddam followed in the tradition of a number of Middle East Strongmen who were despotic leaders but came under the umbrella of their Islamic faction: Saddam Hussein – Sunni, Muammar Ghaddafi – Sunni, Bashar al-Assad – Shia, Abdullah II of Jordan – Sunni and the house of Saud – Sunni.

Shortly after the invasion, the multinational coalition created the Coalition Provisional Authority  (“CPA”) as a transitional government of Iraq until the establishment of a democratic government. The CPA was originally headed by Jay Garner, a former U.S. military officer, but his appointment lasted only until May 2003, when President Bush appointed L. Paul Bremer.

On May 16, 2003 on his first day on the job Paul Bremer issued CPA executive order No1 to exclude from the new Iraqi government and administration members of the Baathist party. This eventually led to the removal of 85,000 to 100,000 Iraqi people from their job, including 40,000 school teachers who had joined the Baath Party in previous years simply to keep their jobs.

U.S. Army General Sanchez called the decision a “catastrophic failure”. This decision continues to plague the unification of Iraq to this day and is a key part of why the Amnesty Law is both necessary and an ongoing problem to get passed by Parliament.  CPA director Paul Bremer signed over sovereignty to the appointed Iraqi Interim Government, in June 2004. Bremer served until the CPA’s dissolution in July 2004.

The Iraqi Interim Government head of government was Prime Minister Iyad Allawi and his deputy was the influential and charismatic Barham Salih. The ceremonial head of state was President Ghazi Mashal Ajil al-Yawer.

They were all sworn in on June 28, 2004, with Paul Bremmer giving Iraqi chief justice Midhat Mahmoud (yes, this is the same corrupt Supreme Court Justice that has issued numerous Maliki favorable rulings and arrest warrants)the legal documents instituting the hand-over.

Allawi’s short period in office was marked by much controversy including closing newspaper offices and issuing arrest warrants for political foes including Ahmed Chalabi.

The Iraqi Transitional Government was the government of Iraq from May 2005, when it replaced the Iraqi Interim Government, until May 2006, when it was replaced by the first permanent government.  It had been approved by the transitional Iraqi National Assembly, which had been elected in January 2005.

It operated under the Law of Administration for the State of Iraq for the Transitional Period, and its main functions were to draft a permanent Constitution of Iraq and to form a transitional government.

The President under this period was Jalal Talibani, Prime Minister was Ibrahim Jaafari and the vice Presidents were Adil Abdul Mahdi and Ghazi al-Yawar.  During this time, al-Maliki was an obscure Member of Parliament.

During Jafari’s short tenure as Prime Minister, ethno-sectarian tensions spiked catastrophically. With Hussein’s criminal excesses still fresh in their minds, Iraq’s new Shia Islamist leaders concocted retribution schemes against Sunnis, resulting in horrifying episodes of torture, rape and other abuses.

Displaced Baath Party members launched a bloody insurgency, while al-Qaeda recruited young men to stage suicide and car bombings, kidnappings, and other terrorist attacks in a bid to foment chaos.

The beginning of 2006 was marked by government creation talks, growing sectarian violence, and continuous anti-coalition attacks.

Sectarian violence expanded to a new level of intensity following the al-Askari Mosque bombing in the Iraqi city of Samarra, in February 2006. The explosion at the mosque, one of the holiest sites in Shia Islam, is believed to have been caused by a bomb planted by al-Qaeda.

Although no injuries occurred in the blast, the mosque was severely damaged and the bombing resulted in violence over the following days. Over 100 dead bodies with bullet holes were found on a single day in February, and at least 165 people are thought to have been killed.

In the aftermath of this attack the U.S. military calculated that the average homicide rate in Baghdad tripled from 11 to 33 deaths per day. In 2006 the UN described the environment in Iraq as a “civil war-like situation”.

Putting The Rookie, Maliki, In Charge

Washington decided that change at the top was essential. After the December 2005 parliamentary elections, U.S. Embassy officials combed the Iraqi elite for a leader who could crush the Iranian-backed Shia militias, battle al-Qaeda, and unite Iraqis under the banner of nationalism and an inclusive government.

The local US presence, Jeffrey Beals and Ali Khadery, were urging the American leadership that the only Iraq politician with any chance to win support from all Iraqi factions — and who seemed likely to be an effective leader — was Nouri al- Maliki.

They argued that he would be acceptable to Iraq’s Shia Islamists, around 50 percent of the population; that he was hard-working, decisive and largely free of corruption; and that he was politically weak and thus dependent on cooperating with other Iraqi leaders to hold together a coalition. Although Maliki’s history was known to be shadowy and violent, that was hardly unusual in the new Iraq.

U.S. Ambassador Zalmay Khalilzad encouraged Iraq’s skeptical but desperate national leaders to support Maliki. Leading a bloc with only a handful of parliamentarians, Maliki was initially surprised by the American entreaties, but he seized the opportunity, becoming prime minister in May, 2006.  He vowed to lead a strong, united Iraq.

Never having run anything beyond a violent, secretive Shia Islamist political party, Maliki found his first years leading Iraq enormously challenging. He struggled with violence that killed thousands of Iraqis each month and displaced millions, a collapsing oil industry, and divided and corrupt political partners — as well as delegations from an increasingly impatient U.S. Congress.

Maliki was the official ruler of Iraq, but with the surge of U.S. forces in 2007 and the arrival in Baghdad of Ambassador Ryan Crocker and Gen. David Petraeus, there was little doubt about who was actually keeping the Iraqi state from collapse.

Crocker and Petraeus met with the prime minister several hours a day, virtually every day, for nearly two years. They coordinated political, economic and military policies, seeking to overcome legislative obstacles and promote economic growth while pursuing al-Qaeda, Baathist spoilers and Shia Islamist militias.

The United States was compelled to mediate among the Iraqis because they felt that the country would become stable only with united and cohesive Iraqi leadership, backed by the use of force against violent extremists.

One of the biggest breakthroughs of this era was the Awakening movement, in which, thanks to long negotiations, Sunni Arab tribal and Baathist insurgents turned their guns away from U.S. troops and pointed them toward al-Qaeda, thereby reintegrating into the Iraqi political process.

Initially hostile to the idea of arming and funding Sunni fighters, Maliki eventually relented after intense lobbying from Crocker and Petraeus, but only on the condition that Washington foot the bill.

He later agreed to hire and fund some of the tribal fighters, but many of his promises to them went unmet — leaving them unemployed, bitter and again susceptible to radicalization.

We can see the seeds of Maliki’s style of ethnic discrimination being established at this time, as there seemed to be less and less pressure from the Americans to change this dysfunctional style of leadership.  These early success would no doubt embolden him later.

Settling into power by 2008, and with the northern half of the nation becoming pacified, Maliki was growing into his job under the tutelage of weekly videoconferences with President George W. Bush.

During these intimate gatherings, Maliki often complained of not having enough constitutional powers and of a hostile parliament, while Bush urged patience and remarked that dealing with the U.S. Congress wasn’t easy, either.

Over time, Maliki helped forge compromises with his political rivals and signed multibillion-dollar contracts with multinational companies to help modernize Iraq. It is understandable that Dinarland had a lot of hope during these improving years for a successful RV outcome.

Prone to conspiracy theories after decades of being hunted by Hussein’s intelligence services, Maliki was convinced that his Shia Islamist rival Moqtada al-Sadr was seeking to undermine him. So in March 2008, Maliki led an Iraqi army charge against Sadr’s Mahdi Army in Basra.

With no planning, logistics, intelligence, air cover or political support from Iraq’s other leaders, Maliki picked a fight with an Iranian-backed militia that had stymied the U.S. military since 2003.

General Petraeus ordered an admiral to Basra to lead U.S. Special Operations forces against the Mahdi Army to rescue Maliki’s butt from near certain failure and possible death. Maliki kept urging American airstrikes to level entire city blocks in Basra; but the American military would not cooperate with that indiscriminate destruction.

But it is easy to see how Maliki thought about taking on insurgent civilian dissent to the government.  Pay close attention to the detail that Iran was backing the Shia cleric, Sadr and picking a fight with the Americans.  More on this detail later.

Although it was a close call, Maliki’s “Charge of the Knights” succeeded. For the first time in Iraq’s history, a Shia Islamist premier had defeated an Iranian-backed Shia Islamist militia. Maliki was welcomed in Baghdad and around the world as a patriotic nationalist, and he was showered with praise as he sought to liberate Baghdad’s Sadr City slum from the Mahdi Army just weeks later.

Buoyed by his win in Basra, and with massive U.S. military assistance, Maliki led the charge to retake Sadr City, directing Iraqi army divisions over his mobile phone.

Through an unprecedented fusion of American and Iraqi military and intelligence assets, dozens of Iranian-backed Shia Islamist militant cells were eliminated within weeks. This was the true surge: a masterful civil-military campaign to allow space for Iraqi politicians to reunite by obliterating the Sunni and Shia armed groups that had nearly driven the country into the abyss.

By the closing months of 2008, successfully negotiating the terms for America’s continued commitment to Iraq became a top White House imperative. But desperation to seal a deal before Bush left office, along with the collapse of the world economy, weakened our hand.

In an ascendant position, Maliki and his aides demanded everything in exchange for virtually nothing. They cajoled the United States into a bad deal that granted Iraq continued support while giving America little more than the privilege of pouring more resources into a bottomless pit.

President Bush made a final trip to Iraq, where he was attacked with a pair of shoes at Maliki’s news conference celebrating the signing of the bilateral agreements.

Are Conditions Conducive For An RV Event?  Part 2 of 4



​Post By Oldwazhisname

September 2015 Status of Iraq –
Are Conditions Conducive For An RV Event?  Part 2 of 4

Maliki’s Second Term – When All of the Prior Good Gets Undone

Bush left office and Obama became President in January 2009.  With the Obama administration vowing to end Bush’s “dumb war,” and the continued distraction of the global economic crisis, Maliki seized an opportunity. He began a systematic campaign to destroy the Iraqi state and replace it with his private office and his political party.

