VZCZCXRO5737
RR RUEHBC RUEHDE RUEHIHL RUEHMOS
DE RUEHKUK #0051/01 0611916
ZNY CCCCC ZZH
R 021916Z MAR 06
FM REO KIRKUK
TO RUEHGB/AMEMBASSY BAGHDAD 0508
RUEHC/SECSTATE WASHDC 0545
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHKUK/REO KIRKUK 0572

C O N F I D E N T I A L SECTION 01 OF 02 KIRKUK 000051 
 
SIPDIS 
 
SIPDIS 
 
BAGHDAD FOR ECON, POL, NCT, USCOE, IRMO 
 
E.O. 12958: DECL:  3/2/2016 
TAGS: PGOV PINS EAGR ECON EFIN EIND ENRG EPET ETRD IZ
IR 
SUBJECT: KURDISH ECONOMY: OIL, IRAN AND CUSTOMS 
 
KIRKUK 00000051  001.2 OF 002 
 
 
CLASSIFIED BY: Scott Dean, Regional Coordinator (Acting), Reo 
Kirkuk, Department of State . 
REASON: 1.4 (b), (d) 
 
 
 
¶1.  (C)  INTRODUCTION AND SUMMARY.  Sarkis Aghajan Mamendu, 
Deputy Prime Minister and Finance Minister for the Kurdistan 
Regional Government in Erbil, told RC February 28 that the two 
KRG finance ministries would have a unified KRG budget by the 
end of 2006.  The KRG would not fire any employees in the 
unification: surplus employees would go to newly created 
ministries.  The KRG-E wished the region had a refinery.  The 
KRG-E was trying to get other oil companies to become active in 
the Kurdish region.  Iraq's MoO had been involved from the start 
in the KRG's contract with the Norwegian firm DPO; the MoO had 
not complained.  The KRG-E collected customs on items as set by 
the GOI.  The Baghdad MOF credited those amounts against what 
Baghdad owed the KRG-E.  Iran tried to keep cross border trade 
small.  It worried about the effect in Iran of Iraq's free 
markets and of alcohol smuggling.  The KRG-E did not allow 
vehicles to enter from Iran.  People had to cross on foot.  The 
KRG-E vetted with the Asayish persons wanting to cross the 
border.  END INTRODUCTION AND SUMMARY. 
 
¶2.  (C)  On the unification of the KRG's in Erbil (dominated by 
the Kurdistan Democratic Party) and in Sulaymaniyah (dominated 
by the Patriotic Union of Kurdistan), Memendu said: 
 
 -- The two finance ministries would present and have a unified 
budget in time for the new fiscal year, which begins with the 
new calendar year.  Budget preparation would begin in October. 
 
 -- The KRG would not fire any employees in the unification. 
Most of the finance ministries' staff were in the field, so 
could keep their jobs.  (NOTE:  The two KRG's do not overlap 
geographically.  END NOTE.)  They would transfer surplus 
employees to newly created ministries. 
 
 -- The budget would be transparent between all parts of the 
KRG, reducing possibilities for corruption in the unified 
government. 
 
¶3.  (C)  On energy and fuel shortages, Memendu said: 
 
 -- Security problems created fuel problems: refineries either 
were not working or were a terrorist target. 
 
 -- Whenever the Iraqi government failed to pay Turkey for fuel 
and Turkey stopped selling fuel, it was Kurdistan that suffered. 
 
 -- Similarly, when the electrical grid system was attacked, the 
Kurdish region suffered.  Mosul and Dahuk depended on 
electricity purchased from Turkey.  The rest of the region 
depended on hydroelectric power from Lake Dokan and Iskan, which 
went into the national grid.  The KRG-E hoped to build a 450 
megawatt power plant in Erbil. 
 
 -- If the Kurdish region had a refinery, it would help both the 
region and the rest of Iraq.  (KDP Politburo Secretary Fadil 
Mirani also touted this with RC the same day.) 
 
 -- Increased government fuel prices helped reduce smuggling out 
of the region to higher price areas and helped boost government 
revenues. 
 
 -- KRG-E conversations with other oil companies about activity 
in the Kurdish region were not yet at the MOU or agreement 
stage.  (Read:  Talks are going on.)  Iraq's MoO had been 
involved from the start in the contract with the Norwegian firm 
DPO; the contract had not come as a surprise to MoO.  The KRG-E 
had obeyed the constitution; statements by others had not 
matched the constitution.  The KRG-E had gotten no official 
complaint from MoO. 
 
¶4.  (C)  On customs revenues, Memendu said: 
 
 -- The KRG-E collected customs on items as set by the GOI. 
 
 -- "Iraq is all one treasury."  Before the budget year, Baghdad 
asked for the projected customs revenues.  At the end of the 
budget year, the KRG provided the actual revenue figures to 
Baghdad. 
 
 -- The KRG-E put in separate accounts the customs revenues it 
collected.  The Baghdad MOF credited those amounts against what 
Baghdad owed the KRG-E. 
 
 -- Customs revenues were the KRG-E's largest revenue source, 
 
KIRKUK 00000051  002.2 OF 002 
 
 
but were much smaller than the subsidies Baghdad owed to the 
KRG-E.  The KRG-E collected between $1 and $2 million per month; 
sometimes it reached $2.5 million.  Over the last several 
months, KRG customs had averaged $1.2-1.3 million per month. 
 
¶5.  (SBU)  On the state of the KRG-E's economy, Memendu said: 
 
 -- Living standards, investment and prices were all rising. 
 
 -- The industrial sector was weak; factories were few and old. 
 
 -- Agricultural was doing better than industry, but was not 
what it should have been.  The Oil-for-Food program had 
destroyed Iraqi agriculture. 
 
 -- High prices forced the middle class, including civil 
servants, to moonlight, but the expanded private sector would 
produce more jobs than government subsidies would. 
 
 -- Workers were coming to the Kurdish region because the 
security situation was better than in the south, and because the 
economy was better.  People in the north had already had 13-14 
years to get used to a free market economy. 
 
¶6.  (C)  In a separate conversation PUK Politburo Secretary 
Fadil Mirani complained that PM Ja'afari was still holding back 
$100 million of the $125 million promised to the KRG from the 
national budget.  Part of this was he was calculating the 
revenues to share as if oil were at $25 per barrel. 
 
¶7.  (C)  On trade with Iran, Mememdu said: 
 
 -- The KRG-E had only one official border crossing with Iran: 
at Hajj 'Umran.  Other points were "not official."  The KRG-E 
was seriously trying to control the border. 
 
 -- Hajj 'Umran had a market for cross border items: largely 
fruit and plastic goods.  Iran tried to keep trade small.  It 
worried about the effect in Iran of Iraq's free markets and of 
alcohol smuggling. 
 
 -- The KRG-E did not allow vehicles to enter from Iran.  People 
had to cross on foot. 
 
 -- The KRG-E vetted with the Asayish persons wanting to cross 
the border.  They were given a visa for a set time and purpose. 
Most people crossed in order to visit relatives (intermarriages 
had come from Iraqi Kurds' 25 years in Iran), to get medical 
treatment, or to trade. 
ORESTE