When, in 2003, a U.S-led invasion ended the decades-long threat that Saddam Hussein posed to Iraqi Kurdistan, Kurds had reason for optimism. For more than two decades, they had run northern Iraq as a state within a state. They received little if any international aid—the United Nations and donor nations insisted on channeling humanitarian assistance through Baghdad—but had nevertheless managed to create a functioning society replete with schools, universities, some small-scale industry, and their own defense force. The Kurdistan Regional Government’s budget was less than one billion dollars. They based its budget on taxation, customs duties from the Ibrahim Khalil/Habur border crossing with Turkey, and some remittances.
Kurds suspected they sat upon huge hydrocarbon resources. While Iraq’s lucrative Rumaila fields were 900 kilometers south of the Kurdish capital Erbil, oil fields on the outskirts of Kirkuk lay just 50 kilometers away from the Kurdish-Iraqi green line, close enough that Kurds could see the glow from the Baba Gurgur oil field and gas flare on the horizon at night.
After 2003, Kurds confirmed what they had long suspected: Their region was relatively rich with untapped hydrocarbon. Their followed a black gold rush. The Kurdish Regional Government sold exploration and development rights over various blocs to international oil companies, and collected advances to support the profligate spending of the ruling families. Corruption abounded. Investors found little recourse in the local judiciary system that answered more to political bosses than to the law. An avalanche of international arbitration cases found against Kurdish authorities. While Kurds expected a windfall, they soon found themselves more than $20 billion in debt, a burden for a region of six million people. Investors meanwhile pulled up stakes and departed for fields less blighted by the corruption and greed of local leaders. Iraqi Kurdish leaders, accustomed to being treated as the centers of the universe by their circles of courtiers, never fully grasped that they needed the oil companies more than the oil companies needed them.
Today, Somaliland has a similar opportunity. International oil companies are increasingly convinced Somaliland has rich reserves, and Somaliland authorities are looking to attract foreign investors.
While oil was ultimately a curse for Iraqi Kurdistan, Somaliland appears well situated to manage and benefit from the windfall. Iraqi Kurdish leader Masoud Barzani and his son (and current Prime Minister Masrour Barzani) always took the attitude L’état, c’est moi. No business can operate in the region without making payments to prominent Barzanis and often taking them or their proxies on as ghost partners. Somaliland, however, has a long history of separating business and politics. In 1991, it was Somaliland businessmen who corralled political leaders to ensure a peaceful and stable system while the rest of Somalia descended into chaos. Today, the richest men in Somaliland are not the politicians but rather the country’s entrepreneurs. Some commercial monopolies or duopolies—especially in telecommunications and banking—may distort the regional economy, but they cannot prevent energy development nor, frankly, do they have any desire to. The net result will be an economy that expands rather than constrains.
Accountability also matters. While Somalia is among the world’s most corrupt states, Somaliland has a record of greater responsibility and is perhaps the cleanest country in the Horn of Africa or, for that matter, the Sahel. In 2019, for example, President Muse Bihi Abdi dismissed two ministers after the auditor general found them complicit in corruption. While critics can point to secrecy surrounding some past administration contracts and press freedom violations when journalists push too hard, the government is broadly transparent with regard to its expenditures. Most importantly, Somaliland’s history of genuinely contested elections encourages accountability. Political opposition does not hesitate to question and shine a light on any alleged impropriety.
Political stability is crucial. To win oil contracts in Somalia, companies must bribe or work through fixers, such as U.S. Rep. Ilhan Omar’s brother-in-law. Somali officials, like Iraqi Kurds, often seek to sell blocs in areas they do not truly control or maintain only a tenuous hold. Somalia President Mohamed Farmaajo likely seeks to stay in power extra-constitutionally in part so he can cash in from what he imagines could be a Somali oil boon. Cutting deals with Russia or China might put money in his pocket, but it does little to alleviate concerns over Somalia’s political instability and terror threats. Somaliland contracts, in contrast, are safe and stable and, with relatively little risk and investment, Somaliland can transport oil and gas from the interior of the country to port.
A windfall after decades of deprivation can be dangerous. Many administrations allow greed and corruption to triumph over good governance and transparency. This in turn leads major energy companies to move on to safer locales with better business environments. That successive Somaliland governments have a history of allowing business to thrive and recognize that true stability depends on the ability of the industry to catalyze development and support a middle class offers more than hope. It makes Somaliland a far safer bet than many recent oil boom examples.
Michael Rubin is a senior fellow at the American Enterprise Institute