He sacked professional generals and replaced them with those personally loyal to him. He coerced Iraq’s chief justice to bar some of his rivals from participating in the elections in March 2010.

After the results were announced and Maliki lost to a moderate, pro-Western coalition encompassing all of Iraq’s major ethno-sectarian groups, the judge issued a ruling that awarded Maliki the first chance to form a government, ushering in more tensions and violence.

This was happening amid a leadership vacuum at the U.S. Embassy in Baghdad. After two months without an ambassador, Crocker’s replacement had arrived in April 2009. Reports coming from Iraqi and U.S. officials in Baghdad were worrisome.

While American troops bled and the global economic crisis flared, the embassy undertook an expensive campaign to landscape the grounds and commission a bar and a soccer field, complementing the existing Olympic-size indoor swimming pool, basketball court, tennis courts and softball field at our billion-dollar embassy.

Relations between America’s diplomatic and military leadership — so strong in the Crocker-Petraeus era, and so crucial to curtailing Maliki’s worst tendencies and keeping the Iraqis moving forward — had collapsed. Maliki’s police state grew stronger by the day.

In a meeting in Baghdad with a Petraeus-hosted delegation of Council on Foreign Relations members from the U.S. shortly after the 2010 elections, Maliki insisted that the vote had been rigged by the United States, Britain, the United Nations and Saudi Arabia.

​One stunned American representative, the father of an American Marine, was heard to ask, “American troops are dying to keep that son ##  ## ##### in power?”

With the political crisis dragging on for months, a new ambassador, James Jeffrey, was sent to try to salvage the hard-won success that was rapidly being squandered by Maliki and other Iraqi leaders. Kurds were asking how they could justify remaining part of a dysfunctional Iraq that had killed hundreds of thousands of their people since the 1980s.

Sunni Arabs — who had overcome internal divisions to form the secular Iraqiya coalition with like-minded Shia Arabs, Kurds, Turkmen and Christians — were outraged at being asked to abdicate the premiership after pummeling al-Qaeda and winning the elections.

Even Shia Islamist leaders privately expressed discomfort with Iraq’s trajectory under Maliki, with Sadr openly calling him a “tyrant.” Worst of all, perhaps, the United States was no longer seen as an honest broker.

White House senior staff members, the ambassador, the generals and other colleagues, were in agreement that Maliki needed to go.  But in September, 2010, Vice President Biden was in Baghdad for the change-of-command ceremony that would see the departure of Gen. Ray Odierno and the arrival of Gen. Lloyd Austin as commander of U.S. forces.

The Vice President made the fateful decision that Maliki was the only option. Indeed, the following month he would tell top U.S. officials, “I’ll bet you my vice presidency Maliki will extend the SOFA,” referring to the status-of-forces agreement that would allow U.S. troops to remain in Iraq past 2011.

Of course, no SOFA Agreement was negotiated and a full withdrawal of military forces was finished by the end of 2011, in part because President Obama didn’t want it bad enough and in part because Maliki had already struck an agreement with the Iranians to usher the Americans out of the country and to make way for a greater Iranian influence into Iraq.

There was great optimism in Dinarland that this single event of the withdrawal of US troops would be a precursor to a concurrent revaluation event in Iraq.  Of course, this scenario was completely off base, out of touch with what was really going on and was never, in fact, a possibility.

In reality, Maliki moved quickly to grab additional power and eliminate his political opponents, a systematic method he employed throughout the balance of his Premiership period.

On December 19, 2011 (the day after the last US Military person left Iraq), Sunni politician and Vice President of Iraq, Tariq al-Hashemi, was accused of orchestrating bombing attacks and a hit squad killing Shia politicians, and his arrest warrant was issued.  Hashimi was sentenced to death in September 2012 in absentia but had already fled to Turkey, which said it would not extradite him to Iraq.

This affair fueled Sunni Muslim and Kurdish resentment against Maliki who critics said was monopolizing power.  Increasingly non-Shia politicians boycotted Parliament and almost no laws of any importance were passed over the next two years.

In mid-October 2012, another Maliki instigated arrest put the Dinar community into a frenzy.  Iraqi authorities issued arrest warrants for the longtime Governor of the Central Bank of Iraq (“CBI”), Sinan al-Shabibi (who had led the bank since 2003) while he was out of the country on official business following allegations of financial wrongdoing.

At the time, the arrest warrants were widely seen as politically motivated and no one was fooled nor even particularly surprised. In part, because in 2011, Iraq’s Supreme Court ruled that the central bank and other previously independent bodies should be put under supervision of the Iraq Cabinet instead of parliament given that their decisions are executive in nature.

The international community immediately stepped up its condemnation of this blatant attempt to put the reserves of the bank under the control of Maliki.  Since then Maliki has appointed two proxy Governors to attempt to put control of the Bank under him.

With only partial success in his influence, the CBI has been much less effective in controlling the value of the IQD and quelling systemic corruption with money laundering and other matters largely seen as beneficial to Iran and corrupt Iraq politicians and leaders.

In January 2013 al-Maliki’s opponents passed a law which prohibited al-Maliki from running for a third term but a heavily Maliki-influenced Iraqi court later rejected it.

As the country descended into increasing stagnation, the rise of militarized opposition groups and the real threat of Iraq being split into three individual countries, by August 2014 al-Maliki was still holding on to power tenaciously despite Iraq’s President Fuad Masum nominating Haidar al-Abadi to take over.

Al-Maliki referred the matter to the federal court claiming the president’s nomination was a “constitutional violation.”  In August 2014, however, in the face of growing calls from world leaders and members of his own party the embattled prime minister announced he was stepping down.

On July 24, 2014, Fuad Masum became the new president of Iraq. He, in turn, nominated Al-Abadi for prime minister on August 11. For the appointment to take effect, Al-Abadi was required to form a government to be confirmed by Parliament within 30 days.

Al-Maliki, however, refused to give up his post and referred the matter to the federal court claiming the president’s nomination was a “constitutional violation.” He said, “The insistence on this until the end is to protect the state.”  By mid-August 2014, in the face of growing calls from world leaders and members of his own party, the embattled Prime Minister announced he was stepping down to make way for Al-Abadi.

The Iraqi Parliament approved al-Abadi’s new government and his presidential program on September 8, 2014. Since assuming office, Abadi has made determined efforts to increase Sunni participation in the Iraqi government.  Abadi appointed Khaled al-Obaidi, a prominent Sunni politician from Mosul, as his Defense Minister, and the appointment was ratified by the Iraqi parliament after two months.

In mid-December 2014, Abadi forged a new revenue-sharing agreement with the Kurds, under which Baghdad agreed to pay the Kurdish Regional Government one half of all income from Kurdish-controlled oil fields.

To counter the widespread corruption in the army stemming from the Maliki years, Abadi announced that 50,000 “ghost soldiers” had been identified and would be removed from army payrolls. “Ghost soldiers” were men on army payrolls who never showed up for duty, but paid their officers part of their salaries, thus institutionalizing corruption and hollowing out the armed forces.

This greater transparency and inclusiveness have helped to encourage a hope that some of the important laws, like the Amnesty Law, a final hydrocarbon law (“HCL”), the National Guard law and others that are believed necessary for the ultimate success of getting Iraq stabilized will ultimately be passed.

However, make no mistake, there is stiff opposition to these being ultimately passed and they may never get done.

Iraqi President Fuad Masum paid a goodwill visit to Saudi Arabia in November 2014. In response, Saudi Arabia prepared to reopen its embassy in Baghdad, which had remained closed since the start of the Gulf War in 1990.

Abadi has also visited Egypt, Jordan, and Turkey to discuss regional strategies to combat militant Islamist forces. Foreign Affairs magazine has written that after four months in power, Abadi’s attempts to resolve Iraq’s sectarian strife make his premiership “a welcome change from the schismatic style of his predecessor”.

As a result of Abadi’s reforms, the United States pledged $1.5 billion to train Iraqi forces and resumed the sale of F-16 fighter jets, suspended after the 2003 invasion of Iraq.

The Emergence of ISIL

According to a study compiled by United States intelligence agencies in early 2007, ISIL, a branch of Al-Qaeda, planned to seize power in the central and western areas of Iraq and turn it into a Sunni caliphate. The group built up strength and at its height enjoyed a significant presence in the Iraqi governorates of Al Anbar, Diyala and Baghdad, claiming Baqubah as a capital city.

The Iraq War troop surge of 2007 supplied the United States military with more manpower for operations targeting Al-Qaeda, resulting in dozens of high-level members being captured or killed.

Between July and October 2007, al-Qaeda in Iraq was reported to have lost its secure military bases in Al Anbar province and the Baghdad area.

During 2008, a series of US and Iraqi offensives managed to drive out Al-Qaeda-aligned insurgents from their former safe havens, such as the Diyala and Al Anbar governorates, to the area of the northern city of Mosul. By 2008, the ISIL was describing itself as being in a state of “extraordinary crisis”.

Its violent attempts to govern its territory led to a backlash from Sunni Arab Iraqis and other insurgent groups and a temporary decline in the group, which was attributable to a number of factors, notably the Anbar Awakening.

In late 2009, the commander of US forces in Iraq, General Ray Odierno, stated that the ISIL “has transformed significantly in the last two years. What once was dominated by foreign individuals has now become more and more dominated by Iraqi citizens”.

In April 2010, the ISIL’s two top leaders, Abu Ayyub al-Masri and Abu Omar al-Baghdadi, were killed in a joint US-Iraqi raid near Tikrit.

