Iraq’s Perennial Electricity Problem and its Implications for Social Stability

The growing social unrest we see in Iraq today can be directly linked to the government’s inability to provide basic services, including electricity, to its citizens. Power disruptions have increased in recent years and are likely to reemerge this summer, placing an immense strain on the government’s relationship with the Iraqi people.

Nearly two decades after the fall of Saddam Hussein’s statues, the Iraqi government still struggles to provide its society with electricity around the clock. The Iraqi electricity sector suffered even before the 2003 invasion, but the last 19 years have seen it weakened even more due to severe corruption and gross negligence. The plans put forth by the government to tackle the lack of electricity have more often proven an easy way for officials to embezzle funds through lucrative contracts than a way to improve the lives of Iraqi citizens. As a result, instead of leveraging its own resources, Iraq has become more reliant on Iran to meet its electricity demands.

A Mounting Crisis

Widespread electricity outages are part of daily life in Iraq and affect citizens regardless of class. To compound this issue, the gap between available electricity and state-wide demand is set to widen in the future. The past five years have already witnessed a growing disparity between electricity supplied by the government and the electricity demanded by the Iraqi people; so far, Iraqi electricity consumption—which grew nearly 30% during this period—has outpaced the government’s efforts to meet surging demand. The outages also contribute to the government’s inability to provide other basic public goods, such as hospitals, airports, and other government buildings whose good functioning has suffered from the interruptions.

These problems will only grow worse in both the short and long term. For example, the next scorching summer will dramatically stretch Iraq’s capacity to meet demand. Observers noted last year that, as the government struggles to meet the people’s need for electricity, protests and demonstrations become more likely, as observers noted last year. Long term, the challenge will be more arduous. Some estimates point at an increase in demand of nearly 10 percent year-on-year, while others suggest that if Iraq’s population increases by one million persons per year, total demand for electricity will double by 2030. Meanwhile, terrorist groups have sought to take advantage of Iraq’s discontent against the government by sabotaging electricity grids and attempting 18 attacks against transmission lines.

The Curse of Corruption

Rampant corruption remains the central reason behind the frequent disruption of electricity in Iraq.  Iraq desperately needs to modernize its entire electricity supply chain— from generation to transmission and distribution. It also needs “to rehabilitate the country’s grid that generates about 15,000 megawatts, although peak demand can reach around 24,000 MW.” There is a nexus among businessmen, politicians, and armed groups that benefit from the status quo that ensures that each party receives their cut from the government’s contracts. Billions of dollars are siphoned away from public coffers by inflating the prices of construction materials; those officials who refuse to take part in these corrupt practices face threats and often lose their jobs. The result leads to both a dearth of reliable electricity and a waste of the country’s natural resources and taxpayer funds. Iraq’s Prime Minister claimed that Iraq has spent more than $62 billion on restoring electricity. A parliamentary committee put the number even higher; an investigation of the utility sector estimated that Iraq has invested $81 billion since 2005 without any noteworthy improvement to its electrical output or the grid’s reliability.

Iraq’s shortages of electricity also stem from its failure to tap into the country’s natural resources. For example, Iraq is endowed with significant amounts of natural gas, but the country lacks the capability to capture it and leverage its immense reserves into electricity. At the same time, the country flares (or burns) huge quantities of methane gas associated with oil extraction. According to the World Bank, Iraq is one of seven countries that account for “roughly two-thirds (65%) of global gas flaring.” In 2017 alone, Iraq flared more than 600 billion cubic feet of natural gas, making it second only to Russia. The more oil Iraq produces, the more gas it will inevitably flare. If Iraq were to harness the natural gas emitted by its oil wells instead of wasting it in this way, it could achieve a more balanced energy portfolio and alleviate some of its domestic electricity problems.

