The salary crisis in the Kurdistan Region is deepening, with public employees now unpaid for 68 consecutive days. Behind closed doors, extensive negotiations have been ongoing between Baghdad and Erbil, with direct involvement from U.S. diplomats. The salary dispute is part of a broader deadlock over the Region’s oil and non-oil revenues, and forms one front in the wider budget conflict between the Kurdistan Regional Government (KRG) and the federal government in Baghdad.

Context: U.S.-brokered talks reveal that the Iraqi government has increased its demands on the KRG. According to Rudaw TV, Baghdad is now asking the KRG to hand over its entire oil production—approximately 300,000 barrels per day—in exchange for covering the region’s domestic fuel needs and transferring its share of the federal budget. Additionally, Baghdad is demanding half of the KRG’s non-oil revenue, roughly 150 billion dinars, given that the KRG’s non-oil revenue exceeds 300 billion dinars.

Another key point of contention is the salary payment mechanism. Baghdad is pushing for the domiciliation of KRG salaries through Iraqi state-owned banks, though some sources indicate it may be open to the “MyAccount” digital banking system—if the KRG provides full employee account details.

Analysis: This standoff is not simply about a few barrels of oil or a slice of the budget. At its core, it is a power struggle—one rooted in mistrust and political competition. The financial details are the battleground, but the underlying question is who concedes to whom, and under what terms. Meanwhile, it is the people of the Kurdistan Region who continue to pay the price.

Tensions escalated after the KRG signed a $100 billion energy deal with two U.S. companies without consulting Baghdad, despite ongoing negotiations over oil export resumption. Baghdad viewed this as a betrayal after making significant concessions, including increasing oil production costs from $6 to $16 per barrel and signaling readiness to begin with just 185,000 barrels, gradually increasing to allow KRG adjustment while permitting the region to retain 115,000 barrels for refining and local consumption.

However, Baghdad interpreted the KRG’s—and especially the oil companies’—additional demands as a sign of bad faith. Officials believe the current arrangement, in which local companies tied to Prime Minister Masrour Barzani profit from unregulated sales, has reduced the KRG’s incentive to resume formal exports. Despite this, Baghdad continued to send monthly salary transfers during the first four months of 2024. Yet it now views these transfers as having been misused by the regional authorities.

The crisis has been exacerbated by broader regional tensions, particularly Israel’s war with Iran. Iraqi officials suspect that the KDP’s sudden rhetorical escalation, led by Masoud Barzani, was politically timed and possibly linked to broader geopolitical calculations, including the anticipated Iranian retaliation and Baghdad’s perceived vulnerability.

Leaks about the negotiation drafts have been inconsistent, but one trend is clear: the KRG’s position is increasingly centralized and insular. Only Prime Minister Masrour Barzani and his father, KDP President Masoud Barzani, appear to be driving decision-making. Nechirvan Barzani appears to be sidelined, and the PUK is almost entirely absent. Bafel Talabani has made no public interventions, while Qubad Talabani’s statements have remained vague.

Politically, the KRG is in a weak position. Nearly nine months after regional elections, no new cabinet has been formed. The parliament remains paralyzed, and Masrour Barzani continues to run a caretaker government with a fragile mandate. This paralysis is frustrating Western governments, including the U.S., which had hoped for more stability and institutional maturity from the Kurdish leadership, especially after years of diplomatic and financial support.

What further complicates the KRG’s position is a broader shift in U.S. strategy. Washington appears increasingly focused on reshaping power balances within states—rather than redrawing borders—by supporting certain institutional actors. This approach is now being applied across the region, including Syria, Iraq, and newly in Lebanon.

For instance, the Pentagon’s 2026 budget includes, for the first time, a dedicated allocation for Lebanon aimed at building a force likely modeled on Iraq’s Counter Terrorism Service. The aim appears to be tipping the internal balance of power in favor of state institutions at the expense of non-state actors like Hezbollah.

In Iraq, the U.S. has been pushing to cut Shia militia salaries from official financial institutions. But to succeed, Washington also appears to be bolstering Baghdad’s hand in its standoff with the KRG—on the logic that a government weakened by one actor (the KRG) will struggle to assert itself against others (the militias). In this sense, pressuring Erbil may be part of a broader balancing strategy.

While many variables could alter the course of negotiations, some observers warn that the situation is approaching a flashpoint. There is even speculation that Baghdad may consider using force to take control of energy fields located in disputed territories, such as Khurmala (south of Erbil) or Khor Mor (east of Kirkuk)—both among the KRG’s largest. Such a move would be highly destabilizing and may be a step too far for the U.S. to tolerate, but recent history shows that not all American pressures on the KRG or Iraqi government have produced results: despite U.S. insistence, formal oil exports have not resumed.