Iraq’s northern export route is becoming strategically important as Hormuz remains disrupted

Iraq has begun a pilot operation to move crude by road from southern oilfields to Kirkuk for onward export through Türkiye’s Ceyhan port. Reuters reports that more than six million litres were transported during a two-day trial, while northern flows remain below their pre-crisis level. The development matters because it links Iraq’s immediate energy-security problem to the long-running Baghdad–Erbil–Ceyhan export dispute and could revive the Kurdistan Region’s relevance as a strategic energy corridor.

By Dr. Pshtiwan Faraj

Baghdad–Erbil relations are being reshaped by oil, budgets, salaries and a deeper struggle over the meaning of Iraqi federalism.

Introduction

The most consequential dispute between Baghdad and Erbil is no longer a single disagreement over oil exports, budget allocations or delayed salaries. It is a struggle over how the Iraqi state itself is supposed to function. Since the adoption of the 2005 Constitution, Iraq has formally operated as a federal state in which the Kurdistan Region possesses constitutionally recognised institutions and powers. Yet the practical boundaries between federal authority and regional autonomy have never been fully settled, leaving oil, revenues, budgets, salaries, customs and security as recurring points of confrontation.

The result is a relationship defined by temporary bargains rather than durable institutions. Baghdad and Erbil repeatedly reach arrangements that ease immediate pressure but leave the underlying constitutional questions unresolved. The consequence is a cycle in which one agreement creates enough stability to postpone the dispute, only for the same dispute to return when oil prices change, budgets are negotiated, governments change, or political relations deteriorate.

The transformation of this relationship is particularly visible in the energy sector. For years, the Kurdistan Regional Government used independent oil exports as one of the principal foundations of its economic autonomy. The model allowed Erbil to develop direct relationships with international oil companies and Turkey while reducing its dependence on federal transfers. But the international arbitration process surrounding Kurdish oil exports, followed by the suspension of exports through the Iraq–Turkey pipeline, fundamentally altered the balance between Baghdad and Erbil. As I have examined in the broader analysis of the constitutional and political struggle surrounding Kurdish oil, the issue was never simply about barrels of crude. It was ultimately about sovereignty, fiscal authority and the meaning of federalism.

The importance of that transformation cannot be overstated. Once independent exports were interrupted, the Kurdistan Region lost one of the most important mechanisms through which it had exercised economic autonomy. Baghdad's leverage consequently increased because federal transfers became more important to the functioning of the regional government. The relationship therefore shifted from one in which Erbil could challenge Baghdad through independent energy policy to one in which Baghdad increasingly possessed the financial instruments needed to influence Erbil's economic choices.

This is why the present Baghdad–Erbil dispute should be understood as an institutional struggle rather than a sequence of disconnected political crises. Oil determines revenue. Revenue determines the ability to pay salaries. Salaries determine political stability. The federal budget determines how those resources are distributed, while constitutional interpretations determine which government believes it has the authority to control them. The dispute therefore begins with oil but ends with the structure of the Iraqi state.

Oil Became the Currency of Federalism

Oil has always been more than an economic commodity in Iraq. It is the principal mechanism through which the state finances itself, and control over oil therefore translates directly into political authority. In the Kurdistan Region, the connection is even more pronounced because oil revenues became central to the development of regional institutions after 2003.

The constitutional dispute has persisted because the Iraqi Constitution recognised collective ownership of oil and gas while leaving important questions about management and administration open to competing interpretations. Baghdad has consistently favoured a stronger federal role in production, marketing and revenue management. Erbil has argued that the constitutional framework gives regions meaningful authority over resources within their territories, particularly in areas where the Constitution does not explicitly reserve exclusive authority to the federal government.

For years, that disagreement remained manageable because the KRG possessed an alternative route to international markets. The Iraq–Turkey pipeline gave Erbil access to the Mediterranean and allowed Kurdish crude to reach global buyers without passing entirely through Baghdad's marketing structures. That infrastructure consequently became one of the most important strategic assets underpinning Kurdish economic autonomy.

The importance of the pipeline became clear again when its legal and political vulnerabilities were exposed. The international arbitration dispute between Iraq and Turkey demonstrated that the northern export corridor was not simply a commercial asset but part of a much larger sovereignty dispute. The subsequent French court decision upholding the arbitration award further reinforced the legal environment in which Kurdish oil exports now operate. The implications were examined in detail in my analysis of the international arbitration dispute and its consequences for Iraq, Turkey and the Kurdistan Region.