Failing to do so will only leave Iraq more reliant on Iran for more expensive natural gas and electricity. According to the Iraqi Oil Minister, Ihsan Ismael, Iraq pays Iran $8 per million British thermal units (BTU) for Iranian gas. By comparison, it is estimated that it would cost the government less than $2 BTU to produce Iraqi natural gas. Iraq also relies on Iran for nearly a third of its electricity, though this too has been subject to interruptions. For instance, when Iran reduced gas supplies from 50 million cubic feet to 8.5 million cubic feet to Iraq because of unpaid bills, widespread electricity shortages struck central and southern Iraq. Though Baghdad has sought to diversify its electricity supply through overtures to countries such as Saudi Arabia, Turkey, Jordan, and Kuwait, progress on these fronts has been hindered due to disagreements over pricing. Nor will the government’s plan of purchasing natural gas from Qatar be realized soon. Reconfiguring Iraqi infrastructure so that the country may import natural gas will take significant investments over a long period of time. Meanwhile, global demand for natural gas is increasing amid the Russia-Ukraine war. Therefore, gas exporting states like Qatar will likely prioritize fulfilling existing contracts before taking on new customers.

Finally, part of Iraq’s electricity problem can be traced back to the country’s neglect of renewable energy resources. Given the intense sunshine in Iraq— particularly in the western and southern parts of the country—more than half of Iraq could rely on solar energy if Iraq fully realizes its capacity to harness the power of the sun. The growing demand for electricity could be met with cost effective and self-sufficient solar power. The government currently plans to generate between 2.24 and 7.5 GW of electricity from renewable energy by 2025. This is likely an exaggeration of future capacity, as harnessing renewable energy sources will face many hurdles; Iraq lacks a coherent solar policy, a strong legal system, and the ability to attract foreign investment because of byzantine bureaucratization. At the same time, the government must balance its desire for a diverse energy portfolio with its other objectives, including  distribution, transportation, fee collection, and electricity infrastructure reconstruction.

Electricity is one of the public goods that impacts essential parts of daily life for millions and has been one of many reasons behind widespread discontent with the central government in Baghdad. Although the current government is trying to ameliorate the situation by devising new plans and diversifying its energy supply, these measures will prove to be a short-term fix for a deeply ingrained and worsening problem. Iraqis will endure another sizzling summer without appropriate access to electricity. As significant improvements to Iraqi electricity infrastructure remain elusive, the likelihood of protests will only increase.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Islamic Finance and Banking as a Response to Western Sanctions: Muslim Russia and the GCC States in an Age of Geopolitical Rivalry

From the 19th to the 21st of May, Russia’s Republic of Tatarstan held the 13th International Economic Summit, titled “Russia-Islamic World: Kazan Summit 2022.” This annual summit aims to encourage cooperation between Russia and the member states of the Organization of Islamic Cooperation (OIC) in the fields of economy, trade, science and technology. The Summit included the Russia Halal Expo 2022 exhibition, World Halal Day, and other traditional events, such as the Forum of Young Entrepreneurs of OIC Countries, the Forum of Young Diplomats of OIC Countries, and SberTalk.

This year’s conference was marked by its unique symbolism; the event was dedicated to the 1100th anniversary of the adoption of Islam by the Volga Bulgars (Volga Tatars). The conversion of the Volga Bulgars followed the visit of a Islamic delegation, led by Ahmad Ibn Fadlan and sent by the Abbasid Caliph Jaffar Al-Muqtadir. In addition to marking this transformative moment, the Forum occurred in uniquely challenging geopolitical circumstances. The war in Ukraine has exacerbated tensions between Russia and the West, and the former remains shackled by a raft of severe economic and financial sanctions.

Every new wave of various recent crises has caused Russia to turn further away from the West and toward the East. For example, the idea to introduce Islamic banking in the Russian Federation first arose during the financial crisis in 2008, when banks faced a shortage of liquidity and began to look for alternative sources of cash. After the annexation of Crimea in 2014, Russian banks felt the squeeze of Western sanctions. In response, the Association of Russian Banks proposed allowing Islamic banking in the Russian Federation and establishing a committee within the Central Bank to regulate the activities of Sharia banks.