In a press conference in June 2010, General Odierno reported that 80% of the ISI’s top 42 leaders, including recruiters and financiers, had been killed or captured, with only eight remaining at large. He said that they had been cut off from al-Qaeda’s leadership in Pakistan.

In May 2010, Abu Bakr al-Baghdadi was appointed the new leader of the Islamic State of Iraq.  Al-Baghdadi replenished the group’s leadership, many of whom had been killed or captured, by appointing former Ba’athist military and intelligence officers who had served during Saddam Hussein’s rule.

These men, nearly all of whom had spent time imprisoned by the US military, came to make up about one third of Baghdadi’s top 25 commanders. One of them was a former colonel, Samir al-Khlifawi, also known as Haji Bakr, who became the overall military commander in charge of overseeing the group’s operations.

Al-Khlifawi was instrumental in doing the ground work that led to the growth of ISIL.  With the withdrawal of all American troops in December 2011, ISIL was essentially left to become what it wanted to become.

In July 2012, al-Baghdadi released an audio statement online announcing that the group was returning to former strongholds from which US troops and the Sons of Iraq had driven them in 2007 and 2008.

He also declared the start of a new offensive in Iraq called Breaking the Walls, aimed at freeing members of the group held in Iraqi prisons. Violence in Iraq had begun to escalate in June 2012, primarily with Al-Qaeda car bomb attacks, and by July 2013, monthly fatalities exceeded 1,000 for the first time since April 2008.  Building off of the Syrian conflict the strength of ISIL began to dramatically grow in Iraq.

On  June 29, 2014, the organization proclaimed itself to be a worldwide caliphate.

In July 2014, ISIL recruited more than 6,300 fighters, according to the Syrian Observatory for Human Rights, some of whom were thought to have previously fought for the Free Syrian Army.

In June and July 2014, Jordan and Saudi Arabia moved troops to their borders with Iraq, after Iraq lost control of, or withdrew from, strategic crossing points that then came under the control of ISIL, or tribes that supported ISIL.

There was speculation that Iraqi Prime Minister Nouri al-Maliki had ordered a withdrawal of troops from the Iraq–Saudi crossings in order “to increase pressure on Saudi Arabia and bring the threat of ISIL over-running its borders as well.

In June 2014, ISIL captured Mosul, the second largest city in Iraq and other large cities in Northern Iraq.  It became a significant threat to Kurdistan.

In August 2014, ISIL captured the cities of Zumar, Sinjar, and Wana in northern Iraq.

The need for food and water for thousands of Yazidis, who fled up a mountain out of fear of approaching hostile ISIL militants, and the threat of genocide to Yazidis and others as announced by ISIL, in addition to protecting Americans in Iraq and supporting Iraq in its fight against the group, were reasons for the  American intervention in Iraq in August 2014, to aid the Yazidis stranded on Mount Sinjar and to start an aerial bombing campaign in Iraq. This significantly increased the World’s awareness of the threat of ISIL.

In October 2014, it was reported that ISIL had dispatched 10,000 militants from Syria and Mosul to capture the Iraqi capital city of Baghdad, and Iraqi Army forces and Anbar tribesmen threatened to abandon their weapons if the US did not send in ground troops to halt ISIL’s advance.

On October 13, 2014, ISIL fighters advanced to within 25 kilometres (16 mi) of Baghdad Airport.  It was at this point, the pressure became too great for a huge loss of American prestige that the Obama Administration finally began to take the situation seriously.

Of late, the tides of fortune appear to be turning in favor of the Iraq military, in spite of their basic incompetence.  This is happening because Abadi is demanding better military accountability and the Iranian-backed Shia militias and American/Coalition “advisors” have made them a more effective fighting force.

The Iraqi Army and Shia militias continue advancing slowly against ISIL in central (towards Mosul) and western (Anbar Province) Iraq. The advance is so slow that there are doubts about any progress at all and some accusations that ISIL is actually in more areas now than at the beginning of the year, despite thousands of air strikes.

The main problem is the difficulty in obtaining accurate data about what is happening on the ground. As the government gains access and then control of more territory more is revealed about what is going on there. Turns out that in late 2014 the government abandoned a lot more territory than ISIL took control of.

This sort of chaos is common in Iraq and the region. A lot of it has to do with the culture of corruption. This highlights another problem: as ISIL has become less of a problem (stalemated or put on the defensive) this year another revolution has appeared.

This uprising is about the endemic corruption that has long crippled Iraq (and the region). The popular anger about the corruption has been growing for decades and became a real threat once democracy was introduced in 2004.

Now there are regular (usually Friday, the start of the “weekend” in Moslem majority nations) and the government has been forced to act. In addition to firing hundreds of corrupt officials the government has also rushed to be more frank, prompt and honest in reporting the state of the war with ISIL. That means admitting that problems exist.

The military leadership is still a mess as is that portion of the military responsible for keeping the fighting troops supplied. The government never liked to admit that the military was corrupt and incompetent, but the Iraqi people can find detailed reports of this on the Internet and in a growing number of Iraqi media outlets. It is no longer forbidden to report the unpleasant truth.

It can still be dangerous, especially if you talk about Iran backed Shia militia. The upshot of more information is the confirmation of what American advisors and trainers have been saying for over a decade; it takes time to find and train competent officers.

An even more unpopular bit of advice was warnings about the impact of corruption. It is now generally accepted that once the Americans left in 2011 the unsurprisingly corrupt Iraqi politicians began replacing competent officers with more corrupt ones who were believed more concerned with politics than in running an effective army. That was the major reason why ISIL advanced so quickly in mid-2014.

Most Iraqis now accept this rather than the usual “it’s all because of a foreign conspiracy” excuse that is so popular throughout the region. All this openness and honesty does not solve the leadership problems in the military and government, but does allow a fix to proceed more quickly.

There is still some resistance to replacing incompetent officers, usually from politicians who sponsored those officers. There is still fear of another civil war between Shia political factions and politicians feel safer if they “own” a few senior commanders.

This mutual mistrust is an ancient tradition in this part of the world and such long-standing practices are not easily changed.

Meanwhile ISIL is also having leadership and morale problems. Popular resistance in ISIL occupied areas, especially Mosul and western Iraq, is growing despite ever more arrests and executions.

Further, ISIL fighters are being reported as deserting the fight to seek a new life in Europe with the rest of refugees swarming there.  It’s hard to keep pace with how interconnected the various moving parts of the Middle East have become.

In Mosul there are apparently dozens (at least) of executions each week. Some of the victims are ISIL members accused of failure, misbehavior, bad attitude or trying to desert. Sources in the city report that a growing number of ISIL men are fleeing the city, often semi-officially by claiming they are needed in Syria.

Civilians can still get in and out of the city because ISIL needs trade with the outside to survive in this huge metropolis. Intelligence analysts can take large numbers of reports and sift through them to determine what is true and what is rumor or lies.

This is easier to do with computerized databases and special software. In addition the Americans have brought back their aerial electronic monitoring capabilities, which adds more data to the pool of reliable intelligence and makes it even easier to separate fact from fiction.


In 2011 the more astute Iraqi commanders tried to convince their political bosses that the loss of these intel capabilities (the Americans would take it all with them) would be dangerous. The politicians were not convinced then but most are now.

A lot of the results of this intel collection and analysis are not released. This is done to prevent the enemy from figuring out exactly where a lot of the intel is coming from and how it is analyzed.

If you know that information you can more effectively deceive the intel effort. Many of the ISIL leadership are former officers in the pre-2003 Iraqi military and know how this stuff works (often courtesy of Russian military schools).

The intel also shows that the same opportunities for destroying Sunni Islamic terrorists are available now as they were in 2007. Back then the Americans convinced the Shia controlled government to make deals with Sunni tribes to get Sunni support to crush Sunni Islamic terror groups.

Many Shia opposed this (and many still do) but it worked then and after the Americans left the Shia politicians dismantled the rewards (jobs, political opportunity and money) that were part of the deal.

History is repeating itself with most Sunnis now hostile to the Sunni Islamic terrorists (ISIL this time instead of al Qaeda in 2007). ISIL is even more unpopular with most Sunnis than al Qaeda was back in 2007.

But the Sunnis feel trapped between ISIL savagery and Iran-backed Shia militias and politicians who feel they are engaged in a war between Shia and Sunni.

While most Iraqi Shia want no part of this enough of them do, and belong to Iran supported militias, to give credence to Sunni fears. The American military advisors are trying to get American diplomacy behind an effort to persuade the Iraqi government to make a convincing offer to the Sunnis and get another 2007 going.

Meanwhile ISIL shows signs of collapsing from a combination of internal disputes and declining morale. In rural areas the locals are increasingly organizing armed militias and waging guerilla, or open warfare with ISIL.

This may seem suicidal but the tribes have centuries of experience with this sort of thing and when they detect that the “occupier” is stretched thin and vulnerable, the tribal militia becomes a popular and effective option. ISIL understands this and informally grants autonomy in these situations.

There is a downside; as in ISIL makes another resurgence and becomes capable of suppressing the autonomous tribes, the retribution can be brutal. This has already happened a few times in the last year in eastern Syria and western Iraq.

But the tribes are always attuned to what is going on in their territory and more tribes are detecting a decline in the ISIL ability to crack down on disobedient tribes, especially heavily armed and determined one.

The Iraqi Army has about 10,000 troops in Anbar and nearly as many Shia militiamen. The main problem with this force is the lack of good leaders and troop support (maintenance and logistics).

These are the things the Kurds have taken care of but what the Arab Iraqis still have problems with. Thus, the Iraqi Arabs are much less effective against ISIL than the Kurds or Western troops.

The American advisors have convinced the Iraqi generals that an advance is possible but only if carried out slowly and methodically, using the few units with competent leaders (battalion and brigade commanders) to lead the way. There is still a shortage of reliable unit commanders.

