IRAQI KURDISTAN: A new frontier

Kurdish flagA surging economy and the potential for a new stock exchange to rival the bourse in Baghdad have drawn investors to Iraqi Kurdistan. Orlando Crowcroft reports from Erbil.

On the busy intersections of Erbil, motorists pass giant green road signs directing them to Baghdad, Kirkuk and Mosul. But although Erbil, the capital of Iraqi Kurdistan, is just two hours drive from the lawless south of Iraq, under almost every other criteria it is a world away.

The local government has had a degree of independence from Baghdad as far back as the mid-1990s, but since the overthrow of Saddam Hussein in 2003 and amid continuing chaos elsewhere in the country, its autonomy has increased. Since the end of last year, the Kurdistan Regional Government has begun exporting oil to Turkey in open defiance of Baghdad, whose approval it is supposed to secure on energy matters. Kurdish troops now patrol the streets and maintain control over all checkpoints to the south.

Meanwhile, foreign business has flooded in. With a population of more than 5 million, Iraqi Kurdistan has an estimated 45 billion barrels of oil reserves as well as unknown quantities of natural gas. Its oil and gas industry has already attracted $20 billion since a 2006 Investment Law threw open the door to international oil companies.

It has been the oil companies, whether they are operating in Erbil or using the region as a base for work in the south, that have persuaded a new generation of entrepreneurs – many of them veterans of the Gulf – to make the move to Iraqi Kurdistan.

“Generally speaking, where the international oil companies go, many follow,” explains John Downe, managing director of Azure, a firm that provides serviced offices in Erbil.
“In many ways it is like being in Dubai years ago. There is huge unmet demand and, being a very networked place, you can find out what is happening fairly easily, if you are plugged in.”

It is relatively easy to get into Erbil physically. Many visitors are granted a 15-day visa on arrival and extensions are relatively easy to come by, at least by Middle East standards. Meanwhile, foreign investors can own a business outright in Iraqi Kurdistan, while in the rest of Iraq they have to partner with a local Iraqi company.

At 23, British-born Hemin Osman was one of those who decided to settle in the Kurdish region early, but like thousands of returning Kurds, he also felt he had a stake in the region. Osman works as a broker in Erbil, a city with little or no history of financial services.

“In Kurdistan and the rest of Iraq there is a general lack of trust in the financial sector, which stems from Saddam’s era, when many people’s assets were frozen by the central bank,” he says. “As a result, people prefer to keep their cash at home in a safe.”

As a broker, Osman has to work hard to persuade wealthy Kurds that investing their assets overseas is not only worthwhile, but a great deal safer than keeping them under the mattress. But obstacles come from the government side too. The Kurdistan Regional Government only recently lifted a rule that prevented the transfer of more than $10,000 out of the country, and red tape remains a challenge at all levels of business.

Foreign investors and funds that do not move to Iraqi Kurdistan wholesale can access the region through the Iraqi Stock Exchange (ISX) in Baghdad.

The ISX – formed out of the ashes of the Saddam-era Baghdad Stock Exchange, which was dissolved following the US invasion – was buoyed in 2012 by the listing of telecoms giant Asiacell, though the listings of Iraq’s other two telecoms firms have been perennially delayed.

In recent months, there have been whispers about the Kurds setting up their own stock exchange in Erbil. Shwan Ibrahim, chairman of Rabee Securities, the Iraqi brokerage that arranged the Asiacell IPO [initial public offering], says an Erbil stock exchange would encourage investment in Iraqi Kurdistan and Iraq more generally.

And while there has been speculation that an Erbil exchange could undermine the ISX – especially given the recent spat between Erbil and Baghdad – Ibrahim believes the two bourses could work together.  

“They have worked for sometime now on it and what I like is that they will try to fix everything before they launch,” he says.

For its part, the ISX is foreigner-friendly, by Arab bourse standards, and there are major foreign stakes in a stock market that is 90% dominated by banks and telecoms firms. Ruchir Desai, a senior investment analyst at Asia Frontier Capital in Hong Kong, thinks an Erbil exchange would be as appealing to overseas funds, particularly given the stability of the Kurdish region.

“Most global frontier fund managers are looking at Iraq more seriously but at times a constraint could possibly be liquidity as volumes are about $1 million a day,” he says. “Having said that, the market cap of the Iraqi stock market is $10 billion which is around 5% of GDP. This is significantly lower than any other frontier market so this can provide opportunities to early investors.”

The image of Erbil as a new Dubai has been often repeated in the international media over the past five years, with the result that the city has developed a reputation as a boom town. The flashy 4x4s that pack the highways of Erbil, as well as an increasing number of luxury hotels, play up to this image, but those on the ground say newcomers would do well to remain cautious.

“The Kurdistan region is a frontier market and while this brings some very interesting opportunities, it also brings some significant headaches, some of which may be anticipated and some of which cannot be planned for,” says Paul Bailey, managing director of Definitus, a specialist investment firm targeting Iraq.

One of the major problems in Kurdistan is access to capital, both on a business and personal level. One reason for the myriad unfinished construction projects that litter almost every vacant lot in the city is the almost complete absence of project finance. Equity investors are reluctant to buy into what remains an untested market.
Bailey expects this to change as the region continues to grow economically, but says change will not come quickly.

“As more international and regional companies are well rewarded following market entry here and as both local and international banks and finance institutions can build credit history and develop a successful loans portfolio this challenge will be overcome,” he says. “But it will not be overcome overnight.”

Downe, of Azure, says that as long as entrepreneurs and start-ups continue to blaze a trail in the Kurdish region, the system will evolve to accommodate them. If Erbil can be positively compared with Dubai, it is by developing a stable and accessible market in a closed and often tumultuous region.

“I hope what we and other entrepreneurs are doing here now will be looked back upon as real pioneering spirit,” he says.

©2014 funds global mena

Related Articles