01 Apr 2010 06:46:35 GMT
By Missy Ryan
BAGHDAD, April 1 (Reuters) - Iraq held parliamentary polls last month that could help consolidate security or thrust a divided nation back into open sectarian conflict.
The coming period will be crucial in determining whether Iraq can capitalise on its great oil wealth, revive a moribund economy and recover from years of war and sanctions. Iraq, which has the world's third largest oil reserves, has signed contracts with energy majors like Royal Dutch Shell <RDSa.L> and Lukoil <LKOH.MM> but needs to broaden investment to create jobs and fend off renewed insurgent activity.
Investors, understandably, are wary.
Iraq remains largely isolated from world financial markets, and it was only a few years ago that people packed tens of thousands of dollars in suitcases coming into Iraq because the few local banks operating were cut off from the outside world. Today, Iraq has an extremely tight credit market; only a few dozen companies trade on the local stock market; the dinar currency is lightly traded.
Below are some of the major risks that facing Iraq seven years after U.S. troops toppled Saddam Hussein.
ENDLESS HORSE-TRADING, POWER VACUUM
Because no single bloc got enough votes to win a majority in Iraq's 325-member parliament, politicians have already begun negotiations to build the coalition needed to form a government.
It is too early to say who that coalition will include, but it's a good bet that Prime Minister Nuri al-Maliki, a Shi'ite Arab who has built his reputation on pulling Iraq back from the brink of civil war, will be a leading figure, as will former Prime Minister Iyad Allawi, a secular Shi'ite with wide support among Iraq's Sunni minority.
Allawi's cross-sectarian Iraqiya coalition took 91 seats in parliament, according to preliminary results, just ahead of Maliki's State of Law bloc with 89.
The Iraqi National Alliance (INA), a Shi'ite alliance which includes anti-American cleric Moqtada al-Sadr, was in third place with 70 seats. Sadr's bloc is likely to figure in any government and will demand faster U.S. troop withdrawal.
The extremely tight race intensifies danger as talks will likely drag on for weeks or months, undermining security and creating a power vacuum just as U.S. troops accelerate their withdrawal.
U.S. President Barack Obama, focused on an intensifying conflict in Afghanistan, is planning to bring the U.S. troop force in Iraq to 50,000 by the end of July and withdraw entirely by the end of next year.
What to watch:
-- Sectarian or political violence flares, as did in the more than five months it took politicians to form a government after 2005 parliamentary polls.
While this may not derail the oil investment already in the pipeline, it could scare away potential investors from other sectors, such as housing, industry or agriculture, who are on the fence about doing business in Iraq.
-- Parliament goes into deep-freeze. A failure to pass important legislation related to investment, already held up for years by political squabbling, would send a poor signal to firms whose interest is piqued by Iraq but worried about legal risks and an opaque, impenetrable bureaucracy.
A RETURN TO MAJOR VIOLENCE
Iraq is a far less violent country than it was at the height of sectarian killing let loose by Saddam's ouster. Maliki likes to take credit for improving security, but cooperation from Sunni militiamen and a U.S. troops surge were also important.
The insurgency is weakened but not defeated. Sunni Islamist insurgents, who the government says are in cahoots with allies of Saddam's banned Baath party, continue to stage major attacks. Since last August, they have killed hundreds of people in suicide bombings at ministries and other symbols of state power.
Renewed violence could be triggered by a number of internal factors -- political feuds, further marginalisation of Sunnis, or even an attack on an important holy site or a clerical leader.
An external catalyst could also ignite violence, such as a hypothetical Israeli strike on Iranian nuclear facilities. That could stir mostly dormant Shi'ite militias to life and renew attacks on American forces, possibly altering U.S. military plans. A full withdrawal is required by end-2011 under a bilateral security pact, but it might be revised. Any major violence will push prices higher on global oil markets <CLc1>, especially if it looks like the unrest will be long-lasting.
What to watch:
-- Attacks on oil facilities or staff. As Iraq takes steps to secure global investment, attacks on foreigners could derail plans to use foreign cash to rebuild the economy.
Such violence may affect investment of certain types or origins more acutely. Since Iraq began to reopen its oil sector to foreign investment two years ago, state-owned Chinese firms have been the first to sign up to work in Iraq.
Chinese, Malaysian and Senegalese firms were the big winners in Iraq's most recent energy auction, reflecting perhaps a higher threshold for risk than U.S. or European companies.
-- Signs U.S. forces are delaying or changing withdrawal plans. If security were to deteriorate markedly, the Obama administration might be forced to reconsider its plans despite the pressure it faces in ramping up in Afghanistan.
There is already a possibility Washington will reconfigure its remaining force structure to focus on unstable parts of northern Iraq, perhaps signalling a U.S. readiness toward extending its troop presence past the 2012 deadline.
-- Major problems emerge in Iraqi security forces, which are increasingly standing on their own as the U.S. role dwindles. Local forces are vulnerable to infiltration and key ministries are still politicised. Iraq is only slowly reequipping its military and still relies on American troops for air support, logistics, and forensic investigation.
KURD-ARAB CONFLICT
Democracy in Iraq has done little to ease tensions between Arabs and minority Kurds, who have enjoyed virtual autonomy in their northern enclave for almost 20 years. Massacred by Saddam Hussein, Kurds have gained unprecedented influence since 2003 and are hoping to reclaim areas they deem historically Kurdish.
Others in disputed areas complain Kurds have exploited their newfound prominence at the expenses of Arabs and Turkmen. At the heart of the impasse is Kirkuk, the northern province that sits on an estimated 4 percent of world oil reserves. [ID:nLDE60L0ON] The feud has destabilized the areas dotting the border of Iraqi Kurdistan and given a foothold to al Qaeda insurgents.
What to watch: -- Confrontation between the Iraqi army and Kurdish Peshmerga forces. A U.S. initiative is trying to strengthen cooperation between the two militaries but the new joint patrols have not erased internal military rivalry.
-- Any breakthrough on oil. Oil officials in Kurdistan, which puts its oil reserves at an estimated 45 billion barrels, have signed development deals with foreign firms. Those deals are a source of major friction with the Iraqi Oil Ministry, which labels them illegal.
-- The resumption of exports from Kurdish fields, halted because of that feud, would be a positive sign. Officials on both sides are making noises about detente, but they've shied away from detente at the last minute before.
-- Passage of oil legislation. A package of proposed laws that would provide a new framework for oil investment has been held up for years because of the Kurd-Arab feud.
The failure to pass those laws hasn't held back oil majors from signing up in Iraq, but the legislation is seen as an important indicator of stability and friendliness to business for potential investors in other sectors.
A NEW AUTHORITARIANISM
In a region where political leaders have a reputation for stepping down only in a "coffin or coup," Iraq's democratic experiment is an important one.
But Iraq is still in the process of defining what sort of democracy it wants to be as it emerges from decades of military rule and, more recently, a bloody civil war.
Many Iraqis believe their country needs a strong hand to keep a fractured population in check, but western powers would be unlikely to stand by if a military coup put a leader unfriendly toward their interests at the helm.
What to watch:
-- Any changes to Iraq's constitution that would allow leaders to amass power or remain in office. This would create investor concerns about the continuity of Iraq's legal and regulatory environment.
-- Re-nationalisation of any industries, especially oil. Saddam Hussein threw global oil firms out of Iraq in the 1970s when he nationalised the oil industry. Obviously very bad news for oil companies. -- If there was a return to authoritarianism, the stance taken toward outside business will be a key indicator on whether it is likely to be friendly toward the West or not.
(Editing by Samia Nakhoul)