The U.S. has about 2,000 troops in Anbar to train and advise Iraqi soldiers, police and pro-government tribal militias. Most of these troops were at al Asad airbase (in eastern Anbar) but more are being sent west, closer to ISIL occupied Ramadi and the main ISIL forces. Iraqis handle security for these bases but American troops take part in the fighting when needed.

More American troops are being seen out in the countryside with Iraqi troops. There are about 5,000 ISIL gunmen in Anbar and most of them were originally recruited from local tribes.

These constant defeats at al Asad and in the two major cities (Ramadi and Fallujah) have been bad for ISIL morale, and many, if not most of the local hires have deserted and taken with them useful information on where ISIL stores its weapons and other important stuff. More of these sites are being bombed even though they are, from the air, just another building with nothing special going on around it.

The locally recruited tribesmen (especially those on the ISIL payroll) were also unhappy with the ISIL policy of kidnapping tribal elders and killing them or holding them for ransom (money or cooperation from tribal chiefs). A lot of the local tribesmen working for ISIL are related to some of the elders kidnapped or murdered by ISIL and that bad treatment is not appreciated.

ISIL needs some victories in Anbar but is having a hard time making that happen. In the meantime ISIL makes what it can of the fact that they still occupy Ramadi and the Iraqi Army advance is not moving much at all. American officials say they believe Ramadi will be retaken by the end of the year.

Such claims are often based on intel that is not available to the public. But sometimes these claims are just wishful thinking. There’s a lot of that going around.

In the north the Kurds continue to push south but are hampered by a shortage of troops. The problem is that protecting Kurdish controlled northern Iraq requires a lot trained and reliable people and takes priority.

There is a long border with Syria and ISIL is always trying to get in or at least cause casualties among the border guards. One reason for the Kurdish success is that their military leaders look after their troops and don’t expose them to needless danger.

Are Conditions Conducive For An RV Event?  Part 3 of 4



Post By Oldwazhisname

September 2015 Status of Iraq –

Are Conditions Conducive For An RV Event?  Part 3 of 4

Very Current Updates

September 15, 2015: Iraqis are alarmed at recent media reports that Iranian Quds Force commander Qassem Soleimani recently made a second visit to Moscow. This comes after Iran and Russia insisting that a July 24th visit by Soleimani to Moscow did not happen. During the July trip Soleimani was said to have met with Russian defense officials and left after two days.

Since 2007 Soleimani has been under numerous sanctions, including ones that are not being lifted by the July 14th Iranian peace deal. Soleimani was not supposed to be able to travel to Russia and Russia knows it. But Russia and Iran simply deny the visits actually happened, the same way Iran denies that Soleimani has spent time in Iraq supervising the creation and use of pro-Iran Shia militias.

September 7, 2015: Several hundred Turkish troops entered northern Iraq in pursuit with some PKK Kurdish separatists believed involved in a roadside bomb attack in Turkey the day before that killed 16 soldiers.


The Turks have been fighting the PKK again (after a ceasefire collapsed) since late July. So far about 200 people have been killed, nearly a hundred of them Turkish soldiers and police.

September 3, 2015: Iraqi F-16IQ fighter-bombers carried out their first combat missions against several ISIL (Islamic State in Iraq and the Levant) targets. This comes 16 months after the F-16IQ made its first flight.

Four F-16IQs arrived in Iraq in July so that Iraqi pilots and maintainers could undertake final training in preparation for the first combat missions. The F-16IQ is a custom version of the single seat Block 52 F-16C and the two-seater F-16D. Iraq has 36 F-16IQs on order.

The F-16IQ is similar to American Block 52 F-16s except they are not equipped to handle AMRAAM (radar guided air-to-air missiles) or JDAM (GPS guided bombs). The F-16IQ can handle laser guided bombs and older radar guided missiles like the AIM-7.

September 2, 2015: In Baghdad 17 Turkish construction workers and their Iraqi (Kurdish) translator were kidnapped by a Shia militia. The kidnappers demanded that Turkey stop the flow of ISIL recruits into Iraq, halt the flow of Kurdish oil via Turkey and do something to end the ISIL siege of several Shia villages in Syria (near the Turkish border) in exchange for the hostages.

On the 11th the kidnappers released a video of the prisoners pleading for help from their government.

On the 16th of September, two of the Turks were released in Basra, near the Kuwait border. The Iraqis government says it is negotiating to get the rest of the Turks released.

Meanwhile the two major Shia clerics in Iraq have condemned the kidnapping and apparently helped the government make contact with the previously unknown Shia group responsible. There are many radical Shia Iraqis who are hostile to Sunnis (for all the al Qaeda and ISIL violence against Shia) and Kurds (for not being Arab and for not obeying the Shia government).

Favorability Index – Government and Military

Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to  Government and Military issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.

Without going back through this detailed perspective as outlined above, I had no idea how bad it really was.  Clearly, under the second term of Maliki as Prime Minister the Favorability Rating would have to have been a “5”, with a near zero probability of a favorable event.

Prior to his second term in office, when the US led coalition was having some success in bringing the needed stability into Iraq, a case for a Favorability Rating might be made for a “3” or even a “2”.

But “on paper” as they say, it would appear that more recently the Abadi-led government is a vast improvement over the Maliki government with Abadi’s reforms to root out corruption, change out unsatisfactory government structures, hold people accountable and be responsive to demands of the people, including being responsive to other sectarian voices.

Nonetheless, many laws still need to be passed and we have seen how difficult it is to get anything passed.  The reemergence of the US-led military presence has the potential of being a game changer for the ISIL threat.  Seemingly, ISIL is increasingly on its heels and trying to find a new foothold.

It appears they may be forced to regroup outside of Iraq, most probably in Syria.   Their resilience and commitment are not to be underestimated.

On the contrary, the true commitment of the US Administration is still in doubt, at least up until the next US Presidential election when possible different attitudes may develop.

The Iranian Problem and Its Current Situation

It is beyond the scope of this paper to go into all of the background of Iran and what all of its issues are.  However, because it seems to me that there is a general misunderstanding of who Iran is and why Iran is in part acting the way it is, I want to point out a couple of fundamental observations that might be helpful to a Dinarian in beginning to understand this complex issue.

First, although Iran is a country, what we are talking about when we use the term “Iran” is an extensive, mafia-like network of Mullahs that have sought to establish a crony-run economy and government that benefited allies and members of their clan.

This Theocracy of religious and political leaders run the country of Iran as a “client state” with appointed leaders, as they do the same in other “client states” like Syria and Lebanon.

At times, this Theocracy has advocated for a state-run economy and trade agreements but can also, when convenient, run capitalist enterprises.  But make no mistake, the cleric’s concern for economic well-being of its people and those whom it dominates is not of its concern.

It’s primary focus is to become a regional hegemony.  Nonetheless, secondly, Iran has operated under international sanctions since 2006 for refusal to place its nuclear intentions under international scrutiny.  The effects of this action have had a devastating effect on the economy of Iran.

The value of the Iranian rial has plummeted and is in worse shape than the Iraqi IQD.  The market for imports in Iran is dominated by state enterprises and state-friendly enterprises, because the way to get around the sanctions is smuggling, and smuggling requires strong connections with the government.

This has weakened Iranian civil society and strengthened the state.  And lastly, Iran and Iraq fought an eight year war beginning in 1980.  Opposing sides were the Shia military of Iran against the Sunni dominated military of Saddam Hussein.

The cost to Iran was astronomical with some estimates placing Iranian casualties alone at 600,000 and causing 130,000 children to be orphaned.  Understandably, Iran puts huge importance on its relationship with Iraq.

Government Speaking

Iran is a dominant player in Iraq’s electoral politics and uses its close ties to Shia, Kurdish and select Sunni figures to shape the political landscape to effect a pro-Shia outcome.  A pro-Iranian, Shia dominated and preferably Islamist government, led by a united Shia alliance remains Iran’s top priority for the Iraq government.

With the exit of the US Military presence in December 2011, Iran became the most influential regional power to shape and influence the outcomes of Iraq’s internal politics.

Iran’s tools of influence include financial support to and pressure on a cross-spectrum of Iraqi parties and officials through economic development assistance; lethal aid to select militant Shia proxies and sanctuary to Iraqi figures fearful of US targeting.  With the vacuum created by the leaving US military presence, the game immediately changed.

The most influential Iraqi politicians (including Maliki, Talibani, Sadr and other high ranking politicians), both nationally and regionally, cozied up to the Iranian government benefiting from money, militia protection and assurances of favorable treatment in the coming new era.

It was widely reported that Iran had the President of the country, Jalal Talibani, answering to its dictates, specifically shielding al-Maliki from the vote of no-confidence threatened in 2012.  Some, like Moqtada al-Sadr, have been known to turn pro-Iranian to revitalize their political/religious credentials.

It is important to note that Iran’s power in Iraq, although extensive, is not without limitations outside of the American influence.  Iran’s greatest political roadblock remains the domineering authority and religious credentials of the Iraq resident, Grand Ayatollah Ali Sistani.

Despite his Iranian heritage, Sistani is Iraq’s most revered Shia religious and political authority.  We have keenly seen his ability to drown out Iranian influence particularly in his recent total support thrown Abadi’s reform efforts in direct opposition to Iran’s wishes.

He has been a critic of Iran’s system of justice and its theocratic governance, not doubt a thorn in the sides of aggressive Iranian Mullahs.  However, his unique style to influence Shia politics is to keep well above the political fray while at the same time ensuring himself significant impact on those rare occasions when he does pronounce on political issues.

Militarily Speaking

In Iraq, the Shia militias, many of them with Iranian advisors, are increasingly being seen as a problem by the new Iraqi government and Iraqis in general. The previous Maliki government had long worked closely with Iran but lost power because Maliki and his allies would not do anything about the corruption that is largely seen as the main reason ISIL made such rapid advances in 2014.

