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One year after military victory over the Islamic State (IS) and a bitter Kurdish defeat in Kirkuk, Iraq, Iraqi Kurdistan is settling into a new moment of hard-won calm. Its two largest parties are poised to form a new regional government, and a newly formed central government in Baghdad presents opportunities for cooperation. Kurdistan Regional Government (KRG) leaders have sought to turn the page on bitter disputes with Baghdad and Washington over the Kurds’ referendum on independence.

To make the most of its new moment, the next KRG will need to embark on three resets:

• Internally, the next KRG must shift gears from existential struggles for survival and independence to focus on the near-term challenge of delivering better governance and economic opportunity for citizens.
• The next KRG should seize this window of opportunity to work constructively with Iraq’s incoming central government in Baghdad to advance cooperation on oil exports, revenue sharing, security cooperation, and the management of the disputed city of Kirkuk.
• The aftermath of Kurdistan’s independence referendum and loss of Kirkuk marked a crisis in relations with the United States that raised enduring questions for both sides. One year later, Washington and Irbil, the KRG capital, have a chance to articulate a forward-looking rationale and agenda for cooperation.

Even as the fight against IS dies down, the United States retains an enduring interest in helping the KRG succeed. The three most important ongoing U.S. projects in Iraq—counterterrorism, keeping a fragile peace, and competitive engagement to help Iraqis prevent Iranian domination—will each be less difficult with strong pro-American partners among Iraq’s Kurds. That will depend on whether Iraqi Kurds can tackle the three resets above. Success—however imperfect, however short of Kurds’ dreams of their own state—can still help prevent an IS resurgence or relapse into Iraqi civil war. It can deliver a greater measure of opportunity and governance to a restive young population. And in so doing, it can provide a forward-looking sense of purpose to a partnership that otherwise risks drift and deterioration. Failure risks sowing the seeds of future conflict and upheaval for Iraqi Kurds who have come to know both far too well.

Such a U.S. agenda should include:

• Early engagement and political support for the incoming KRG government. This could include a visit to Washington and a memorandum of understanding defining political commitments on both sides.
• Shift the focus of U.S. policy toward long-term challenges. The United States should clearly signal that its priorities have shifted post-IS, and a top goal will be tangible progress on long-standing issues of governance and economic opportunity.
• Press for agreements between Irbil and Baghdad. The United States should encourage quick progress between the incoming KRG and its counterparts in Baghdad on issues including oil, revenues, customs, security cooperation, and Kirkuk. Showing they can deliver results could shore up the political position of pragmatic leaders on both sides.
• As security sector assistance declines, emphasize reform and cooperation. Current levels of U.S. support, paid for with funding for the anti-IS campaign, are unlikely to persist for long. Future support should be focused on sustaining counterterrorism capacity, reforming and professionalizing the peshmerga, and deepening cooperation with Iraqi Security Forces. A capable, well-organized, appropriately sized peshmerga can also help deter aggression by militia groups. An agreed-upon program for peshmerga reforms exists on paper, but convincing KRG leaders to make meaningful headway will take time and sustained political pressure.
• Engage Kurdish society beyond its two ruling parties and security forces. S. military engagement reinforces politico-military winners inside Kurdistan. U.S. officials should make a point to complement these important ongoing relationships with a deeper engagement in Kurdish society, including youth, political opposition, and business sectors in the hopes of more pluralistic politics in the future.
• Sustain humanitarian cooperation with the KRG on refugees, displaced people, and religious minority communities. The end of the military campaign should not obscure the fact that this work is in many ways just beginning and deserves continued U.S. support.

While America’s influence in the KRG and Iraq as a whole has diminished from the heights of the anti-IS campaign, U.S. policy will still affect the outcomes. The United States should use its influence to help Iraqi Kurds seize this moment to take difficult steps now that lay the groundwork for future peace, prosperity, and progress.