The 2023 arbitration ruling changed the political balance because the interruption of Kurdish exports removed a major source of independent regional revenue. The KRG could no longer rely on the previous export model in the same way, while Baghdad gained a stronger argument for federal control over oil marketing. That transformation was not merely legal. It was fiscal.

When oil stopped flowing through the previous mechanism, the question of who controlled exports became inseparable from the question of who financed the Kurdistan Region. The oil dispute consequently became a budget dispute, and the budget dispute became a salary dispute. The relationship between the three issues is central to understanding the current situation.

The Pipeline Is a Federal Question

The Iraq–Turkey pipeline remains one of the clearest examples of how infrastructure can determine the practical meaning of sovereignty. A government may control production but still depend on another state for transportation, international access and commercial infrastructure. That reality made the northern pipeline both an economic asset and a political vulnerability for Erbil.

The approaching expiration of the longstanding Iraq–Turkey pipeline framework therefore became a major issue for Baghdad, Erbil and Ankara. The analysis of the pipeline agreement and its implications for Iraqi and Kurdish energy policy showed why the question could not be reduced to a technical transportation agreement. The pipeline determines how Iraqi oil reaches international markets, who controls the export mechanism and how the northern route fits within Baghdad's broader energy strategy.

The later arrangements have demonstrated the same reality. The emerging model places Kurdish crude within a federal export framework rather than restoring the previous form of independent regional marketing. This provides operational continuity, but it also confirms the central political change that has occurred since 2023: Baghdad now occupies a stronger position in determining how Kurdish oil enters international markets.

That does not eliminate the importance of Erbil. The KRG remains essential to production, infrastructure and regional energy security, while international companies operating in the Region require a workable relationship between federal and regional authorities. But the institutional centre of gravity has shifted.

The change is also visible in the debate over the financial architecture surrounding exports. Questions concerning transportation payments, intermediaries and historic oil revenues have become increasingly important because transparency is now part of the broader debate over whether the previous Kurdish export model can provide a credible foundation for future arrangements. The questions raised by the investigation into the financial flows surrounding the Iraq–Turkey oil corridor illustrate why future arrangements will require greater financial transparency as well as political agreement.

The issue is not simply whether historic payments were legitimate. It is whether Baghdad, Erbil, Turkey and international companies can establish a sufficiently transparent framework to prevent the same disputes from becoming political crises again.

That is particularly important because the absence of a permanent federal hydrocarbons framework has allowed temporary arrangements to substitute for legislation. As a result, the same questions about authority, contracts, revenue sharing and cost recovery continue to reappear.

Salaries Turned Oil Politics Into Everyday Politics

The salary dispute is where the Baghdad–Erbil relationship stops being an argument among governments and becomes an issue affecting households directly. For years, public-sector salaries in the Kurdistan Region have been caught between disagreements over oil revenues, budget allocations and constitutional authority. The interruption of independent oil exports intensified this vulnerability because the KRG became increasingly dependent on federal financial transfers.

The scale of the problem is substantial. According to figures cited by the KRG, the Region was allocated 58.3 trillion Iraqi dinars under the 2023–2025 federal budget framework but received approximately 24.3 trillion dinars. The dispute has continued into 2026, with arguments over deductions, non-oil revenues, payroll verification and the legal status of federal transfers. My analysis of the latest confrontation over salary transfers and the political dispute inherited by Iraq's new government examined how salaries have become inseparable from the wider disagreement over oil, revenues and constitutional authority.

Yet it would be misleading to describe every salary delay as simply a political decision in Baghdad. The dispute involves genuine disagreements over payroll figures, non-oil revenues, financial reporting, federal budget implementation and the mechanisms through which transfers should be calculated. Baghdad argues that federal funding requires accountability and transparency. Erbil argues that constitutional rights cannot be converted into discretionary payments that can be withheld whenever another disagreement emerges. Both positions reflect a deeper institutional problem.

The federal government wants a single national financial system. The regional government wants federalism to retain meaningful fiscal consequences. The salary dispute exists in the space between those two positions.

