Iraq finance: Geopolitical pawns

Investors are being asked to bankroll some increasingly volatile parts of the world. In early March, Iraq’s finance minister confirmed that the country is discussing a bond worth up to $6 billion through Deutsche Bank and Citi. 

The same month, Kurdistan – a semi-autonomous region of Northern Iraq – was approaching investors in the UK, also apparently seeking to raise billions of dollars, having previously roadshowed (reportedly through Goldman Sachs and, again, Deutsche Bank) for as much as $5 billion in loans at the end of 2014.

Any state has the right to go to market and raise funds, but what exactly would investors be participating in here? In the case of an Iraq sovereign bond, it’s to meet a potentially colossal budget deficit of as much as ID25 trillion (more than $21 billion) this year. That may sound palatable enough, but why is that shortfall there? Falling oil prices are only part of the answer. The other main contributor is the military campaign against Islamic State.

Similarly, Kurdistan’s need for funds reflects a combination of tumbling crude prices and the need to finance a war (as well as problems with the federal government in Baghdad). 

Now, the world is full of nations that wage military campaigns – the US and UK, for a start – and naturally any sovereign debt issue, right the way through to US Treasuries, could garner funds potentially for military use without explicitly being raised to do so. And there have been few more unequivocal bad guys in recent world history than IS, so it is generally seen to be in the world’s interests to help any state that’s fighting against them. But when the need for war funding is so clearly a major part of the use of proceeds for a sovereign issue, when does this begin to give institutional investors pause? Is there an issue for SRI investors here?

There are ways around describing issues like these as purely war bonds; the Kurdistan funding, for example, will likely be based on selling rights to tolling fees on the vital Ceyhan pipeline that connects Northern Iraqi fields to the Mediterranean via Turkey, while Iraq’s bond will be sold as a play on its long-term crude reserves. But at some point institutional investors are going to find themselves becoming players in geopolitics, which is probably more than the pension funds who mandate them intended.