The KRG is re-emerging from a painful period when its aspirations for independence ran headlong into the coercive force of Baghdad and Tehran. In September 2017, the KRG conducted a controversial independence referendum against the wishes of Baghdad, its neighbors, and the United States. While the official tally had 92 percent of Iraqi Kurds voting in favor of Kurdish independence, Iraq’s central government—and later its Federal Supreme Court—declared the referendum unconstitutional.¹ Weeks later, Iraqi Security Forces and Iranian-backed Shiite militias forcibly retook the disputed city of Kirkuk. Without this vital city and the revenue of its surrounding oilfields, Iraqi Kurds’ path to a state of their own was blocked. Slightly more than a year later, bitter disappointment persists, but Kurdish leaders have reckoned with their changed circumstances and made a strategic choice to work constructively with Iraq’s central government.^{2 3}

Internally, the KRG is in the midst of an uncertain transition—and its future capacity as a U.S. partner will depend on its success. A generation of leaders defined by a national liberation struggle is slowly giving way, and their successors are struggling to consolidate power. It will fall to this next generation to revamp an entrenched political and economic system that leaves many young Kurds disempowered and disillusioned. Electoral turnout is down amid widespread accusations of fraud.⁴ Half of all Kurds are 21 years old or younger.⁵ Twenty-nine percent of Iraqi Kurds ages 18–34 are unemployed, and many have lost hope of finding work absent connections to political or economic elites.⁶ The existential threat of IS and the exuberance around the ill-fated independence referendum held such trends in abeyance. Now, as one Kurdish leader put it, “there are no more excuses.”⁷

To meet this new moment, America’s focus inside the KRG will need to evolve from intensive crisis response toward a more sustainable, proactive agenda to address longer-term challenges including governance, economic growth, and security sector reform. The next year offers an opportunity to pivot away from the mutual disappointments after the referendum to restore and update America’s partnership with Iraqi Kurds.

The rationale for U.S.-KRG engagement is shifting but remains compelling. Both sides today are reconsidering the nature and extent of their ties. The U.S. refusal to assist peshmerga forces routed from Kirkuk taught Iraqi Kurds a painful lesson about the limits of Washington’s support beyond the counterterrorism fight. The United States in turn saw the limits of Kurdish loyalty when leaders in Irbil ignored Washington’s pleas to delay the 2017 independence referendum and then opposed the U.S.-backed bloc in government formation.⁸ Meanwhile, events on the ground foreclosed the hope among some hawkish U.S. policymakers that an independent Kurdistan could serve as a forward operating position for military or intelligence operations against Iran.

Still, Iraqi Kurds remain among the most pro-American publics and political elites in the Middle East. Despite the lessons of Iran’s successful coercion in Kirkuk, there remains cause to hold out cautious hope that future U.S.-Irbil cooperation might find opportunities to shape Iraqi politics away from domination by militias or Iran. Deep and abiding U.S.-KRG security and intelligence ties provide a source of ballast to weather political differences past and future.⁹ Moreover, Iraqi Kurdistan, much like Iraq itself, remains at the forefront of at least three region-wide struggles that matter to U.S. interests:

• Counterterrorism: The fight against IS and its successors inside Iraq is ongoing and will likely persist and flare up again.¹⁰ U.S. counterterrorism partners will need support to maintain their capacity. The KRG’s peshmerga and intelligence services remain willing and able U.S. partners, with fewer political constraints and contingencies than the rest of Iraq.
• Coexistence: The KRG, and Iraq as a whole, remain at the epicenter of a region-wide struggle for different religions, sects, and ethnicities to live peacefully together. Continued U.S cooperation with both sides can help prevent large-scale Arab-Kurdish conflict and help restore what remains of the small, IS-ravaged Yazidi, Christian, and other minority communities of the Nineveh plains. Iraqi Kurds also host 1.5 million refugees and displaced Iraqis, making them a key humanitarian partner.
• Competition to prevent Iranian domination: The loss of Kirkuk forced Iraqi Kurds to reckon with Iran’s growing power across post-IS Iraq. The KRG—like U.S. partners across the Middle East—is hedging its bets in the face of a shifting balance of power and uneven U.S. engagement. Iran is attempting to divide and dominate Iraq, hollow out its sovereign institutions, and empower militias. If the United States hopes to push back, it must engage and compete for influence, particularly with longtime U.S. partners such as the Kurds. The United States should help the KRG maintain a peshmerga force primarily to fight jihadist terrorists, but also to discourage aggression from Shiite-dominated militias and engage in local self-defense. Doing so without encouraging conflict between U.S.-backed forces will be challenging but essential.

