Iraq has recently seen the most severe infighting in years between political factions of the country's Shi'a majority, as dozens of people were killed and hundreds were wounded overnight on 29-30 August in armed confrontations between followers of the Shi'i cleric Muqtada al-Sadr ('Sadrists') and other Shi'a factions on the streets of Baghdad and southern cities like Basra.
Whiletensions were defused by Sadr's order for his followers to withdraw from Baghdad's Green Zone and fears of the beginning of a new civil war in Iraq have been averted for now, the current situation is arguably the worst political crisis in Iraq since at least the end of the conventional war against the Islamic State group that saw the formal recapture of all lost territory by November 2017. The fundamental problem behind this latest round of escalation and de-escalation remains: namely, the inability of Iraq's political parties to agree on the formation of a new government following parliamentary elections in October 2021.
This analysis seeks to explore three important questions: First, why is there an ongoing political deadlock specifically between the Sadrists and the other Shi'a political factions, which constitutes the main obstacle to forming a government? Second, what are the likely scenarios moving forward? Can the deadlock be broken, or will we have to wait until the next parliamentary elections? Third, what are the implications and risks for the economy and those who seek to do business amid the ongoing deadlock?
An analysis of the wider context of the history of government formation in Iraq since 2003 and the timeline of events since the 2021 elections in particular point to a deadlock revolving around competing outlooks among Iraq's Shi'a political class regarding government formation, pitting a Sadrist conception of majoritarian-coalition rule against the idea of national unity consensus rule that is generally favoured by his rivals and has been the norm since 2003 whenever elections have been held.
Sadr's Shi'a rivals, organised in a coalition backed by Iran, obtained legal rulings that effectively prevent their exclusion from government in any current negotiations and outmanoeuvred him in the parliament this summer, despite their general underperformance in the 2021 elections. However, Sadr retains the street power of his followers as an impediment to the formation of a government that could marginalise him. It seems most likely that no government will be formed in 2022.
Amid the political deadlock, potential risks to business and investors stem from the risk of disruption to oil and gas operations and other business projects through renewed rounds of infighting between Sadrists and other Shi'a factions in Baghdad and the southern regions, where partisans of the opposing sides may vent their frustrations on each other over the ongoing deadlock. These risks stem in significant part from the militiafication of the Iraqi state and society.
We also assess two other risks for business that have existed from the days before the political deadlock: namely, (i) the ongoing low-level 'Islamic State' insurgency stretching across the west and north of central government-controlled areas into the eastern province of Diyala, and (ii) the threat of disruption to Western and Gulf business interests from attacks aimed at them by shadowy Shi'a militia groups who may well have a connection with Iran but afford Iran plausible deniability regarding responsibility for the attacks. Of these risks, we assess that the first is unlikely to change because of the deadlock but the second may increase for reasons we will outline.
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