Iraq’s Plan to Transform Its Economy Is a Risky Bet

James Durso

James D. Durso is the Managing Director of Corsair LLC, a supply chain consultancy. In 2013 to2015, he was the Chief Executive Officer of AKM…

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• Iraq’s Development Road aims to reduce dependence on oil by turning the country into a key trade corridor between Asia and Europe.
• The project involves Türkiye, Qatar, and the UAE, but faces resistance from Iran, Kuwait, and the U.S.
• The project faces internal challenges like corruption, security concerns, and Kurdistan’s limited participation.

In May 2023, Iraq announced the Development Road, $17 billion, 1,200-kilometer rail line and roadway from a new port at Al Faw in southern Iraq to Türkiye, linking Asia and Europe.

The Road is more than an upgrade to Iraq’s old infrastructure and aims to leverage Iraq’s location as a future trade corridor to solve several complex problems: unemployment, corruption, outdated infrastructure, and over-reliance on hydrocarbons at a time of declining demand for oil.

The project is supported by Türkiye, and Qatar and the United Arab Emirates (UAE) are participating, probably as the bankers.

The Development Road Project in Iraq is a bold initiative and some potential benefits are:

Economic Diversification and Growth. By connecting southern Iraq to Türkiye, the project aims to boost economic prosperity by at transforming the country into a major transport hub.

The project aims to reduce Iraq’s reliance on oil exports which, according to the World Bank, are virtually Iraq’s sole source of foreign exchange, in most years more than 99% of the country’s total export earnings. Oil provides approximately 85% of Iraq’s federal revenue, making Iraq one of the most oil-dependent economies in the world), and accounts for about 42% of Iraq’s Gross Domestic Product (GDP).

Because the Iraqi government’s budget heavily depends on oil revenues, fluctuations in oil prices can lead to significant budgetary adjustments, affecting public spending on infrastructure, health, education, and other social services. Given this high reliance on a single commodity, Iraq’s economy is vulnerable to oil price volatility. Economic stability is closely tied to global oil market dynamics, making fiscal planning challenging.

Related: Shell Boosts Deepwater Oil Production Offshore Malaysia

Iraq hopes to use the project to get ahead of future declines in demand for oil. The International Energy Agency reports, “Global oil demand will decline faster than expected in the coming decades…as electric vehicles continue to erode oil use in road transport, while biofuels and hydrogen deflate the need for oil in the aviation and shipping sectors.” The IEA projects that oil demand will peak in 2030.

The control over oil resources also plays a significant role in Iraq’s internal politics, affecting dynamics among different groups and regions, particularly between the central government in Baghdad and the semi-autonomous Kurdistan Regional Government (KRG).

This dependency means that economic policies, national budget planning, and even social stability in Iraq are heavily influenced by the price of a single commodity whose price Iraq does not control. Efforts to diversify the economy are crucial for long-term stability and resilience against oil price shocks.

Regional Cooperation. The project involves stakeholders like Türkiye, Qatar, and the UAE, and ideally will foster regional economic integration, cooperation, and economic interdependence, though there will be tension between the parties.

For example, the UAE may see the new port at Al Faw as competition for its seven major seaports, and neighboring Kuwait may oppose any effort that threatens its Mubarak Al Kabeer Port under construction on Bubiyan Island (part of China’s Belt and Road Initiative).

Iran may see the Road as competition to its three major ports, Chabahar, Bandar Abbas, and Bandar Imam Khomeini. Tehran may use its allies in Baghdad to stop it via the political process, or may resort to sabotage, though that is a high-risk approach.

Iran proposed a rail link from Iran through Iraq to Syria’s Mediterranean coast, though Iraq has always seen a short section, from Shalamcheh, Iran to Basra, just for transporting religious pilgrims, not regional trade or supporting Tehran’s “resistance” allies in the Levant. That said, Iraq may buy peace by agreeing to a connection to the Road by the Shalamcheh-Basra railroad (that Iran will fund.)

In this case, the spoiler may be the U.S. which may target economic normalization between Iraq and Iran as part of its ongoing war against the Islamic Republic, in effect taxing Iraqis to fight Iran.

An important recent development is the declaration by Abdullah Öcalan, the leader of the Iraq-based Kurdistan Workers’ Party (PKK), to the party to disarm, dissolve, and make peace with Turkey. This positive development could also ripple through Iraq, Iran, and Syria, reducing political violence and improving the economic prospects for the region, though much depends on incumbent political leaders reining in triumphalist posturing and working with former PKK members to integrate them into the political and economic landscape.

Involving all Iraqi groups and sects will encourage Qatar, the UAE, and other possible funders, such as China, that local rivalries or the exclusion of some Iraqi stakeholders will not endanger the project.