The KRG’s role in rising to these challenges depends on its internal stability, which requires updating its political and economic order to respond to the needs of the next generation. Nearly two-thirds of the KRG’s population is younger than 30 years old.¹¹ Lower oil prices and a growing population mean that they will not be able to look to oil-fueled government patronage as their parents did. Meanwhile, the KRG’s electoral institutions—like Iraq’s as a whole—reflect a struggle to deliver effective governance and accountability. Kurdish parties’ recent track record of peacefully sharing power represents an achievement worth building on, but that same continuity can block essential reforms and progress. In the years ahead, Iraqi Kurdistan could emerge as a flashpoint of conflict among its parties, with Baghdad, or with regional neighbors. If its leaders make tough choices now, however, the KRG could finally live up to its international reputation as an open, dynamic buffer against regional trends toward extremism, ethno-sectarian hatred, self-serving elite stagnation, and inevitable popular upheaval.

Since 2014, the KRG has faced a cascade of crises:

• The terrorist army of IS threatened to overrun Kurdish cities and ravaged nearby communities.
• Oil prices collapsed, along with revenue-sharing arrangements with Iraq’s central government.
• Harsh blowback over a long-promised referendum on independence included the loss of the Kirkuk and its surrounding oilfields—both pillars of a future Kurdish state.
• Deadly clashes occurred with Iraqi Security Forces and militias in Iraq’s disputed territories.
• Baghdad, Iran, and Turkey put in place a regional economic embargo.¹²
• A deep rupture in trust in U.S.-Kurdish relations occurred under a new U.S. president.
• Iraqi Kurds suffered through their most severe factional disputes in two decades and saw any near-term hopes of achieving statehood scuttled.

Kurdish leaders barely managed to stave off even worse outcomes including intra-Kurdish violence, political collapse, or outright war with Baghdad. Kurdish leaders expressed relief at a respite from what one KRG official called “a dark tunnel” and another described as “plodding through a shitstorm.”¹³

This report draws on field research in Irbil and Sulaymaniyah in late October 2018, including the author’s interviews with senior Iraqi Kurdish political, security, and economic officials, business people, civil society leaders, and university students, to consider the choices confronting Iraqi Kurds and U.S. policymakers.

Major Kurdish parties have re-established their hold

Paradoxically, Kurds’ traumatic loss of Kirkuk to Iraq’s central government seems to have further entrenched the two main KRG parties, the Irbil-based Kurdistan Democratic Party (KDP) and the Sulaymaniyah-based Patriotic Union of Kurdistan (PUK). The two major parties—each transitioning from the larger-than-life leadership of an elder generation—can claim control over a region of Kurdistan, an extensive patronage base, businesses, media channels, and peshmerga paramilitary units that report to party leaders. In recent elections—whose results and turnout figures several Kurdish leaders disputed—the KDP won 45 seats in the KRG parliament, compared with just 21 seats for the PUK. Opposition parties failed to capitalize on economic discontent, with the Gorran Movement running a distant third with just 12 seats and the New Generation Movement and Coalition for Democracy and Justice even further behind.¹⁴

Iraqi Kurdistan’s two major parties, despite the setbacks they oversaw in late 2017, both appear to have consolidated their political positions. As one Kurdish scholar told the author of this report, the loss of Kirkuk actually creates a rally-around-the-flag effect: “You see Iraqi militias in Kirkuk and you cling to your Kurdism.”¹⁵ Meanwhile, the reform-minded Gorran party emerged from elections severely weakened, while the upstart New Generation Movement has yet to emerge as a potent political force.¹⁶ As one longtime observer noted, the shock of losing Kirkuk reduced Kurdish politics “to its elemental core.”¹⁷ With twice as many seats in Kurdish parliament as the PUK, the KDP has a commanding position from which to form the next government. The KDP is set to accept the PUK inside the next government, but “on [KDP] terms”¹⁸—meaning consistent with the allocation of seats rather than as equal partners. The KDP may also bring in the reformist Gorran party as a check on the PUK.