These activities have remained quite limited until now. But as Russia must adjust to a new, more severe wave of sanctions, Islamic banking and investments from the OIC, which forums such as Kazan Summit seek to attract, may emerge as a palatable alternative to Western investors. Unsurprisingly, the conference drew much attention to the original emissary Ibn Fadlan, connecting his travels nearly a millennium ago to Russia’s contemporary links to the Gulf region. To what extent might this link emerge as crucial for bilateral relations with the Gulf states? In other words, can shared Muslim identities—that may transcend the current raft of sanctions—soothe Russia’s economic worries and enhance Moscow’s diplomatic profile in the Middle East? Arguably, the current geopolitical rivalry may push Russia to look to the Middle East for its economic development, though challenges to this shift remain to be addressed.

Tatarstan’s “Halal Lifestyle” as the Key to Collaboration with the GCC States

The Kazan Summit project is part of the Group of the Strategic Vision “Russia-Islamic world.” Established in 2006, the Group has been coordinated by the Republic of Tatarstan, and the government retains significant control over the organization’s leadership. In 2014, current President Rustam Minnikhanov was appointed as the Group’s chairman. Tatarstan, as an economically developed and predominantly Muslim region of Russia, has been central to the development of Islamic finance infrastructure in the country. In 2020, I interviewed Marat Gatin, the former the head of the Sector for Asian and African Countries of the Department of Foreign Relations of the President of the Republic of Tatarstan (2009 – 2010). He currently serves as the Head of the Representative office of Rossotrudnichestvo in Egypt. He said:

“[…] if before the mid-2000s, a great emphasis on regional interaction was of a religious nature, then in the last 10-15 years it has begun to move into the economic plane. Here, if we take Rustam Minnikhanov, he promotes the importance of drawing on the experience of the Muslim countries of the Arab world in introducing Islamic banking tools into our daily life. Islamic banking is part of what he calls the ‘halal lifestyle’ (in the Arab countries it is called a little differently – it is called ‘Islamic lifestyle’). It is very comprehensive, but with an emphasis on the economy; this includes developments of sectors, such as tourism, Islamic banking, and the production of relevant pharmaceuticals.”

Foreign direct investment (FDI) flows from the Gulf countries to Tatarstan was $68 million by 2019. Investments from Saudi Arabia in Russia amounted to $185 million, and in Tatarstan totalled $3 million. Saudi investments in Tatarstan established the Kingdom as a shareholder in the Tatarstan International Investment Company of Islamic Development Bank. Indeed, both Tatarstan and Saudi Arabia see plenty of opportunities to cooperate on Islamic banking and finance in the future. In particular, this ongoing work is closely associated with the Islamic Development Bank. Taliya Minullina, Chief Executive of the Tatarstan Investment Development Agency and the person responsible for convening the Kazan Summit, spoke to Saudi-Tatar coordination during my interview in 2020:

“We work with those institutions that in Saudi Arabia set the standards for organizing accounting and auditing in Islamic institutions. We have a consultant in Saudi Arabia, specifically on Islamic banking, they help us. We have the Russian Islamic University in Kazan, we have a local bank, Ak Bars Bank, which recently launched a mortgage product in accordance with sharia law. That is, we make Islamic contracts in accordance with these international standards and in order to be consulted, we work a lot with Saudi Arabia in this area.”

Tatarstan also finds the UAE among its key partners for fostering Islamic banking in the Republic. For example, the Dubai Islamic Economy Development Centre signed a memorandum of understanding (MoU) with the Tatarstan Investment Development Agency at Kazan Summit 2018. The MoU enabled the Dubai Islamic Economy Development Centre to host a number of workshops focusing on cooperation with the Strategic Vision “Russia-Islamic World” to share knowledge linked to Islamic banking and finance, identify leading developments and trends in the Islamic economy sector, and transfer the experience of Dubai and the UAE to the creation of an integrated Islamic economic strategy in Tatarstan. This year at Kazan Summit 2022 , UAE Minister of the Economy H.E. Abdulla bin Touq Al-Marri was among the guests of honor, symbolizing mutual interest in deepening connections between Abu Dhabi and Tatarstan in this area, despite the wider geopolitical turbulence that has impacted Russia’s economic situation.