Iraqis are discovering, as the anti-corruption efforts now accelerate, that a lot of that corruption, especially in the military, was encouraged, and sometimes paid for, by Iran. This has caused public opinion among the majority Shia Arabs in Iraq to turn against Iran.

Another reason for that is the Iran supported (and often armed and paid) Shia militiamen are seen as fanatics and undisciplined who are mainly loyal to Iran. These Shia militiamen are largely motivated by revenge (for years of Islamic terrorist attacks on Shia civilians) and their Iranian advisors encourage that.

The Iran backed Shia militias are now seen as a potential threat to the Iraqi government. While the Shia militiamen have less training they are more fanatics and undisciplined. To the Americans the biggest risk is the Shia militiamen terrorizing (kidnapping, murdering, looting and so on) Sunni civilians in areas ISIL has been driven out of. The Americans realize that the key to regaining control of Anbar is gaining the support of the Sunnis (who comprise nearly all the Anbar population).

Iran is not happy with this new attitude. It got worse recently when Iraq got its first few F-16s into service. While being used mainly for attacking ISIL on the ground, the F-16s can also use air-to-air missiles and the
Iraqi pilots can go after Iranian cargo aircraft transiting Iraqi airspace on their way to Syria and force them to land or turn back.

Iraq could never do this before and Iran was able to pretty much use Iraqi air space for these flights without any fear of the transports being threatened. Iraq has always tolerated this Iranian use of Iraqi airspace to rapidly supply the Assad government in Syria.

Iraq did this despite constant pressure from the United States to block the Assad aid. Now the Iraqis are paying more attention to their American allies than their Iranian neighbors.  It appears that very recently Russia may have brought in its own jets to support Syria and Iran in this matter and act as a deterrent/counter-balance to any Iraqi bravado.

Economic Speaking

With bilateral trade between Iran and Iraq estimated at $4 billion (up 30% since 2008) and comprised mostly of Iranian imports (approximately half of Iraq’s imports are Iranian goods), Iran continues to jockey for economic domination in Iraq through corruption and its targeted economic development assistance.

Iran has focused largely on refurbishment of Shia religious shrines, trade agreements and bilateral agreements aimed at and fostering Iraqi economic dependence on Iran.

These efforts have been quite successful.  The reason is twofold: first, Iran’s geographic proximity and cultural similarities gives it clear advantages and secondly, access to Iraqi markets by the US, Europe and other industrialized countries is more difficult and politically more challenging given the current rampant culture of corruption, lack of security and absence of economic-related laws and norms of international business practices.

Favorability Index – Iranian Influences Upon Iraq

Given the international sanctions that Iran currently operates under causing a huge need to suck wealth out of Iraq, the political desire to dominate Iraq for its own protection and the aggressive style of expanding Iran’s regional influence, it is easy to see how Iran’s expanding influence of Iraq is directly detrimental to our desired outcome.

Conversely, it would appear hard to imagine that Iran would want a more economic successful and stable neighbor from which its own population could see the benefits of a pro-West society.  It would be my general expectation that continued clear and aggressive interference by Iran into Iraq’s affairs will be a reality in Iraq for decades to come, if not endemic to its culture.

Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to  Iranian Influence issues that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) but improving.

Again, given hindsight, it is easy to gain the perspective that Iran is doing all it can do to keep Iraq from moving forward and such would otherwise cause a rating of “5”.  A year or two ago, the chances of any revaluation event was practically zero.

However, now that a new Prime Minister with an apparent inclination to offset Iranian domination with Iraq first policies, the efforts to rid the military and government of certain pro-Iranian figures, the advancement of non-sectarian policies and the renewed involvement of the US in matters relating to Iraq, I feel something of a tide has turned.

Again, it is too early to tell.  If needed laws are passed, if the military of Iraq can get its act together such that the ISIL threat diminishes and that moderate political figures remain in power, the future for our investment looks better.  Nonetheless, it is far from certain.

The Economic Situation in Iraq

No  conclusive opinions about the revaluation of the IQD (and maybe an estimate of the timing of such an event) can be made without a basic understanding of the economic issues that face Iraq and the current state of economic affairs.

Economic Overview

An improving security environment and foreign investment are helping to spur economic activity, particularly in the energy, construction, and retail sectors. Broader economic development, long-term fiscal health, and sustained improvements in the overall standard of living still depend on the central government passing major policy reforms. Iraq’s largely state-run economy is dominated by the oil sector, which provides approximately 95% of government revenue and 80% of foreign exchange earnings.

Iraq in 2014 boosted oil exports to a 30-year high of 3.5 million barrels per day, a significant increase from Iraq’s average of 2.2 million in 2011. Government revenues had increased as global oil prices remained persistently high for much of 2009-13, with per barrel of oil prices hovering around $110.

This had generally allowed for a slight surplus in government spending.  However, starting in mid-summer 2014, global oil prices began a precipitous drop and now are under $50/barrel.

This has turned a generally favorable Government of Iraq budget into a budget crises where revenues are not covering expenditures by a significant amount, in spite of spending slashes.

Iraq’s contracts with major oil companies have the potential to further expand oil exports and revenues, but Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable these deals to reach their economic potential.

The Iraqi Kurdistan Region’s (IKR) autonomous Kurdistan Regional Government (KRG) passed its own oil law in 2007, and has directly signed about 50 contracts to develop IKR energy reserves.

The federal government has disputed the legal authority of the KRG to conclude most of these contracts, some of which are also in areas with unresolved administrative boundaries in dispute between the federal and regional government.

Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors’ concerns regarding the uncertain business climate, which may have been harmed by the November 2012 standoff between Baghdad and Erbil and the removal of the Central Bank Governor in October 2012.

The government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles including a tenuous political system and concerns about security and societal stability.

Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors.

Iraq is considering a package of laws to establish a modern legal framework for the oil and non-oil sectors and a mechanism to equitably divide oil revenues within the nation, although these reforms are still under contentious and sporadic negotiation.

Under the Iraqi Constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (Law 4 of 2006) and the Kurdistan Board of Investment, which is designed to provide incentives to help economic development in areas under the authority of the KRG.

Inflation (estimated at 2% in 2013) has remained under control since 2006 as security improved. However, Iraqi leaders remain hard pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace.

Unemployment (hovering around 16% – ranking a very low 143 out of 182 nations) remains a problem throughout the country despite a bloated public sector. Encouraging private enterprise through deregulation would make it easier for Iraqi citizens and foreign investors to start new businesses.

Rooting out corruption and implementing reforms – such as restructuring banks and developing the private sector – would be important steps in this direction.  However, we have seen these positive steps largely stalled out in a dysfunctional Parliament when it comes to passing needed laws.


Oil Revenues

The economic driver of Iraq is crude oil production, of course.  In the Saddam years, Iraq’s crude oil production was very volatile depending upon whether Iraq was at war (the Iran-Iraq War or the first Invasion by Coalition forces).

Average Daily Production varied from a low of 305,000 barrels in 1991 to a high of 2,897,000 barrels in 1989.  This high point was never again matched until 2012 and Iraq’s production has exceeded that each year since.

The 2015 production is expected to be at an all-time high of an estimated 3,981,000 barrels per day.  Iraq has the potential to increase production from 4 million barrels a day to over 5 million barrels a day or more in the next five to ten years. In fact, Iraq has announced an ambition to reach 10 to 12 million barrels a day of production.

Oil reserves in Iraq are considered the world’s fifth-largest proven oil reserves, with 140 billion barrels.  Iraq is expected to seek a higher share for its output inside the Organization of Petroleum Exporting Countries (OPEC).

Rising output from Iraq would likely alter the balance of political power within OPEC and challenge Saudi Arabia’s current leadership.  Iraq’s massive oil expansion program is highly dependent on continuity of the governing infrastructure of Iraq and the successful implementation of a power-sharing deal emerging from recent elections.

Hopes are high that Abadi can forge a stable government coalition and end the long running dispute over oil development with the Kurdish Regional Government. The Iraqi oil industry will need strong technical leadership but political rivalries have in the past thwarted cooperation on major economic development programs.

In 2009, the Iraqi Ministry of Oil awarded contracts to international oil companies for some of Iraq’s many oil fields. The winning oil companies entered joint ventures with the Iraqi Ministry of Oil, and the terms of the awarded contracts include extraction of oil for a fixed gain of $1.40 per barrel for the oil companies with the remainder going to Iraq.

The fees will only be paid once a production threshold set by the Iraqi ministry of oil is reached.  Iraq’s Production Cost to produce a barrel of oil is estimated at $4.80, the second lowest cost (behind Kuwait) in the World.  Notable was a mention in an Iraq Business Journal article that Iraq was $9 billion in arrears in its payments to international oil companies at the end of 2014.

Iraq’s expected revenue from sale of oil in 2015 is expected to approximate $70 billion.  As this makes up 95% of the government’s revenues and the total expenditure budget for the government of Iraq is $102.5 billion, it is not hard to see that Iraq has a huge funding problem.

The ever present problem of corruption plagues this rich segment of the Iraq economy.  According to a US Study from May 2007, between 100,000 and 300,000 barrels per day of Iraq’s declared oil production over the past four years could have been siphoned off through corruption or smuggling.

In 2008, Al Jazeera reported $13 billion of Iraqi oil revenues in U.S. care was improperly accounted for, of which $2.6 billion is totally unaccounted for.   Some reports that the government has reduced corruption in public procurement of oil; however, reliable reports of bribery and kickbacks to government officials continue to persist.

The longer term prospects for the price of oil are expected to improve.  A reliable estimate pegs a slowly improving price to approximately $71/barrel in 2020. At today’s level of oil output and if everything else remained the same, Iraq would need a $69/barrel of oil to breakeven.