Beneath the calm, uncertainty over the future

It will take more than the swearing-in of a new Kurdistan Region parliament and government to address the deterioration of the region’s electoral institutions in recent years. Steps such as the disbanding of parliament, the extension of a KRG president’s electoral term, and the failure to share power with the reformist offshoot Gorran party exposed underlying weaknesses in Iraqi Kurdish democratic politics.¹⁹ Bitter, zero-sum competition between the KDP and PUK can stand in the way of political progress and creates openings for outside manipulation. Meanwhile, Kurds young and old, inside and outside the KRG’s elite bargain, described youths’ disengagement from politics and sense of disempowerment in the face of the consolidated political, economic, military, and media power wielded by the two major Iraqi Kurdish parties in the areas they control.²⁰ Demonstrations over the past year were harshly repressed. One Kurd pointed out that the official voter turnout—which he considered artificially inflated—was roughly equal to the number of Kurds receiving government salary, suggesting a lack of support beyond direct patronage.²¹ Such vested interests make the kinds of reforms that would better serve citizens extremely difficult to carry to completion. As senior PUK official Mala Bakhtiar memorably downplayed the stakes of Kurdish elections, “”Even if we win only one seat, we are the PUK. We are armed. Nobody can disarm us.”²²

While party elites compete for power, the upcoming generation is the most educated Iraqi Kurdistan has ever seen. Ninety-three percent of 18-to-24-year-olds can read and write.²³ In interviews with the author, Iraqi Kurds young and old described a young generation caught in the middle of major societal shifts that have yet to fully play out. Youths find themselves stuck between a public sector patronage system that is too overextended to provide them the security it gave their parents but formidable enough to crowd out independent private enterprise. And they are no longer sure of their role in previous generations’ storied struggle for national liberation but are struggling to find their place in entrenched Kurdish power structures and an as-yet-undefined political future inside Iraq.

The KRG is still unlikely to face the kind of rioting seen in Basra, Iraq, where clashes with security forces broke out due to widespread shortages of water and electricity.²⁴ By contrast, Kurdistan’s close-knit societal context; the lack of a Kurdish equivalent to Shiite populist leader Muqtada al-Sadr ready to convert popular disaffection into political power; budgetary relief due as oil prices rebound from previous depths;²⁵ money coming in from Baghdad; and significant gains in standards of living over the past two decades that reflect achievements of Kurdistan’s political system. However, an analysis focused only on elite jockeying and bargaining misses important societal dynamics that will shape Kurdish politics and stability in ways that merit watching.

The incoming KRG is signaling reforms

With dreams of independence on the backburner, figures such as KRG’s Prime Minister Nechirvan Barzani, who was nominated by KDP leadership to replace his uncle Masoud Barzani as KRG president, and Deputy Prime Minister Qubad Talabani make a compelling case that the major political project for the next KRG should be improving governance via reforms. Both have spoken of plans to streamline and professionalize Kurdistan’s oversized public sector, using biometrics and e-salaries to remove graft.²⁶ Such reforms are necessary to keep the KRG solvent. By one official’s estimate, 70 percent of the KRG’s budget went to direct payments to citizens through salaries, subsidies, and other payments, crowding out both investments in infrastructure and private sector-led growth. Kurdistan’s debt, estimated at $17 billion last spring, may now be higher than its gross domestic product.²⁷ It remains to be seen how and whether Masrour Barzani, who was recently nominated by the KDP to become KRG’s prime minister after serving as its security chancellor, takes ownership of these reforms in his new position. While streamlining spending will be painful, being branded a reformer may have political appeal. Deputy Prime Minister Talabani, who has spearheaded technocratic reform efforts, rode pledges of stability, services, and jobs—as well his prominent lineage as the son of Iraq’s first postwar president—to become the top individual vote-getter in recent KRG elections.²⁸

