Shafaq News
As negotiations between Russia and Ukraine
gain momentum, global energy markets are reassessing supply expectations,
raising concerns for oil-dependent economies such as Iraq over the fiscal
impact of lower prices.
For Baghdad, the effect is not
straightforward. Analysts point to near-term risks driven by higher supply and
falling prices, alongside a medium-term scenario in which stronger global
growth could lift demand and ease pressure. How these forces interact will
shape Iraq’s fiscal outlook.
Markets have reacted cautiously to the
prospect of a settlement, amid expectations that easing sanctions could allow
Russia to rapidly increase exports and add millions of barrels per day to
global supply. Reuters has reported that Russia holds significant spare export
capacity that could return quickly if restrictions ease, intensifying
oversupply concerns.
Oil prices have already weakened. Brent
crude, which traded above $80 per barrel in September 2024, slipped below $60
by December 2025, reflecting subdued demand growth and rising supply
expectations.
Iraq’s exposure is reinforced by the April
2025 Article IV consultation of the International Monetary Fund (IMF) which
estimated that Iraq requires oil prices above $92 per barrel to balance its
2025 budget. According to the World Bank, oil accounts for more than 85% of
government revenue, with official Iraqi data showing the figure can reach 95%
in some years, while oil represents over 99% of exports.
By comparison, Gulf producers such as
Saudi Arabia and the UAE have reduced oil reliance to roughly 40–65% of state
income through diversification into industry, services, and sovereign
investment returns, giving them fiscal buffers Iraq largely lacks.
Spending rigidity further heightens the
risk as Iraqi data show that 4.55
million public-sector employees, 2.6 million retirees, and 2.15 million social
welfare beneficiaries receive more than 8.5 trillion dinars ($6.5 billion) per
month in fixed payments, sharply limiting the government’s ability to absorb
revenue shocks.
Economic and financial expert Hilal
Al-Taan told Shafaq News that oil prices respond to a complex mix of global
growth, geopolitics, and market sentiment, not peace alone. Still, he warned
that Iraq’s dependence magnifies any downturn.
“Iraq is already facing a financial
crisis, and any further decline in oil prices will intensify its effects,”
Al-Taan said, cautioning that Baghdad could be pushed toward internal and
external borrowing, a “dangerous stage for an economy exhausted by repeated
financial shocks.”
Oil expert Hamza Al-Jawahiri argued that a
peace deal would likely deepen oversupply pressures. Russia, he said, is
already exporting under sanctions and could quickly raise volumes if
restrictions ease. “Higher US shale output could further increase supply,
pushing prices toward $50 per barrel or lower.”
Iraq, however, cannot easily offset price
declines by increasing exports. Its production remains constrained by OPEC+
quotas, limiting output even during revenue downturns, a restriction
highlighted repeatedly in OPEC market assessments.
Read more: Stable but not secure: The fragile reality of Iraq’s economy
Economist Mohammed Al-Hasani warned that a
ceasefire could weigh on prices and curb investment spending. He pointed to
Iraq’s experience during the COVID-19 oil crash, when prices briefly fell to
$14 per barrel, forcing heavy borrowing to cover operating expenses.
“Despite the collapse, salaries were not
cut,” Al-Hasani told Shafaq News, suggesting that borrowing could again become
the primary response if prices fall, adding to long-term fiscal risks.
Not all assessments are pessimistic.
Mudhir Mohammed Salih, financial advisor to the Prime Minister, argued that
peace could ultimately support oil prices by stimulating global growth.
“Peace belongs to the political economy of
growth,” Salih told Shafaq News. “If global growth rises by 1%, oil demand
typically increases by about 0.7%.”
He said stronger demand could absorb
additional supply over time, challenging the assumption that a settlement would
automatically harm oil exporters.
Against this backdrop, Iraq has begun
preparing its 2026 federal budget using a conservative oil price assumption of
$60 per barrel, aiming to restrain spending and protect core obligations.
Following a December 15, 2025 meeting
chaired by Prime Minister Mohammed Shia Al-Sudani, the Ministerial Council for
the Economy approved measures to curb spending and boost revenues, including
cuts to allocations for the three presidencies and reduced official travel
allowances.
Salih said such steps remain insufficient
on their own. Avoiding recurring salary crises, he argued, “requires structural
reform, including revenue diversification and improved spending
efficiency—goals outlined in the government program approved by parliament in
October 2022.”
Iraq’s vulnerability is most acute in the
short term, when supply-driven price declines would immediately strain the
budget. Medium-term outcomes depend on whether global growth accelerates enough
to lift energy demand. Without diversification, however, Iraq remains
structurally exposed regardless of how the Russia–Ukraine conflict concludes.
Written and edited by Shafaq News staff.