Are Conditions Conducive For An RV Event?  Part 4 of 4




Post By Oldwazhisname

September 2015 Status of Iraq –
Are Conditions Conducive For An RV Event?  Part 4 of 4

Infrastructure Opportunities

Although many infrastructure projects are underway, Iraq remains in deep housing crisis, with the war-ravaged country likely to complete only 5 percent of the 2.5 million homes it needs to build by 2016 to keep up with demand, the Minister for Construction and Housing said in September 2013.

The needs for basic services infrastructure continues to go unmet, in part due to budget and corruption issues.  Huge economic possibilities exist if this segment can be properly unleashed.

What About All Of the Supposed Deposits of Undiscovered Gold?

When I first got involved in buying IQD, I heard about an untold amount of wealth available to Iraq from undiscovered and unmined gold deposits under neighborhoods in Bagdad.  It was supposedly accidentally found by US soldiers during the early days of the Invasion.

I went about enough research into this matter to give a strong opinion that this is most probably total fiction, probably fabricated to advance the storyline of why the IQD would see a significant rise in value.  I read reports of symposiums put on by the Iraq Minister of Mining whatever, and while he talked tangently about gold to be mined (Iraq is a big country), his excitement was centered on phosphates, quartz, salt and Sulphur.


Historically, 50 to 60 percent of Iraq’s arable land has been under cultivation.  Because of ethnic politics, valuable farmland in Kurdish territory has not contributed to the national economy, and inconsistent agricultural policies under Saddam Hussein discouraged domestic market production.

Despite its abundant land and water resources, Iraq is a net food importer. Under the UN Oil for Food program, Iraq imported large quantities of grains, meat, poultry, and dairy products.

The government abolished its farm collectivization program in 1981, allowing a greater role for private enterprise in agriculture.  Rightly so, this important segment of the Iraqi economy has huge upside if the Government will support its development.

The international Oil-for-Food program (1997–2003) further reduced farm production by supplying artificially priced foreign foodstuffs. The Invasion of 2003 did little damage to Iraqi agriculture; because of favorable weather conditions, in that year grain production was 22 percent higher than in 2002.

Although growth continued in 2004, experts predicted that Iraq will be an importer of agricultural products for the foreseeable future.

Long-term plans call for investment in agricultural machinery and materials and more prolific crop varieties—improvements that did not reach Iraq’s farmers under the Hussein regime. In 2004 the main agricultural crops were wheat, barley, corn, rice, vegetables, dates, and cotton, and the main livestock outputs were cattle and sheep.

Favorability Index – The Economy Of Iraq

Using a scale of “1” to “5” (with “1” being very favorable and a “5” being very unfavorable) to assign a current estimate of the conditions relating to  Iran’s overall economic situation that would support a revaluation event, I would assign a current rating of “4” (“unfavorable”) and deteriorating.

As it stands, Iraq is a “one trick pony” with oil being its primary source of revenues and the depressed global oil prices is outside of its control, aside from producing more.

The 2016 Budget will soon be proposed and what the GOI comes up with to generate enough revenues to support the country will be revealing.  Failure to address this issue satisfactorily will have a direct negative impact on the value of the dinar, I can nearly guarantee that.

To the extent that an estimated 25% of the Governments budget is being spent on the ISIL problem, a near-term resolution of the ISIL problem will significantly help but not totally alleviate this issue.  Rescue will come from a combination of a rise in oil prices and the diversification and development of the Iraqi economy.

The Prognosis For An Increase In The Value Of The IQD

The totality of the above discussion should allow a reasonable reader to come to conclusions about the overall prospects for an increase in the value of the IQD, at least looking back from something of a historical perspective and an accurate read on current conditions.

IMO, the prospects have been dim for several years and the current prospects still look quite difficult, albeit maybe improving.  But no doubt, there is a long ways to go for the conditions to seem ripe for a favorable event.

If my assessment seems overly harsh, consider the recent bond ratings assigned by internationally respected bond rating agencies during Iraq’s efforts to float international bonds. Standard & Poor’s credit rating for Iraq stands at B- Fitch’s credit rating for Iraq is B-.

In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Iraq thus having a big impact on the country’s borrowing costs.  Pathetically weak countries like Belarus, Congo and Ghana have been assigned this same level of rating.  Actually, I could find only the countries of Greece and Valenzuela, both know to have already defaulted on recent debt, to have a lower rating.

What Determines the Value of a Country’s Currency Value When It’s On a Pegged Value?

My challenge is going to be to try to state this topic in a relatively simple manner, while making it relevant to Iraq and the IQD.  Gurus both make it too complex with talk of “reducing the note count”, while others convey that moving the value of the IQD can be done at a whim without a whole cascade of fallout issues to worry about.

Manipulating the value of a country’s is often a balancing act between several opposing objectives (as an example, when China recently decided that by devaluation or manipulation of its currency’s value, it can help spur a better balance of trade by making their products more competitive but it comes at the cost of greater in-country inflation).

Let me begin with the “short term” determinants of the value of currency.

There are two primary ways for deciding it. The first is the exact monetary regime that Iraq has been using and it calls for some authority (in our case, the Central Bank of Iraq, the “CBI” ) to peg the currency to some commodity or some other currency. In Iraq’s case this has been the USD.

This is referred to as ‘fixed exchange rate” or a “peg” (as if the value of the IQD is nailed to the value of the USD, i.e. when the USD moves in value, so does the IQD).

While it is pretty rare today, it used to be that most of the Word’s currencies for the last five hundred years were “pegged” or fixed to gold; after the Second World War, when USA emerged as the dominant economy, many countries have chosen to peg their currency to the dollar, as is the case of Iraq.

In this situation, the CBI has declared an exchange rate of 1166 IQD equal to $1 USD and it must be willing to either buy or sell its currency for gold or any foreign currency at the declared rate.

The other way is a floating exchange rate.  Iraq does not currently use this method.   Here, no central authority “decides” the value of the currency. There are open markets where the currency is allowed to trade and the value of the currency is whatever is decided by these markets.

Typically, a market consists of a large number of “market makers” – people who are willing to buy AND sell currency at some (slightly different) rates. The difference between their buy and sell rates is what they earn as profits – compensation for creating the markets.

Typically these will increase the “value of currency” if they have net positive demand (i.e. more people buy the currency than those who sell it) and vice versa. This adjustment keeps happening continuously allowing others to gauge the value of the currency.

In Dinarland, there is great debate as to what Iraq will do to effect a RV of its currency.  Some guru’s like Kaperoni are adamant that a float of some sorts is what will happen.

Other Gurus have stated specifically that there will be some initial adjustments to new peg rates of anywhere from between $0.10 to $4.20/IQD and higher.  IMO, there is no clearly stated and consistently applied method for such an event (which if you think about it, is a problem for the RV scenario, in and of itself).

In the medium run, the value of currency is determined, by two main factors – balance of trade and inflation rate.

Roughly speaking, balance of trade refers to difference between exports and imports. If exports are higher, then more people will demand the currency and hence it will appreciate (or increase in value) and vice versa.

Iraq from 2009 through 2012 enjoyed a significant surplus situation and we saw the CBI’s reserves begin to rapidly increase.  It was a cause for a lot of enthusiasm in Dinarland.   In order to drive home this point, we sometimes forget that we saw several upward revaluations of the IQD during this time.

Conversely, with the collapse of global oil prices and the cost of fighting ISIL having significant detrimental effects of a deficit balance of trade and a huge deficit in the Iraq government’s budget, we are increasingly of late getting comments that a devaluation of the IQD is being considered (see article below by an American economist).

Very modest inflation is common in most of the World’s stable economies.  However, Inflation is basically a decrease in the value of currency. Thus, as things become more expensive, the currency becomes less valuable or depreciates.

Typically, inflation is a local phenomenon (i.e. it changes the value of the currency within the country) while balance of trade is a foreign phenomenon (i.e. it changes the value of the currency relative to other currencies).

This is the exact situation we have seen in-country, where the Street Rate of the IQD is significantly worse than the international rate being defended by the CBI.  There cannot long exist a great disparity between in-country street rates and international official exchange rates.

As we move forward, it will be important to not only keep track of the deficit trade problem caused by diminished revenues from foreign trade, but it will be important to track the internal inflation that could be caused by taxes and tariffs that will reduce the purchasing power of goods and services inside Iraq when a 7-20% tax that didn’t previously exist is now applied in the marketplace.

I will add that it is my opinion that the double whammy of the falling value of the street rate of the IQD caused by limiting the supply of USD through the auctions and the application of the Taxes and Tariffs Law earlier, caused the GOI to suspend collection of most taxes several months back.

In the long run, the value of currency is determined by one single factor: whether the rate of printing (or creating) the currency is higher or lower than the rate of increase in demand for it.

The demand for currency would typically grow with the real growth rate of the country.  We saw this significantly happen between 2003 and 2009, when Iraq was making huge strides in getting its act together.

If the central bank were to print more than that rate, then the money supply would increase. It would lead to higher inflation. People within the country would import more and export less thus leading to an unfavorable balance of trade. These would increase the supply of the currency, thus forcing the market makers to decrease the price leading to depreciation.

On the other hand, if the printing of money is LESS than the rate at which economy expands, we would see deflation. Prices would fall and people could “make money” just by holding onto it. This is a rare phenomenon because governments typically prefer to print money and use it for their ends rather than allow deflation.

In the case of us in Dinarland, the speculation has been (because there is no clear proof this is happening) that the CBI is reducing the money supply by removing IQD from the marketplace.  This is one of the narratives that actually could ultimately lead to a meaningful improvement in the value of the IQD compared to other currencies

The Historical Value Of the IQD

Money is not an organic creature but its value keeps changing with the society and its economic conditions. One IQD in 1931 is not the same as one IQD today, both in terms of appearance and purchasing power.