As economic crises abate, private sector growth remains elusive

One year ago, the KRG economy faced an embargo as Iraq’s central government worked with its neighbors to close airports and borders as punishment for the Kurds’ independence referendum. Meanwhile, a lack of oil revenue from Baghdad exacerbated a massive KRG debt load. Today, the embargo has been lifted, oil revenues are coming into KRG coffers, Russia’s Rosneft has bought into the KRG’s oil industry, and an agreement has been reached between Irbil and Baghdad to boost exports. Kurdish business leaders report an uptick in real estate development and restarting of construction on other large investments shelved amid plunging oil prices and the war against IS.²⁹

It remains an open question, however, whether the KRG can capitalize on its improved security and hoped-for reforms to attract investment and create private sector jobs. Multiple Kurdish officials interviewed spoke of their aspirations to jump-start job-intensive sectors rather than simply relying on fluctuating oil revenues and the government spending it allows.³⁰ But the reality is that the KRG’s economy remains heavily dependent on spending from oil revenues—both directly from formal and informal KRG exports and indirectly via revenue payments from Iraq’s central government.³¹ An estimated 60 percent of Kurdistan’s economy comes directly from government spending.³²

Several Kurdish officials mentioned reviving KRG agricultural produce, pointing to the Kurds’ lush farmland and past role as Iraq’s breadbasket before Saddam Hussein’s forced urbanization campaigns and the United Nations’ Oil-for-Food program decimated local farming.³³ Challenges include the dumping of surplus fruits from neighboring Iran and Turkey, cumbersome land ownership regulations, and the need to encourage individual entrepreneurship after years of state-directed, monopolistic farming. If Kurds can figure out how to surmount the double taxation of payoffs required at militia checkpoints into the rest of Iraq, then Iraq’s 40-million-person domestic market could present opportunities. KRG officials also hope to attract Iraqi and eventually international tourists to Kurdistan’s religious shrines and mountains. Finally, working with Baghdad to create a functioning banking sector, as the KRG is now doing with U.S. support, would remove a major constraint to Kurdish inward investment and entrepreneurship.³⁴

Skeptics—including those within Kurdish institutions—note that many powerful actors are invested in political and economic self-preservation, and their zero-sum competition risks swallowing reform efforts.³⁵ The United States has the U.S. Agency for International Development (USAID) and State Department-led programs, which focus on service delivery and provide a great deal of humanitarian support.³⁶ While additional funds are unlikely, the United States can and should use its bully pulpit as well as the technical expertise and advice available from the international community to assist KRG officials who demonstrate political will to modernize and reform their government. For example, the United States could invite the next KRG president, prime minister, and deputy prime minister to Washington to sign a memorandum of understanding that seeks to define the next phases of U.S.-Kurdish strategic partnership, with a special emphasis on delivering on the reform agenda proposed by the incoming government.³⁷

Opportunities for cooperation with Baghdad

The incoming KRG government also has an opportunity to work with the incoming Iraqi government. The appointments of Iraqi President Barham Salih and Finance Minister Fuad Hussein give Kurds multiple champions within Iraq’s central government. But lingering partisan resentments over President Salih’s election show the Kurds’ challenge of overcoming divisions to speak with one voice in Baghdad.³⁸ Kurdish and Iraqi leaders have now agreed to resume Kirkuk oil exports, which builds goodwill and creates additional funds to help Baghdad and Irbil reach terms on revenue sharing.³⁹ During the yearlong standoff between the Iraqi government and the KRG over halted oil exports, a net revenue loss estimated at $8 billion ensued.⁴⁰ And on friendly recent visit by former KRG President Masoud Barzani to Baghdad, Iraq’s prime minister also expressed optimism that a deal to harmonize customs collections—removing another obstacle to commerce with the KRG—could soon be reached.⁴¹

The next hurdle in a sequence of increasing difficulty would be security cooperation along the disputed boundaries between Kurdish peshmerga and Iraqi Security Forces, as well as Shiite militias that could spark further conflict. Iraqi military and militia forces are in a far stronger bargaining position on the ground than when past agreements were struck, but the basic problem remains that IS exploits fault lines in disputed areas between Kurdish peshmerga and Iraqi Security Forc