Finally, relations between Bahrain and Tatarstan have been developing for some time on Islamic banking and finance. Shaykh Abdulrahman bin Mohammad bin Rashid Al-Khalifa, Chairman of the Supreme Islamic Affairs Council of Bahrain, attended the 2022 Kazan Summit as a guest of honour. As he commented during my interview with him (in Arabic) in January 2022:

“The main interests of the two sides lie in the presence of many economic and commercial possibilities in the Kingdom of Bahrain and the Republic of Tatarstan…[and] the Kazan Summit…[contributes] to the presentation of economic and commercial possibilities and opportunities available for cooperation, which are currently being studied by the concerned authorities in the two countries.”

Relations between Tatarstan and Qatar have proven active, prior the Ukraine conflict—though Tatar-Qatar ties have not expanded to include the field of Islamic finance. Rustam Minnikhanov visited Qatar on an official visit and met with Shaykh Tamim Al-Thani on 8 December 2015. The two discussed economic projects, including cooperation in the oil and IT fields, along with enhancing trade and economic collaboration. Despite cooperation in other areas and industries, the coordination between Doha and Tatarstan in the Islamic banking sector has yet to develop.

Limitations and Opportunities

Despite numerous discussions with Russian regions, including the aforementioned consultations with Tatarstan, the Gulf states do not invest in Russia and its regions directly, but only through the Russian Direct Investment Fund, the country’s sovereign wealth fund, which manages $10 billion in capital. At the time of writing, both the Qatar Investment Authority and the Emirati Mubadala Investment Company have paused their investments in Russia. Even prior to the Ukraine situation, the raft of post-Crimea sanctions against Russia have remained a significant challenge to Russia’s efforts to acquire FDI.

Domestically, Russia should pass legislation to better support Islamic banking and economic practices. Existing Russian laws do not yet accommodate all the aspects of Islamic economic activity. During my fieldwork in Kazan, Aydar Shagimardanov, the President of the Association of Russian Muslim Entrepreneurs, stressed the importance of the inner legal consciousness of a Muslim businessman:

“We do not have such an understanding of Islamic banking in our legislation, and the Islamic bank in the full format in which it operates in Islamic countries and some foreign countries, cannot exist with us [in Russia]. However, we have some…‘sprouts’ of Islamic finance that have been opening for a long time in Kazan. This is the financial house Amal, a member of our Association. We are friends with them, we have been cooperating for many years, many members of our Association just use the services of the Amal financial house. […]  But the legal consciousness of a Muslim is not yet so developed that they can completely abandon non-halal banks. And when a businessman with such an unstable sense of justice comes to Sberbank, where they can get a loan at 11%, and in the Amal financial house there is no loan, but property or equipment that interests you is bought, an extra charge is made on it and sold and given to you in instalments. That is, roughly speaking, it turns out to be 15% […]. It depends very much on the inner world, the inner level of development of the Muslim himself. [Individuals struggle to] choose between ‘more expensive’ and haram [forbidden].”

From another perspective, Western sanctions may prove to have positive effects for Gulf-Russia relations, which could be leveraged to develop Islamic banking and finance. Displaced by sanctions and unwelcome in the West, Russian oligarchs have reportedly been fleeing sanctions and hunting for houses in Dubai. This diaspora can be seen in the UAE’s “golden visa” program, which provides long-term residency for foreigners if they invest at least 10 million dirhams ($2.7 million) in a local company or investment fund. Such connections may incentivize investments between the UAE and Russia in the future. It is unclear to what extent Muslim ethnic businessmen move in the oligarchic circles of Russia and may establish themselves in the GCC states. What is clear is that such a diaspora could become another link for flourishing relations between Muslim Russia and the Gulf states, based on Islamic economic practices. Existing shared Muslim identities can only complement potential business projects, including further development of the so-called “halal lifestyle.” More generally, the movement of Russian citizens—and potentially representatives of the Russian Muslim republics—from the West to the Gulf offers further opportunities for collaboration.

