The Iraqi government has approved a temporary agreement reached with the Kurdistan Regional Government (KRG) regarding the handover of oil and non-oil revenues in exchange for Baghdad sending salaries to KRG public employees, who have now gone unpaid for 77 days. The agreement was finalized amid a wave of drone attacks that have caused damage to at least four major oilfields, halting production across much of the region.

Context: The agreement, reached after weeks of negotiations, applies initially to the months of May and June. Under its terms, the KRG is required to deliver 230,000 barrels of oil per day to SOMO and transfer 120 billion dinars in non-oil revenues for each of the two months. Of the daily oil production, 50,000 barrels will be allocated for local consumption which binds the KRG to itself cover the production cost for this ammount, with the possibility of increasing to 65,000 barrels if a joint committee deems it necessary. For now, only the May salary is expected to be disbursed—tentatively on Sunday—while the June payment is contingent on the full delivery of the agreed oil and 240 billion dinars in non-oil revenues for both months.

Analysis: This temporary agreement, concluded after weeks of intensive negotiations involving American diplomats, appears designed primarily to ensure at least one salary payment reaches KRG employees, who will have been without pay for 80 days by the time the Iraqi finance ministry is scheduled to send May’s salary on Sunday. The situation in the Kurdistan Region had reached a critical juncture, with mounting public frustration given that public employees constitute 37% of the workforce, directly impacting money circulation and market activity. The regional market has ground to a complete standstill in recent weeks, making this agreement more of a stopgap measure to prevent the situation from spiraling out of control rather than a comprehensive solution to the ongoing crisis.

Several factors complicate the agreement’s implementation and sustainability. No agreement has been reached with the international oil companies (IOCs) operating in the region, making it unlikely that exports will resume soon. The ongoing drone campaign, nearly six strikes in just three days, has caused some serious damage to key oilfields. Even if the strikes cease, the existing damage may prevent the KRG from meeting its baseline production capacity of 280,000 barrels per day, which is essential to fulfilling the agreement.

Moreover, the deal explicitly applies only to May and June and will be subject to review. That opens the door to further disputes. After Sunday’s salary payment, the KRG faces the challenge of implementing the agreement’s clauses to secure June’s salary disbursement. Notably, the KRG must transfer 240 billion dinars exclusively from non-oil revenue, despite the KRG’s stated lack of funds, which are allegedly allocated to ministerial operational costs. When the KRG Council of Ministers convened three weeks ago to discuss the possibility of paying salaries even with deductions, they were unable to do so, with the KRG finance minister reporting only 160 billion dinars in the treasury.

Beyond May and June, the agreement stipulates a review of clauses and verification of the KRG’s actual non-oil revenue, of which 50% must be transferred to Baghdad. Additionally, the KRG must increase its oil production to exceed 400,000 barrels daily within a specified timeline, as mandated by budget law. Finally, the Iraqi government has imposed a four-month deadline for the complete domiciliation of KRG public employees, though the nature of this domiciliation remains unspecified.

This agreement appears to have been finalized through a political settlement brokered in Baghdad. PUK leader Bafel Talabani and Iraqi Foreign Minister Fuad Hussein, Barzani’s man in Baghdad, worked together to negotiate the final terms with Prime Minister Mohammed al-Sudani. The Shia political leadership subsequently approved the arrangement. This agreement likely reflects pressure to balance carrot-and-stick approaches, as excessive demands from the Iraqi government before salary payments could have backfired, particularly given the US element that, while supporting Erbil-Baghdad dialogue, seeks to prevent complete destabilization of the Kurdistan Region.

However, with nearly 20 drone attacks on the Kurdistan Region in just 15 days, increasingly targeting oil infrastructure, it is evident that this agreement serves as a temporary stopgap designed to balance the growing tactics aimed at subjugating the KRG with US considerations in mind and managing internal Kurdish rivalries. Offering the PUK a degree of credit for securing salaries also fits into Baghdad’s longer-term strategy of leveraging intra-Kurdish divisions to contain the KDP’s dominance, without pushing the crisis into total meltdown.