At the recent 7th Baghdad International Dialogue, the Kurdistan Region’s president Nechirvan Barzani supported the Road, calling Iraq’s political and economic stability a “shared national interest.”

The Road project has been criticized for avoiding the semi-autonomous Kurdish region  except for except for the last 15 kilometers near the border with Turkey. But Baghdad indicated in 2023 the route was due to the challenging terrain in mountainous Kurdistan that would have added time and cost to the project. A senior Iraqi government official recently indicated the Road will follow the route of the oil pipeline to Turkey and take advantage of the pipeline’s security measures. Referring to a topographical map, there is a narrow, less mountainous corridor in western Dohuk Governorate in the Kurdish region, so the Road planners, just like the pipeline planners, did not have much choice as to the route.

What Baghdad can do is explore the viability of a connecting line from Erbil, the capital of the Kurdish region, to the Road’s mainline. This may allow traffic from the mooted Iran-Kurdistan-Türkiye rail line to instead merge with the Road, giving Tehran and Erbil a piece of the action and incentive to ensure the Road succeeds.

Infrastructure Development. The project includes significant investments in infrastructure, such as rail and land transport, which could modernize Iraq’s transport sector.

The project will also broaden Iraq’s infrastructure portfolio to include projects not tied to hydrocarbon extraction. And Baghdad may use international demands for transparency and contract oversight to drive change in a political culture that often defaults to cronyism and corruption.

The Road may also accommodate fiber optic lines, creating a secure “information road,” useful redundancy in light of the damage to Red Sea fiber optic lines due to Houthi attacks on merchant shipping in 2024. The damaged cables impacted about 25% of the traffic flowing through the Red Sea.

The introduction of high-speed rail (HSR) may interest China, which is the world’s leading developer of HSR. Autonomous vehicles (trucks) will require 5G/6G/XG wireless connectivity, another area of Chinese leadership and an “XG corridor” will drive economic development along the route with the help of local wireless providers such as Asiacell and Supercell.

The PKK may be demobilizing which will reduce violence and political risk, Iraq is making progress in reducing corruption and increasing fiscal transparency, and Kurdish leaders like Nechirvan Barzani share the prime minister’s vision for the Road’s potential to benefit all Iraqis.

China may eventually wish to contribute to the Road, but will the U.S. be opposed to China’s participation despite Baghdad’s friendly relations with Beijing? China is Iraq’s biggest trade partner and a leader in HSR and 5G wireless communications. Iraq is a significant supplier of oil to China, is a Belt and Road country and received $9 billion in 2024, and a total of $17 billion from Beijing.

Job Creation. The construction and maintenance of new transport routes and infrastructure could create numerous job opportunities for Iraqis.

The project’s advertised gains are 100,000 jobs, and $4 billion/year of revenue, which is needed as the current population of 46 million will probably increase to 50 million by 2028

Fifty-six percent of Iraq’s population is under 24 years of age, and Iraq produces 250,000 university graduates per year, and many expect government jobs at a time when the private sector is slow to hire. In 2023, Iraq’s parliament approved a $153 billion spending bill to mostly fund government sector salaries and to hire more than half a million Iraqis (the current public sector is about 4,5 million employees). In the future, Baghdad will find such profligacy unsustainable and injurious to the country’s financial health,

The unemployment rate is 16.5%, higher for women and in rural areas.  Lack of jobs was one reason for the 2022 protests and Iraq’s leaders will want to avoid any unrest that will spook foreign investors and weaken public confidence in their stewardship, though public concern about corruption may do more to erode public trust.

Does Iraq have the engineers and managers to administer the project? Or operate and maintain it after completion? If not, the Road contract must include a training and education deliverable so Iraqis can eventually replace the cadre of foreign managers and engineers that may be imported to complete the project.

Strategic Position. By becoming a key link between East and West, Iraq could enhance its geopolitical significance and attract further foreign investments in non-hydrocarbon sectors, however the participation of China and Iran will attract America’s attention and not in a positive way.

Will U.S. attempt to block Iranian participation? If so, there will be no consequences for American workers and businesses, so no consequences for U.S. politicians by stalling a rail and road project 7,000 miles away as part of Washington’s vendetta with the Islamic Republic.

The U.S. advocated for the Middle Corridor to keep cargo out of the Northern Corridor (Russia), and the India-Middle East-Europe Economic Corridor (IMEC) was promoted to speed Israeli-Saudi reconciliation, so will the U.S. undercut the project to satisfy a political objective of blocking Iran and China, regardless of local consequences?

The U.S. has sanctioned so many entities in Iran and China that it will be easy to claim Baghdad is violating some U.S. proscription or other just by doing day-to-day business. And, Iraq will probably always be friendlier with Iran that the U.S. would prefer as they are “neighbors forever,” but Washington’s “national interests” are always in peril when someone in Tehran is making a buck.

