Baghdad harms its interests in Kurdish dispute

Oil revenues should be more than enough to fund Iraq's post-war reconstruction. The country's exports now exceed 3 billion barrels per day, are projected to double by 2020, and in August surpassed Iran's exports for the first time since the 1980s. Of course, some analysts say, those gains have been boosted by the re-export of smuggled Iranian oil (a charge Baghdad denies), but there is no doubt that the country's energy sector is recovering by leaps and bounds.

Iraq's problems have little to do with economic fundamentals. If the country fails to reach its potential, it will be because of politics, both regional and domestic.

On Tuesday, one of the most intractable disputes reared its head as the Kurdish Regional Government announced that it would again suspend oil exports to Baghdad. Irbil claims that the central government owes more than 350 billion dinars (Dh1.1 billion).

Both sides are keeping their own accounting ledgers. But regardless of who is in the right - and the fact that the unity of Iraq as a functioning state could hang in the balance - there are certain hard realities on the ground. The central government has marshalled forces in the north, particularly in the new Tigris Operations Command near the disputed city of Kirkuk, raising the chances of a military confrontation.

But while Baghdad is flexing its muscles, Irbil is signing deals. The oil exploration and production contracts signed with international majors such as ExxonMobil, Chevron and Total have substantially changed the terrain. The central government may call these deals illegal, but it also risks being sidelined, and not just in Kurdish energy production.

All of this is happening amid momentous events in the region. Iraq is being drawn closer into Iran's sphere, even as the latter finds itself more isolated; Turkey is taking an increasingly aggressive role, at least partially in favour of the Iraqi Kurds; Syria's eventual outcome remains anyone's guess. Prime Minister Nouri Al Maliki's government in Baghdad would be well advised to tread cautiously, although that has never been the prime minister's style.

The dispute this week may be resolved soon - Irbil shut off the taps in April, only to resume exports in a rather short-lived compromise. But there are bigger issues than whether Baghdad is in temporary arrears.

Mr Al Maliki may gamble, rightly, that the Shia-led central government holds not only federal legitimacy, but also the whip hand in terms of military power. But if this dispute and the resolution of Kirkuk's status come down to brute force, every side loses.