There is a lot of confusion and misinformation floating around in Dinarland about what the historical value of the IQD had been, why it has changed and the reasons why it will revalue.  Hopefully, the insights in the section will put to rest the many false stories about the historical value of the IQD.

The IQD was introduced in 1931 and the IQD was originally pegged to the British Pound.  The value of one IQD was equal $4.86 USD between 1942 and 1949 and (because of devaluation changes to its underlying peg, the Pound) the value equaled $2.80 USD between 1949 and 1971.

As a gesture of independence in 1959, Iraq uncoupled the IQD officially from the British Pound.  However, the IQD remained at equality with the Pound until the unit of the British Pound devalued for the second time.

Soon after the inflation of the US Dollar in 1973, the IQD revalued to $3.39 USD.  The value of IQD remained the same until the Iran-Iraq War.  Iraq in 1982 devalued the IQD by 5% equating it to $3.22 USD.

In early 1988, the official exchange rate of the IQD continued to equate to $3.22 USD, but, the levels of Iraq’s cost of living was rapidly rising (inflation) by 25-50%/year starting in 1985, such that by 1988, the street rate of the IQD was half the official rate of exchange per USD.

After the Gulf War in 1991, because of UN sanctions, the formerly used version of the IQD (called “the Swiss Dinar”) was used no more.  A new “Saddam Note” set of currency units was created.

Because of the sanctions by the United States and the over-printing these new currency units by the government, the IQD devalued rapidly, and by late 1995, the value of 3,000 IQD equaled $1.00 USD.

Between October 2003 and January 2004, the Coalition Provisional Authority issued new Iraqi dinar coins and notes (the ones we now hold), with the notes printed using modern anti-forgery techniques, to “create a single unified currency that is used throughout all of Iraq and will also make money more convenient to use in people’s everyday lives”.

Old Saddam-era banknotes were exchanged for new at a one-to-one rate, except for the Swiss dinars, which were exchanged at a rate of 150 new dinars for one Swiss dinar.  (This event pegged the value of the IQD as 3,703 IQD equal to $1.00 USD.)

I want to point out that this last paragraph is straight from CBI’s website and if you follow the above train of the changes to the value of the IQD, you will see no room for the Guru myth that George W. Bush destroyed the value of the IQD (and so goes all of the false narrative of the US can once again turn on the value of the IQD back on. You see, the value of the IQD was already destroyed before George W. Bush ever showed up on the scene).

In August 2005, the IQD exchange rate had improved to 1,470 IQD equal to $1.00 USD.  The value had steadily improved until it reached a value of 1,170 IQD by 2008.

In October 2012, Dr. Shabibi, Governor of the CBI, announced changing the per to 1,166, the last official announcement of any change to the official pegged rate of the IQD.

Let’s Hear From An American Think Tank Economic Professor About Iraq’ Current Economic Situation And How Current Affairs are Affecting the prognosis For a RV

Finally, I have included excerpts from an excellent (but dour) article put out in January 2015 by Frank R. Gunter, a Professor of Economics at Lehigh University and a Senior Fellow at the Foreign Policy Research Institute.

His study is based on discussions at the November 2014 Iraq Economics, Development, and Policy program at the American University of Sharjah in the United Arab Emirates.  I include it, in part because it ties in nicely with the above analysis but it also touches on the valuation prospects for the IQD.

“The combination of the ISIS insurgency and low oil prices are producing an economic shock unprecedented in Iraq’s troubled history.

The ongoing conflict will require a sharp rise in security expenditures at the same time that government oil export revenues are collapsing, forcing the government into deficit spending.

This deficit spending, combined with a loss in reserves from the Central Bank of Iraq, calls into question the much-vaunted stability of the Iraqi dinar.

Dollar Flows in Iraq

The flow of dinars and dollars within Iraq is critical to dealing with the ongoing crisis and yet little understood even within the country. The figure below illustrates the pattern of these flows. As is well known, the primary source of government revenues – over 95% – is from oil exports.

For over a decade, the dollars earned from these exports have been paid into the Development Fund for Iraq (DFI), which is held by the Federal Reserve Bank of New York. The primary reason for having oil export payments paid to the DFI rather than directly to Iraq’s Ministry of Finance (MoF) is to avoid confiscation of these funds by foreign courts in settlement of Saddam-era lawsuits.

Upon request, dollars from Iraq’s oil exports are transferred from the DFI to the MoF. At this point, a divergence occurs. Over half – about 60% in 2013 – of the dollars flow out again to the rest of the world as payments for government imports, debt service, and miscellaneous transactions.

The remaining dollars are sold to the Central Bank of Iraq (CBI) for dinars at a rate of 1166 Iraqi Dinars per US Dollar. The MoF then uses these dinars to pay for the Government of Iraq (GoI) expenditures in the Iraq economy such as salaries, pensions, social safety net, security, etc. The dollars accumulated by the CBI through these dinar sales are, of course, the nation’s international reserves.

However, many of these dollars immediately flow out again. The CBI holds daily auctions to provide dollars to the Iraq economy. Financial institutions buy dollars from the CBI in order to provide them to individuals and organizations that want dollars as a more secure savings asset, to facilitate domestic transactions, to purchase legal and illegal imports, and for capital flight.

This demand for dollars is quite large. For example, during the first 14 auction days of December 2014, CBI dollar sales totaled $2.25 billion.

Those Iraq individuals or organizations that are forbidden by the CBI to directly access the currency auction must purchase dollars at a premium in the parallel currency market. On December 18, 2014, the exchange rate in the parallel market was 1199 Iraqi Dinars per US Dollar – about 3% higher than at the CBI auction.

In every year but one over the last decade, the inflow of dollars to the CBI from the MoF exceeded the outflow of dollars through currency auctions resulting in an increase in the country’s international reserves.

For example, in 2013 the MoF sold about $55 billion to the CBI while about $53 billion flowed out again through the currency auctions resulting in about a $2 billion increase in international reserves. The large increase in international reserves since 2004 has been the major support for the country’s enviable exchange rate stability. However, the results for 2014 were grim.

Because of political disputes, Iraq never passed a 2014 budget. Instead, government expenditures in 2014 were based on an arguably unconstitutional extrapolation of the 2013 budget. And the Government of Iraq (GoI) has continuously delayed even a partial accounting of 2014 revenues and expenditures.

However, recent data from the International Monetary Fund support the view that Iraq’s fiscal and monetary situation is deteriorating. At the same time that oil export earnings are declining, GoI security-related dollar imports have increased dramatically.

One effect has been on fiscal reserves held at the DFI, which have fallen from almost $18 billion at the end of 2012, and $6.5 billion at the end of 2013, to about $4 billion at the end of November 2014 (IMF Press Release 14/560, 9 December 2014). Equally worrisome is the drop in the country’s international reserves.

From $77 billion at the end of 2013, the international reserves held by the CBI fell to about $67 billion at the end of November 2014. This is only the second year-over-year fall in international reserves in the last decade. In the absence of reliable data from the GoI, there are two possibilities.

Either there has been a decrease in MoF sales of dollars to the CBI and/or a substantial increase in dollar auction sales to financial institutions. However, through November 2014, auction sales of dollars by the CBI have totaled about $47.4 billion, which is roughly in line with 2013 dollar sales.

Therefore, the cause of the drop in Iraq’s international reserves is more likely a result of the collapse in oil export revenues combined with increasing security-related dollar expenditures by the Iraqi government and, possibly, accelerating capital flight.

Thus in 2015, Iraq not only faces a fiscal crisis from falling oil export revenues but also a monetary crisis because of the loss of international reserves. The fiscal crisis might be best understood by distinguishing between the “break even” price of oil and the “crisis” price of oil.

Break Even and Crisis Prices

Despite the fact that the country’s 2015 fiscal year starts this month (January), the crucial assumptions underlying the budget are uncertain. Over the last several months, no sooner has the GoI announced a planning price for oil for the 2015 budget then world prices have fallen below this level.

The most recent announcement on December 25th was for a $102.5 billion budget based on an annual average oil price of $60 per barrel resulting in a large deficit (Gulf Research Center, December 25, 2014).

Expenditures of $102.5 billion in 2015 means that the GoI expects to spend almost $22 billion less than its actual expenditures in 2013! Where will the cuts occur? The drop in oil prices to similar levels in 2009 provides insight into both the reactions of the GoI and the effects on the Iraqi economy.

In 2009, as total revenues decreased by about 33%, salary and pension expenditures increased by about the same percentage. This necessitated sharp cuts in the other major expenditure categories, safety net transfers and public investment, in order to reduce expenditures.

The remaining deficit was financed through the sale of GoI treasury bills and the MoF “clawing back” unspent government funds from the state owned banks. The economic effects of the draconian cuts in public investment were severe and long-lasting.

Since public investment accounts for over 90% of Iraq’s fixed capital formation, the cuts in the investment budget caused most economic development activities to grind to a stop.

Work on improving roads, increasing electricity generation, opening schools and clinics, increasing access to clean water, and so on was abandoned until oil prices finally recovered in 2010.

And when the projects were eventually restarted, it was often discovered that previous work had to be completely redone due to looting, vandalism, environmental damage, or planned revisions. By some estimates, it was not until 2011 that public investment returned to the levels achieved at the end of 2008.

Assuming oil exports of about 3.3 million barrels per day, Iraq needs an oil price of about $80 a barrel in order to break-even and to be able to pay for its sharply reduced 2015 expenditures without running a budget deficit.

An oil price this high would provide sufficient revenues to pay not only for current expenditures and security costs but also for essential infrastructure investment. Since world oil prices are already less than $60, it is extremely unlikely that Iraq will be able to break-even in 2015. But at what price of oil will the required reductions in GoI expenditures become politically destabilizing?