This is why salaries cannot be permanently separated from the oil question. When Erbil provides oil and revenues under an agreed framework, Baghdad's obligation to finance the Region becomes clearer. When those transfers are delayed or disputed, the KRG's ability to maintain public services becomes vulnerable. The danger is not simply economic hardship. It is the erosion of confidence in the federal bargain itself.

If citizens repeatedly experience constitutional rights through the uncertainty of monthly salary payments, federalism becomes something abstract. The constitutional structure may remain intact, but its legitimacy is increasingly judged through whether institutions actually deliver predictable outcomes. That is why the salary question has become one of the most important measures of the health of Baghdad–Erbil relations.

The Budget Is Where Federalism Becomes Real

The federal budget is the institutional mechanism through which Iraq's constitutional relationship becomes financial reality. The Kurdistan Region's share of national resources is therefore not simply an accounting matter. It is a practical expression of its place within the Iraqi state.

This is particularly important because the Region's constitutional status distinguishes it from ordinary Iraqi provinces. The argument in Erbil is therefore not merely that Kurdistan should receive money from Baghdad. It is that its share should reflect its constitutional position within Iraq's federal structure.

Baghdad, meanwhile, has increasingly emphasised national standards for expenditure, payroll verification and revenue collection. The federal government's argument is that regional institutions cannot operate as financially autonomous entities while simultaneously relying on national revenues.

The disagreement over the federal budget consequently reveals a fundamental contradiction in Iraq's federal system: political authority has been decentralised in some areas without creating a stable fiscal settlement that clearly defines how those powers should be financed.

That contradiction has become increasingly visible in debates over the Region's percentage of federal expenditure. Recent discussions surrounding the 2027 budget have brought the question back to the centre of Baghdad–Erbil relations, particularly following the population census and competing interpretations of what the Region's share should include. The wider analysis of Baghdad's recentralization and the emerging 2027 budget dispute demonstrates how oil marketing, budget formulas, salary payments and constitutional authority have increasingly become part of the same institutional contest.

The problem is compounded by Iraq's broader dependence on hydrocarbons. When the national budget itself depends overwhelmingly on oil revenues, any dispute over oil production or exports becomes a dispute over the capacity of the entire state to spend.

The wider Iraqi fiscal crisis therefore matters to Erbil. An Iraq dependent on volatile oil revenues has less room to accommodate regional demands, while a Kurdistan Region dependent on federal transfers has less room to absorb delays. The two sides are consequently locked into a relationship of mutual economic dependence. That is the paradox at the heart of the dispute.

Baghdad possesses greater fiscal authority but needs the Kurdistan Region for northern energy production, security and territorial stability. Erbil possesses significant natural resources and strategic geography but requires access to the federal financial system and national export infrastructure. Neither side can simply remove the other from the equation.

Customs and Non-Oil Revenues Are Becoming More Important

The evolution of the dispute is increasingly moving beyond oil. One of the most important developments is the effort to establish a more integrated customs and revenue system. The progress surrounding ASYCUDA matters because customs have historically represented another area in which Baghdad and Erbil have operated with different administrative practices.

The emerging effort to standardise customs administration could therefore have significance beyond trade. As examined in the analysis of the Erbil–Baghdad customs negotiations and the ASYCUDA system, a unified electronic customs framework could provide Baghdad with greater visibility over regional revenues while giving Erbil a more standardised system for trade and revenue collection. This is potentially more important than it first appears.

A sustainable federal settlement cannot depend indefinitely on oil transfers. If Baghdad wants greater fiscal integration, it needs reliable mechanisms for collecting non-oil revenues. If Erbil wants greater fiscal autonomy, it must demonstrate that its own customs, taxes and other revenues can be transparently measured and administered. This creates one of the few areas in which Baghdad and Erbil's interests can converge.

The same logic applies to the Region's domestic energy market. The recent fuel shortages exposed how closely energy supply itself has become connected to federal relations. The KRG's argument that insufficient crude allocations contributed to the shortage demonstrated that the consequences of the oil dispute now extend beyond exports and government revenues into the daily operation of the regional economy.

The fact that motorists were travelling from the Kurdistan Region into Mosul to obtain cheaper subsidised fuel illustrated the practical consequences of different energy systems operating inside the same country. The lesson is straightforward: economic fragmentation has costs even when political institutions remain formally federal.