Islamic banking and finance are seen as a possible vector to evade Western sanctions, or at least cushion the impact of economic restrictions in Russia. Platforms such as the Kazan Summit play a crucial role in promoting this initiative, helped along by Tatarstan’s prominence in the event and its claim to a deep-rooted Muslim identity. The question remains to what extent other factors, including the national interests of the Gulf states and their relations with the United States and other Western partners, could prove to be obstacles to progress. Internally, too, it remains to be seen whether Russia has the will and the resources to make the necessary legislative changes to enable Islamic finance to flourish. Finally, geopolitical rivalries almost certainly impact the prospects of Russia-Gulf cooperation in this area, as Gulf investors choose between sides in the current crisis (or maintain a tenuous neutrality). Assessments of political stability, economic potential, and shared interests may all come into play as today’s geopolitical competition continues to play out.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Challenging Prospects for Saudi-Iranian Talks

A fifth round of talks between Saudi Arabia and Iran, held in late April 2022, raised hopes that the two countries’ foreign ministers might meet to reopen their respective embassies in Riyadh and Tehran after diplomatic ties between the two capitals broke down in 2016. Despite this promising sign, however, there has still been no guarantee that Saudi Arabia and Iran can work together unless the United States commits to restoring the balance of power between them, irrespective of the recurring shifts in U.S. foreign policy from changes in administration. Recent attempts by President Joe Biden’s administration to encourage improved ties between Saudi Arabia and Iran have been perceived as falling short of ensuring an enduring peace between the two countries, even if a thaw in relations is achieved.

Overview of Saudi-Iranian Talks

Riyadh and Tehran embarked on their first round of talks in April 2021. More talks followed through February 2022. Early on in the process, Riyadh described its talks as cordial and exploratory and said that it was keen to build results with Iran. The Saudi Crown Prince Mohammed bin Salman al-Saud even confirmed that his country sought good relations with Tehran, despite his past hesitation to work with Iran.

The Saudi-Iranian talks arrived on the heels of efforts by the Biden administration to revive a nuclear deal with Tehran. The initial nuclear deal, called the Joint Comprehensive Plan of Action (JCPOA), first concluded during the Obama administration between Iran and the world powers in 2015, broke down after the Trump administration withdrew the participation of the United States. Trump then re-imposed harsh sanctions on Iran in May 2018.

When the revived talks to salvage the nuclear deal failed to yield results by the end of 2021 in spite of months of tense negotiations between the world powers (Russia, China, France, Germany and the United Kingdom) and Iran, as well as indirect talks between Washington and Tehran in Vienna, the Saudi-Iranian talks also suffered a temporary setback. In response to the failed nuclear talks, Iran raised the stakes; it linked the prospects of peace in Yemen between the Iranian-backed Houthis and a Saudi-backed Yemeni government to a successful outcome of the nuclear talks, which would also lead to the removal of anti-Iranian sanctions.

Then in January 2022, Iran held Friday Prayer rallies across the country to condemn the Saudi-led military coalition’s war in Yemen. By February, Saudi Foreign Minister Prince Faisal bin Farhan al-Saud suggested that the revival of a nuclear pact could be a starting point to addressing Saudi Arabia’s other issues with Iran, including its missile program and interference in the domestic affairs of neighboring Arab countries. Iran, in turn, rejected a new nuclear deal that went beyond the terms of the JCPOA. The talks have now stalled over a disagreement with the United States’ hesitation to remove the Iranian Islamic Revolutionary Guards Corps from its list of foreign terrorist organizations.

At the same time, the Houthis in Yemen escalated their missile and drone attacks against Saudi energy and refining facilities in March 2022. Officials in Washington claimed that Tehran enabled the attack; Tehran responded by unilaterally suspending the next round of its talks with Riyadh. The Saudi-Iranian talks resumed for their fifth round in April, but started on an acrimonious note after Tehran publicly denounced Saudi Arabia’s execution of 81 individuals—including a reported 41 Shias convicted of carrying out acts of terrorism. The executions took place as the Houthis stepped up their attacks against Saudi targets.

