The Middle East, a region synonymous with geopolitical turbulence, has once again captured global attention, as crises have escalated over the past 15 months. The reverberations of such crises are not confined to national borders, but ripple across the globe, affecting oil prices, financial markets, and economic stability. The stakes for the Kurdistan Regional Government (KRG) are particularly high, given its heavy reliance on oil exports and the fragile political and economic environment in which it operates.
Geopolitical Risk (GPR) and War and Terror Acts (GPRA) indices have surged in recent years due to events such as the Russia-Ukraine war, the Israel-Hamas conflict, and attacks by non-state actors like Hezbollah. The three significant peaks in these indices, as illustrated in Figure 1, reflect pivotal geopolitical events that heightened global instability and risks. The first peak in 2015 corresponds to the ISIS-coordinated attacks in Paris, which sent shockwaves across the world and amplified fears of global terrorism, leading to a notable surge in both the GPR and GPRA. The second peak, observed in 2022, is tied to the outbreak of the Russia-Ukraine war. This conflict severely disrupted global energy markets and supply chains, significantly increasing geopolitical uncertainty and pushing the indices to new heights. The third major peak, from 2023 to 2024, is linked to escalating tensions in the Middle East, particularly the Israel-Hamas war in late 2023 and the subsequent Israel-Hezbollah conflict in 2024. These events underscored the region’s volatility and further intensified geopolitical risks, causing another sharp rise in both indices. During this period, the GPR increased by approximately 33.3%, while the GPRA rose by around 35.7%, reflecting the severe escalation of risk in the Middle East.
For the Kurdistan Region, these spikes in geopolitical risk are more than just abstract global metrics. They represent direct threats to its economic lifeline: oil exports. The Kurdistan Region’s economy is deeply intertwined with the global oil market. Any disruption in the region’s ability to export oil – whether due to regional instability, global sanctions, or conflicts – can have severe repercussions on its budget, public services, and infrastructure development. The recent halting of oil exports via Turkey, following disputes between Baghdad and Erbil over revenue-sharing agreements, underscores how geopolitical events can exacerbate existing economic challenges for the KRG.
Oil and the Middle East
The Middle East’s centrality to global energy markets means that regional conflicts often lead to oil price volatility. Higher oil prices, a typical response to increased geopolitical risk, can temporarily benefit oil-exporting regions like Kurdistan. However, this is a double-edged sword.
On one hand, rising prices could theoretically bolster the KRG’s revenues if export channels remain functional. On the other hand, prolonged disruptions, such as those caused by conflicts, attacks on infrastructure, or geopolitical disputes, nullify any potential gains. For instance, the KRG’s oil exports have been suspended for months, forcing the region to seek alternative revenue streams and heightening financial pressures. This situation places immense importance on negotiations, like those recently held between Prime Minister Masrour Barzani and U.S. officials, including U.S. Assistant Secretary of State for Energy Resources Geoffrey R. Pyatt, to ensure the resumption of oil exports.
One of the most profound impacts of geopolitical risk is that it undermines foreign direct investment. For the Kurdistan Region, which aspires to diversify its economy beyond oil, heightened geopolitical tensions are a significant obstacle. Investors are naturally cautious when considering regions where instability, conflict, or unresolved political disputes dominate the landscape.
The KRG’s reliance on oil revenues makes it vulnerable to global market fluctuations, but the lack of diversified investment compounds the challenge. While the government has taken steps to attract investment in sectors such as agriculture, tourism, and technology, sustained geopolitical instability undermines these efforts.
The KRG’s geographic location positions it as a critical player in Middle Eastern energy politics. However, this strategic position also makes it vulnerable to regional tensions. Disruptions in neighboring countries, whether from conflicts or political instability, directly affect Kurdistan’s ability to maintain energy security and export capacity.
The recent closure of the oil pipeline to Turkey – a key export route for Kurdistan’s oil – highlights this vulnerability. The pipeline shutdown has not only curtailed the region’s oil revenues, but also exposed its over-reliance on a single export corridor. This underscores the need for the KRG to diversify its export routes and reduce dependence on volatile neighbors.
The broader implications of conflicts such as the Russia-Ukraine war and the Israel-Hamas conflict also have localized effects on Kurdistan. Global energy markets, already strained by the Russia-Ukraine war, face additional pressures from Middle Eastern instability. In turn, economic pressures from global conflicts influence Iraq’s federal budget, which directly affects the KRG’s revenue-sharing agreement with Baghdad. Additionally, reduced national revenues due to lower oil production or sanctions can lead to delayed or diminished budget transfers to the KRG.
Policy responses for the KRG
To navigate the complex interplay of regional and global conflicts, the KRG must adopt a multi-pronged strategy. Here are some key policy recommendations:
As the Middle East continues to grapple with escalating conflicts and geopolitical tensions, the KRG finds itself at a crossroads. While the region’s vast oil reserves remain a vital asset, over-dependence on this resource has made it vulnerable to external shocks.
The resumption of oil exports, as discussed by Prime Minister Barzani with U.S. officials, is a critical step toward stabilizing the region’s economy. However, this must be accompanied by broader structural reforms and strategic planning to reduce the Kurdistan Region’s susceptibility to geopolitical risks.
By diversifying its economy, securing alternative export routes, and fostering stronger international partnerships, the KRG can navigate the complexities of its geopolitical environment and build a more resilient future. The lessons of recent global and regional conflicts should serve as a reminder that economic and geopolitical stability are inextricably linked. For Kurdistan, proactive measures taken today will determine its ability to thrive in an uncertain world.
Sherzad Ahmed Shahab is a PhD candidate in Financial Economics, School of Economics, Finance, and Banking, Northern University of Malaysia.