Federalism Is the Real Dispute

The most important question is therefore not whether Baghdad should control oil or whether Erbil should receive a particular percentage of the federal budget. The deeper question is what Iraqi federalism means in practice.

The 2005 Constitution created a system in which the Kurdistan Region possesses constitutionally recognised regional institutions while Baghdad retains exclusive authority over areas such as foreign affairs, monetary policy and national defence. The system was never designed to create two separate states. Nor was it designed to reduce the Kurdistan Region to an ordinary provincial administration. The unresolved areas are precisely where political power is concentrated: natural resources, revenues, disputed territories, security, customs and fiscal transfers.

The broader constitutional structure of the Region demonstrates why these disputes cannot be separated from the question of federalism. The institutional framework governing the Kurdistan Region makes clear that relations with Baghdad are embedded in the Region's constitutional position rather than being simply an administrative relationship between a provincial government and the central state.

This explains why attempts to solve individual disputes repeatedly fail to produce permanent stability. An oil agreement can determine how barrels are sold, but it cannot by itself settle the constitutional question of resource authority. A salary agreement can determine how employees are paid, but it cannot resolve the long-term fiscal relationship.

A budget can determine annual allocations, but it cannot permanently define the meaning of federalism. A customs agreement can improve revenue collection, but it cannot settle every question concerning regional economic authority. Each agreement addresses one mechanism while leaving the broader architecture unresolved.

Baghdad's Leverage Has Increased

The balance between Baghdad and Erbil has nevertheless changed. The earlier Kurdish model of autonomy depended heavily on the ability to generate independent revenues. Oil exports provided that capacity. After the suspension of independent exports, Baghdad gained greater leverage over the Region's finances.

This is why the issue of centralization has become increasingly important. As argued in the analysis of Baghdad's expanding administrative and economic leverage over Kurdistan, oil, salaries, customs, banking and legal disputes have increasingly become mechanisms through which the federal government can shape the practical limits of regional autonomy.

The important point is that this does not necessarily require Baghdad to formally abolish Kurdish autonomy. Federal systems can become more centralised through administrative practice rather than constitutional amendment. If the federal government controls the main revenue flows, oil marketing mechanism, national banking framework and budget transfers, the formal existence of regional institutions can remain intact while their practical room for manoeuvre becomes narrower.

That distinction between formal autonomy and practical autonomy is becoming increasingly important. My broader assessment of the changing foundations of Kurdish autonomy examined how the loss of independent oil revenues has exposed the gap between possessing natural resources and possessing the institutional capacity to monetise those resources independently.

The issue, therefore, is not whether Kurdistan still possesses oil. It does. The issue is who controls the legal, financial, transportation and institutional mechanisms required to turn that oil into political and fiscal autonomy. That is a very different question.

The Relationship Is Moving Toward Institutional Bargaining

There are nevertheless signs that the relationship is becoming more institutionalised in some areas. The resumption of oil exports through a federal framework, discussions over customs integration, continued negotiations over salaries and efforts to coordinate security around energy infrastructure all demonstrate that Baghdad and Erbil increasingly recognise the costs of permanent confrontation.

The security dimension is particularly significant because energy infrastructure cannot function without physical protection. Discussions over greater Baghdad–Erbil security coordination around foreign oil companies therefore have an economic dimension as well as a military one. The emerging federal-regional security coordination around energy infrastructure reflects this growing connection between security cooperation and energy governance.

The broader Iraqi oil market also matters. Baghdad's ability to maintain national exports increasingly depends on multiple infrastructure systems and export routes, while the Kurdistan Region remains an important part of the northern energy equation. Recent data on Iraqi exports has demonstrated the continuing dominance of southern terminals while Kurdish export volumes remain constrained.

This makes the northern route strategically important even when the political relationship remains difficult. The economic logic therefore points toward cooperation. The political logic has historically produced confrontation. The institutional challenge is to make the first stronger than the second.

What Baghdad and Erbil Actually Need

The central weakness of the relationship is not a shortage of agreements. It is the absence of a comprehensive settlement that makes those agreements unnecessary.

Baghdad needs a functioning federal framework in which regional institutions are accountable for revenues but also protected from arbitrary financial pressure. Erbil needs predictable access to federal resources while accepting transparent mechanisms for oil, customs, payroll and public finances.