However, Washington may have encouraged Riyadh to stick to the talks with Tehran, as signs also emerged that pointed to possible progress in the nuclear talks. For example, Iran reported that $7 billion of its frozen assets in overseas banks could be released to help the country cope with sanctions. In addition, a two-month truce, scheduled to last from April 2 until June 2, went into effect in Yemen, promising humanitarian assistance and air routes between the Houthi-controlled capital city of Sana’a and Saudi Arabia’s allies, including Jordan and Egypt. Saudi Arabia also secured the resignation of Abdrabbuh Mansur Hadi, president of the internationally-recognized government of Yemen, in favor of a new Presidential Leadership Council.

Finally, closer to home, Iran persuaded Kuwait and Saudi Arabia to accept a resource sharing mechanism to develop the shared Al-Dorra/Arash gas field in the Partitioned Neutral Zone, despite a longstanding Iranian failure to demarcate the eastern Gulf maritime boundaries where the field is located with its two Arab neighbors.

Will a Saudi-Iranian Partnership Last?

For now, all signs seem to suggest that Iran will continue talks with Saudi Arabia for as long as necessary to achieve some results. This also satisfies Iran, which needs Saudi Arabia to buffer the frequent tensions between Washington and Tehran over the Iranian nuclear program.

However, Saudi Arabia seems to resent playing this buffer role—particularly if Washington does not commit to upholding Saudi interests, including its desire to contain Iran’s influence in Yemen. According to former Saudi chief of intelligence Prince Turki al-Faisal, Saudis felt let down by the withdrawal of U.S. support for their country in the face of looming threats, including Iran’s use of the Houthis to “destabilize Saudi Arabia,” and Washington’s refusal or inability to respond to the Houthi attacks on Saudi oil installations.

My talks with a senior Saudi royal family member also revealed concerns in Saudi Arabia that Tehran might seek to exploit. It is speculated that the war in Yemen will hasten the return of the Mahdi, a Shi’a imam believed to have gone into occultation around 941CE to return to earth to restore justice in an unknown time in the future. This talk sounds imaginary. Yet even in the Sunni countries of the Gulf region some believe in the Mahdi in the form of a savior. However, they may not so readily subscribe to the Iranian apocalyptic version of needing to expedite his return, unless provoked by Tehran.

Iranian clerics see Iran’s growing regional influence in places like Yemen as signs of this apocalyptic goal, and believe that they must recruit allies as well as sympathetic Sunnis to reach this goal. Unsurprisingly, in my conversations with Saudi policy experts, they said that they viewed previous Houthi missiles targeting Mecca in 2019 as Iranian attempts to someday control the holy city, where Muslims from around the world congregate, from where they could then advance toward the several locations where the Mahdi is expected to return, i.e., on the borders between Syria and Israel or near the Al-Aqsa Mosque.

Given these deep Saudi concerns about Iranian intentions, if the United States were to withdraw from the Gulf but offer little by way of security guarantees to Saudi Arabia, the resulting tensions in the region would likely not sustain a strong partnership between Riyadh and Tehran. For now, however, since Iran needs sanctions relief, the country also welcomes outreach to Saudi Arabia.

As a sign of further compromise, Iran has also displayed a willingness to accommodate Saudi Arabia in other arenas. For example, Iran supported the recent talks between Riyadh and Baghdad to link their power grids in the same industry and markets where Iran also competes. Tehran also welcomed outreach efforts between Saudi Arabia and Syria, which occurred despite years of tensions between them, during which Iran backed the Syrian government against rebel forces backed by its Arab neighbor.

Given these complex realities, any peace to be had between Riyadh and Tehran would remain fragile unless the United States encourages a steady partnership between the two regional capitals. This support would need to continue irrespective of whether Republicans or Democrats control the White House or Congress. This condition, however, may never fully materialize. Consequently, even in the best-case scenario, it is fair to expect that Riyadh and Tehran will build only fragmented multilateral regional institutions that may not sufficiently uphold their mutual security interests. They may also fail to keep each other’s potential hegemonic ambitions in check, and would be left with limited options to engage through niche diplomacy to address some of the most pressing challenges in their ties.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Subscribe to Receive Latest Updates from GIF.