Despite, or because of, the positive potential of the Road, there are still obstacles to its success:

Political Instability. Iraq’s volatile political environment and ongoing disputes among various political factions pose a major challenge. Widespread (though declining) corruption in Iraq may affect project success and readiness of investors to contribute, and alienate contractors and suppliers.

The Kurdish region needs to be a participant. The Kurds will probably assume the task of helping the PKK members integrate into the region’s economy and politics and may need support from Baghdad and Ankara in the process, and their support will be a wise investment.

Also, a project of the magnitude of the Road will have environmental and social repercussions, including displacement of communities or environmental degradation, which could lead to public opposition if not managed well.

Security Concerns. The presence of various armed groups, some sponsored by Iran, and the potential for conflict relapse threaten the safety and continuity of the project. The PKK may soon dissolve but the Islamic State, which doesn’t control much territory but has world-side appeal, will be an ongoing problem.

Economic Constraints. The project’s estimated cost has already increased from $17 billion to potentially over $24 billion. Baghdad has been accused of failing to conduct an adequate feasibility study for the ambitious project, though the World Bank committed to delivering a study by February 2026, three years after the project was announced.

Securing sufficient funding and managing financial resources effectively remain critical challenges. Rival transborder projects in the area, such as the Belt and Road projects, the Middle Corridor, the Saudi Arabia Land Bridge from the Persian Gulf to the Red Sea, the India–Middle East–Europe Economic Corridor, and Kuwait’s Bubiyan Port may lead to opposition from neighboring countries.

Will opposition parties in Iraq’s parliament appropriate the funds needed for the project or will they prioritize obstructing Prime Minister Sudani’s efforts?

Baghdad and Erbil need to resolve the shutdown of Kurdistan’s oil pipeline to Turkey’s Ceyhan port, which has cost Iraq $25 billion over 22 months – enough to pay for the project. Washington wants exports to resume to increase global supplies and as part of its renewed “maximum pressure” campaign against Tehran, and to support its Kurdish partners who host U.S. troops, but the negotiations ended in deadlock on 6 March despite American pressure on Baghdad.  

Regional Tensions. Iraq’s relationships with neighboring countries, particularly Iran, which is not included in the project, could undermine its progress, but including Tehran may attract Washington’s attention. Baghdad needs to convince the neighbors, and China, the Road will not be duplicative and improve economic, and thus political, resiliency.

Infrastructure Challenges. Constructing the necessary infrastructure, such as the Grand Al Faw Port and the extensive rail and highway networks, requires overcoming technical and logistical hurdles. Does Iraq have the “human infrastructure,” the skilled managers, contract administrators, and financial advisors, to execute the project in a transparent manner? Can local contractors, tradesmen, and laborers do some of the work or will skilled labor have to be imported?

As important as oil is for Iraq’s future, the Road depends on another valuable liquid, water.

Iraq is ranked “extremely high” for water stress, #23 in the world, according to the World Resources Institute. In 2023, Iraq joined the UN Water Convention, a “legal and intergovernmental framework aims to ensure the sustainable use of transboundary water resources by facilitating cooperation across borders.”  However, Turkey, the source of the Tigris and Euphrates rivers is not a member of the Convention, so Baghdad and Ankara will have to find a suitable venue to work out a water sharing agreement.

The Tigris and Euphrates account for 98% of Iraq’s surface water. Turkey’s Southeastern Anatolia Project, a complex of 22 dams and 19 power plants to develop the southeastern provinces, the Kurdish region, has significantly decreased Iraq’s water supply. If the PKK rank-and-file stack arms and return to their homes, Turkey may feel it is “winning” and be oblivious to the need to generous in victory, especially as it will expect Iraq to ensure the PKK is no longer in northern Iraq, its home base.

What does this have to do with the Road? Well, all that concrete won’t mix itself – it needs water. In the U.S., the Interstate Highway System traffic lanes are topped with 11 inches (28 centimeters) of concrete for a roadway 48 feet (14.7 meters) wide. And its not just the concrete, all the workers and equipment will also make significant demands on the country’s water supply.

The UN feasibility study for the Road isn’t due for a year so now is the time for Iraq and Turkey to get started on a joint water agreement, though Iraq may have to pledge to modernize its irrigation system and substitute less thirsty crops to get the Turks to the table.

There will be many beneficiaries of the Development Road if it succeeds. Businesses will flourish, governments will diversify economies and revenue sources, and the always popular “connectivity” will get a boost, but this is really for young Iraqis who desire an end to decades of drama and foreign intervention and want Iraq to finally be a normal country.

By James Durso

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