Both sides also need a permanent hydrocarbons framework that clarifies the relationship between federal and regional authorities. The continuing absence of comprehensive legislation has allowed the same arguments over contracts, marketing, revenue sharing and constitutional authority to reappear for almost two decades.

A durable arrangement must therefore address the entire chain rather than one component at a time: production, contracts, transportation, marketing, revenue collection, cost recovery, federal transfers, payroll, customs and auditing.

The objective should not be to determine whether Baghdad or Erbil wins. It should be to establish rules under which neither government needs to use economic disruption as a substitute for political negotiation. That would represent a much more meaningful form of federalism than the current system of recurring crisis management.

The Central Problem Is Institutional, Not Personal

Leadership changes in Baghdad have repeatedly generated expectations of a new relationship with Erbil. Yet the persistence of the dispute demonstrates that the problem is deeper than any individual prime minister.

The transition to Ali al-Zaidi's government has once again brought the salary question to the forefront, but the underlying disagreements remain the same: oil marketing, revenue sharing, budget allocations, constitutional authority and financial oversight. The same pattern appeared under previous governments because the institutions governing the relationship remain incomplete. The same is true in Erbil.

Different Kurdish governments have pursued different approaches to Baghdad, but the fundamental economic vulnerability remains. The Region's dependence on federal transfers means that its political leadership cannot treat relations with Baghdad as simply an external diplomatic relationship. Baghdad is not a foreign capital. It is the capital of the state of which the Kurdistan Region is constitutionally a part. That distinction is fundamental.

The strategic objective for Erbil should therefore not be maximum separation from Baghdad at every point. It should be maximum constitutional autonomy combined with institutional integration where integration strengthens the Region's economic and political position. For Baghdad, the objective should not be maximum centralisation. A federal Iraq that formally recognises regional autonomy but repeatedly undermines its financial foundations is unlikely to produce a stable constitutional order.

Conclusion: Iraq Cannot Solve the Oil Dispute Without Solving Federalism

The Baghdad–Erbil relationship has reached a point where oil, budgets, salaries and federalism can no longer be treated as separate policy files. They are different expressions of the same unresolved question: how should political and economic authority be distributed inside the Iraqi state?

The post-2003 model created a Kurdistan Region with substantial political and administrative autonomy but never fully established the fiscal architecture necessary to sustain that autonomy. Oil temporarily compensated for this weakness by giving Erbil an alternative source of revenue. The collapse of independent exports exposed the underlying institutional dependency.

Baghdad now possesses greater leverage over oil marketing and federal transfers. Erbil remains indispensable to Iraq's northern energy system and continues to possess constitutional institutions and significant economic resources. Neither side, however, has succeeded in translating those realities into a durable settlement.

The result is a form of federalism that functions through bargaining rather than rules. That is the central problem. A functioning federal state cannot depend on whether the federal and regional governments are having a good political month. Salaries cannot become bargaining instruments every time oil negotiations stall. Oil exports cannot depend indefinitely on temporary arrangements. Budget shares cannot be renegotiated through recurring political crises. Customs revenues cannot remain trapped between competing administrative systems.

Iraq therefore needs something more ambitious than another temporary Baghdad–Erbil agreement. It needs a settlement that makes the relationship predictable.

The foundations already exist: the Constitution, federal institutions, the Kurdistan Region's recognised status, national energy infrastructure and decades of experience with regional-federal cooperation. What remains missing is the political willingness to turn these foundations into permanent rules.

The central lesson from the past two decades is clear. Baghdad cannot permanently resolve the Kurdistan question through centralisation, and Erbil cannot permanently sustain autonomy through economic separation. The future of both depends on making Iraqi federalism function.

That is ultimately what the oil dispute is about. Not barrels. Not salaries. Not budgets. Power.

Dr. Pshtiwan Faraj is a political analyst and researcher specializing in Iraq, the Kurdistan Region, Iran, regional security, geopolitics, and conflict. He is the founder of Kurdish Policy Analysis, where he writes on political, security, economic, and strategic developments across Iraq and the wider Middle East.

#BaghdadErbil #KurdistanRegion #KRG #Iraq #IraqiPolitics #Kurdistan #OilPolitics #KurdistanOil #IraqOil #OilExports #Federalism #Baghdad #Erbil #KRGOil #IraqBudget #KRGBudget #KurdistanSalaries #PublicSectorSalaries #RevenueSharing #SOMO