That depends on the crisis price of oil.

The crisis price is the lowest oil price that will allow the GoI to pay salaries and pensions, purchase the necessary supplies for the police and army, maintain a minimum social safety net, pay interest on its debts, pay war reparations, and continue the absolute minimum infrastructure maintenance and construction to allow a steady increase in the volume of oil exports.

If the world price of oil falls below the crisis price for an extended period of time and other revenue sources are not available, then the necessary expenditure cuts can be expected to be politically destabilizing. In 2009, this crisis price was an estimated $50 a barrel.

Therefore, while the world price of oil in 2009 was below Iraq’s break-even price, it was above the crisis price.

However, in 2015, the crisis price of oil is expected to be much higher. Not only has there been a steady increase in government salaries and pensions since 2009, but also the GoI expects to sharply increase its security expenditures to fight ISIS. As a result, the 2015 crisis price of oil is an estimated $70 a barrel.

Since world oil prices are expected to remain below the crisis price in 2015, the GoI faces a difficult challenge – either find another source of revenue, borrow the needed funds, or make politically unacceptable cuts in salaries or pensions. The latter option can be expected to lead to widespread political protests by government employees and retirees as well as threats of a government shutdown.

If world oil prices average $60 per barrel in 2015 (currently at under $50), then the GoI needs at least an additional $12 billion to fund its minimal crisis budget and an additional $12 billion – $24 billion in total – to rise to the break-even point.

While its international and domestic options to raise these funds are limited, the GoI has a high probability of funding its crisis budget. However, the GoI faces a much lower probability of being able to fund its 2015 break-even budget.

Options for international lending are limited. Government to government loans from the United States and other countries involved in the current war on ISIS are likely to face strong opposition in Washington and other world capitals. It will be argued – with an element of truth – that Iraq’s budget problems are mostly self-inflicted, the result of GoI mismanagement and corruption.

In addition, it will be pointed out that the U.S. and other states have already forgiven 80% or more of their Iraqi debt and that these countries have spending needs at home. Iraq’s regional neighbors such as the UAE and Kuwait – who generally did not participate in the loan forgiveness program – are facing their own budget challenges resulting from the collapse in oil prices.

However, it is likely that the GoI will be able to borrow several billion dollars. In addition, it appears that Kuwait has agreed to a one-year suspension of war reparations.

These reparations were imposed under an agreement with the UN, where Iraq agreed to pay Kuwait 5% of its gross earnings from oil exports to compensate for the damages incurred during the Iraq invasion of Kuwait in 1990. With a world price of $60 a barrel, a one-year’s suspension will free up about $3.6 billion.

There are at least five other sources of funds to meet the fiscal deficit. First, the GoI can readily access the funds held at the Development Fund on Iraq that were an estimated $4 billion at the end of November 2014.

Second, in 2009, the GoI was able to transfer about $7.7 billion from state-owned banks back to the MoF. These funds represented amounts that had been budgeted but not yet spent. In view of the constraints on spending in 2014, it is unlikely that more than several billion can be clawed back from state-owned banks in 2015.

Third, the GoI could attempt to borrow domestically although the amount raised would probably be less than $1 billion. While there have been several bond issues since 2003, demand for such instruments is limited especially since there is no liquid secondary market for government debt.

Fourth, although the country has an income tax system, tax revenues in previous years have been de minimis. It is unlikely that increasing the tax rate will raise substantial revenues in 2015.

Finally, and most controversially, it has been proposed that the MoF obtain part of the country’s $67 billion in international reserves by encouraging/forcing the CBI to buy dollar denominated bonds from the MoF.

Until a few years ago, it was believed that the CBI could resist such GoI pressure to monetize its debt, but former Prime Minister Nouri al-Maliki was able to remove the head of the CBI without the approval of the National Council of Representatives and replace him with a Maliki loyalist. This event severely undermined the perceived independence of the CBI.

Adding together these various sources of funds, the GoI should be able to raise or borrow enough to pay not only for its crisis budget in 2015 but also move part of the way towards its break-even budget.

However, if sub-$60 per barrel oil prices continue into 2016, then the GoI will face an even wider budget gap while having exhausted its borrowing options. It may be impossible for the GoI to even pay for its crisis budget in 2016. But a more immediate challenge than the future price of oil is the increasing stress in early 2015 on the Iraqi exchange rate.


Exchange Rate Options

A great source of pride for the CBI has been its ability to maintain a relatively stable exchange rate despite intense conflict in 2006-7. In fact, the CBI actually allowed a 20% appreciation of the dinar during this period. However, as discussed above, CBI reserves are falling as a result of lower dollar sales to the CBI by the MoF combined with large auctions of dollars by the CBI to financial institutions.

In addition, there is the possibility that the GoI will attempt to relieve its current fiscal crisis by encouraging or forcing the CBI to buy GoI dollar denominated bonds. This would replace liquid assets in the CBI accounts with illiquid assets, GoI bonds.

If either or both of these events occur, then there will be a loss of confidence in the ability of the CBI to maintain the current exchange rate of 1166 Iraqi Dinars per US Dollar.

Anticipating a depreciation of the dinar, speculation against this currency can be expected to increase. The CBI and GoI have few options to curb this speculation and prevent a loss of the nominal anchor of the Iraqi economy – its stable exchange rate.

One possibility is to further restrict access to the daily currency auctions.   (And this is exactly what subsequent to this article happened.  The GOI at the time it approved the 2015 Budget, mandated that there be a cap on auctions of $75 million/day.

The street rate of the IQD immediately floated to an approximate 6.3 % devaluation in purchasing power.) This was the primary policy response when the exchange rate came under attack in February 2012.

Buyers of dollars were required to be registered and provide documentation for the precise purpose of the dollar purchases. Further restricting access can be expected to lead to a widening gap between the official exchange rate of 1166 Iraqi Dinars per US Dollar and the rate in the parallel currency market.

An expansion of a dual exchange rate system can be expected to increase corruption as institutions use their political influence to gain access to the more favorable currency auction rates.

In addition, by restricting access to dollars for less favored groups – primarily in the private sector – it can be expected that there will be a further slowdown in the growth of the country’s non-oil economy, exacerbating the economic crisis.

A more cynical or possibly realistic policy response to the loss of the country’s international reserves would be a sharp pre-emptive depreciation of the Iraqi dinar. This would not only lead to an increase in import prices and a decrease in the prices of non-oil exports boosting domestic production but also reduce – at least temporarily – speculative pressure on the dinar.

The experience of countries in similar situations over the last several decades show that if the depreciation option is chosen, then it is better is to depreciate sooner rather than later and by a larger rather than smaller amount.

One view is that the GoI should immediately announce a return to the pre-2006 exchange rate of about 1470 Iraqi Dinars per US Dollar – roughly a 25% depreciation. However, with a new government, it is unlikely that there will be an aggressive dinar depreciation.

Typically, governments wait until a crisis brought about by a substantial loss of reserves occurs before depreciating their currency. And there is the fear that without fundamental changes in the Iraqi economy, any depreciation will only be the first of many.

A more long-term solution to the country’s loss of reserves and accompanying exchange rate crisis would be a return to using a currency board such as the one that provided Iraq with a stable exchange rate during

the tumultuous period of 1930-49. Unlike the CBI, the former Iraq currency board guaranteed full dollar convertibility of dinar notes and coins only.

This immunized the currency board from the speculative attacks that are often the downfall of fixed exchange rates such as Iraq’s. However, the adoption of an orthodox currency board can be expected to face serious political opposition since it would reduce the GoI’s ability to divert financial resources in order to favor particular economic sectors or to benefit friends of government officials.

Iraq’s Perfect Storm

The combination of falling world oil prices and the ISIS conflict has resulted in the most serious fiscal and exchange rate challenges since the 2003 invasion. It is tempting for the new government of Prime Minister Haidar al-Abadi to seek only limited modifications of fiscal and exchange rate policies so as not to run the risk of further destabilizing an already complex situation.

And if low – sub-$100 a barrel – oil prices are a temporary phenomenon with higher oil prices returning in 2016, then this limited strategy should work.

However, if deceased oil demand from the BRIC countries combined with an increased oil supply driven by both the fracking revolution in the United States and Saudi Arabian attempts to rein in the world oil market, then Iraq may face several years of oil prices substantially below $100 a barrel.

It should be noted that, even after adjusting for inflation, the world recently experienced two decades, 1985-2005, of sub-$60 a barrel oil. A future of low oil prices will require difficult and, to a great extent, irrevocable decisions about both fiscal and exchange rate policies. Rich countries with long histories of stable government can afford to make stupid decisions. Iraq cannot. “


After wading through a nearly 30 page report, some of you will want to hear my conclusions.

I am no different than many of you reading this, wanting some level of a favorable RV event to occur, preferably yesterday.

However, I have a career dedicated to underwriting risk, judging conditions and estimating whether a good or bad outcome is likely.  One of the tenants of underwriting is that past behavior is a very good predictor of what the future will bring, certainly until conditions improve.

Based upon the above, it is difficult to see how things will change anytime soon.  If anything, there is great potential for things to get worse, even a worst case scenario where the fundamental remaining positives of Iraq are completely wiped out through some sort of adverse regime change.

I think we came very close to that happening twice in the last four years: once with Maliki nearly becoming a dictator and again with Iraq nearly being overrun by ISIL.

Although both have seen positive steps toward successful resolution, we are far from a certainty of either resolution.  Further, Iraq is clearly high centered in sectarian issues and not able to move forward on any meaningful resolution of the unification/reconciliation/reform issues.

The collapse of the global price of crude oil and the significant cost to fight ISIL have Iraq in a very difficult place.  No, I don’t see an increase anytime soon and think the possibility to devalue the IQD along the lines of what Dr. Frank Gunter says above is very reasonable on the near term horizon.