Mosul's Takeover Increases Risks Of Civil War

BMI View: Risks of a return to civil war in Iraq increased significantly as radical Islamist group ISIS took over northern city of Mosul. The Iraqi army will have to engage in a protracted fight before it can retake the city, and ISIS will come out of its takeover of Mosul significantly more powerful as a result. The takeover will result in increasing risks to regional stability, and Iraqi Prime Minister's Nouri al-Maliki will likely lose much of its political clout as a result.

Risks of a return to civil war in Iraq have increased significantly following the takeover by radical Islamist militants of the northern city of Mosul - the country's second largest urban centre - on June 10. Hundreds of armed men linked to the radical Jihadist organisation Islamic State of Iraq and the Levant (ISIS) seized local government's offices and police stations before taking control of the airport and the army's headquarters. Militants reportedly seized military hardware, including helicopters, and stormed the Badousha prison. Iraqi security forces suffered a dramatic collapse of morale, despite outnumbering ISIS fighters by more than 15-to-1.

The occupation of Mosul represents a threat to Iraq's fundamental stability. We have decreased Iraq's short-term political risk ratings from 36.9 to 35.2 out of 100, owing to a deterioration in the "policy-making process" and "security" subcomponents. Risks that the country will fall back into full blown civil war have increased significantly as a result.

Kurdistan At Risk From Mosul's Takeover
Iraq - Map

BMI View: Risks of a return to civil war in Iraq increased significantly as radical Islamist group ISIS took over northern city of Mosul. The Iraqi army will have to engage in a protracted fight before it can retake the city, and ISIS will come out of its takeover of Mosul significantly more powerful as a result. The takeover will result in increasing risks to regional stability, and Iraqi Prime Minister's Nouri al-Maliki will likely lose much of its political clout as a result.

Risks of a return to civil war in Iraq have increased significantly following the takeover by radical Islamist militants of the northern city of Mosul - the country's second largest urban centre - on June 10. Hundreds of armed men linked to the radical Jihadist organisation Islamic State of Iraq and the Levant (ISIS) seized local government's offices and police stations before taking control of the airport and the army's headquarters. Militants reportedly seized military hardware, including helicopters, and stormed the Badousha prison. Iraqi security forces suffered a dramatic collapse of morale, despite outnumbering ISIS fighters by more than 15-to-1.

The occupation of Mosul represents a threat to Iraq's fundamental stability. We have decreased Iraq's short-term political risk ratings from 36.9 to 35.2 out of 100, owing to a deterioration in the "policy-making process" and "security" subcomponents. Risks that the country will fall back into full blown civil war have increased significantly as a result.

We believe that the ISIS attack on Mosul poses no immediate threat to oil production. That said, further escalation poses increased security risks to energy infrastructure, and we flag that further military intrusions into Kurdistan or the south could disrupt oil production. ( see 'Growing Risks Of Disruption Following Mosul's Attack, June 11). Moreover, both domestic and foreign investment will likely decline significantly as a result of increasing political risks, and consumer spending and fixed investment will be hard hit. We are waiting for further developments before decreasing our 2014 real GDP growth forecast.

ISIS's takeover of Mosul will pose a particularly significant security threat to the semi-autonomous Kurdish region. Mosul is just 90km from Erbil, and many Kurds live in or around eastern Mosul. We have long believed that the Kurdistan region will outshine the rest of the country in terms of investment potential over the next few years owing to a better security and business environment. However, investors will adopt a wait-and-see approach as long as the Nineveh region is in ISIS's hands, and risks to the Kurdistan's macroeconomic outlook are firmly tilted to the downside as a result.

Kurdistan At Risk From Mosul's Takeover
Iraq - Map

Protracted Fighting Ahead

The takeover of Mosul highlights the depth of sectarian tensions in Iraq. Mosul is the political and economic capital of the majority-Sunni region of Nineveh. Iraq's Sunni minority has felt increasingly marginalised by Shi'a Prime Minister Nouri al-Maliki's allegedly authoritative style of governing over the past few years. This feeling of marginalisation provided fertile territory for ISIS in the occupation of the cities of Fallujah and Ramadi in the Western province of Anbar - a traditional stronghold of radical Sunni militants - since December ( see Oil Production Elevated Despite Increasing Violence, February 11).

The government's attempts to regain control of Mosul will be protracted and the outcome is far from certain. We expect the Iraqi government to use every resource at its disposal to quell the insurgency, including the support of the Peshmerga force, the semi-autonomous Kurdistan's region infantry force. Iraqi officials suggested that the collaboration between Sunni tribal leaders and the US military which quelled an insurgency in 2007 might be used as a template to retake Mosul. However, this tactic will likely be much less successful this time, given increased tensions between Sunnis and Shi'as. Moreover, despite the Iraqi army's heavy armour and around a million enlisted men, its capabilities in operations for urban warfare are much weaker. Also, the Iraqi army runs the risk of overreaching by committing forces in Mosul given the growing number of major ISIS assaults in Baghdad and other cities.

Significant Regional Implications

The scale of the attack on Mosul suggests a further erosion of the border between Iraq and Syria. ISIS is one of the major groups fighting against the Syrian regime of Bashar al-Assad, and the organisation has seized large swaths of eastern Syria and parts of Iraq as it is trying to set up an Islamic emirate. Even if ISIS is unable to maintain its hold on Mosul, its looting of the city's resources will strengthen its hand in its fight against more moderate rebels fighting the regime in Syria. We believe that the group will come out of its takeover of Mosul significantly more powerful as a result.

The US State Department said on June 10 that the United States will provide the necessary assistance to the Iraqi government in its war against terrorism, and announced the imminent arrival of US Assistant Secretary of State to Baghdad to discuss the security file for the provinces of Anbar and Nineveh. The international community's failure to intervene in the Syrian civil war indicates that the appetite for involvement in another war in the Middle East is minimal, and we believe that the US's involvement will be limited to assistance and training.

That said, the takeover is testament of ISIS's growth from an outfit capable of little more of isolated attacks to a group capable of challenging the Iraqi central authorities. Should ISIS maintain control of Mosul and be able to establish a de-facto state between Syria and Iraq, potential for an external military intervention in the two countries would significantly increase.

Significant Risks Of Civil War
Iraq - Short-Term Political Risk Scores, Before (LHS) and After Revision

Takeover A Substantial Blow To Maliki

Maliki's State of Law party obtained a majority in parliamentary elections which took place in April, and he is running for a third term as prime minister. However, he centred his election campaign on improving the security situation, and the takeover of Mosul represents a testament of its failure to pacify the country. We believe that his political clout will be significantly eroded by recent events, while Sunni and Kurd political blocs will seek to gain advantages from their support to the resolution of the crisis. In particular, Kurdish support will likely come at a heavy price, as we believe that Erbil will seek concessions to the Kurds on issues such as the international marketing of KRG oil and revenue-sharing between Baghdad and Iraqi Kurdistan. However, we cannot preclude the risk that Maliki will take advantage of the crisis to reinforce his hold on power, particularly should he perceive Sunnis and Kurds are not doing enough to support Baghdad's counteroffensive in Mosul. Under this scenario, the potential for Iraq to return to civil war would increase significantly.

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Sector: Country Risk
Geography: Iraq
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