On 12 March, Kuwaiti officials registered a complaint at the UN after Iraqis protesting against the demarcation of the joint border near Umm Qasr threw stones at security forces and attempted to undo repairs to border posts.

The protesters claimed the new border line, based on a 1993 UN Security Council demarcation, cut through several Iraqi-owned farms. Although they targeted their wrath at Iraqi security guards, Kuwaiti border guards believed they were being targeted and opened fire. Iraqi police also fired shoots to disperse a group of Kuwaitis protesting near the disputed border.

Although no casualties were reported, the conflagration highlights the tortuous progress of re-establishing solid bilateral relations between two countries whose modern history has been a by-word for antagonism.

Bones of contention

For every step forwards – such as Kuwait’s recent indications that it would be prepared to reinvest Iraq’s war-related compensation payments in economic development in the Basra region – there have been two steps back, as long-standing tensions resurface.

Creating a lasting relationship of equals between the two states that share the narrow waterway at the head of the Gulf, is likely to continue to prove a struggle.

Dealing with the aftermath of the Gulf war remains a festering sore for both sides. Kuwait has taken a robust line towards Baghdad over reparation and compensation. State carrier Kuwait Airways instructed lawyers to impound an Iraqi Airways plane in April 2010 as it made its first scheduled landing in London in two decades. Kuwait claims damages caused by Saddam Hussein’s troops during the 1990-91 invasion, when 10 of its planes and aircraft parts were seized.

In May 2011, a more serious bone of contention emerged, as Kuwait started construction of a major deepwater container port, Mubarak al-Kabir, at Bubiyan Island. Iraq was also attempting to build its own deepwater port at Al-Faw. Baghdad saw Kuwait’s plan to build a massive logistic hub, with a port capacity of 2 million 20-foot equivalent units, in such close proximity as a challenge to its hopes  to attract investment into the south, potentially stifling its economic recovery. 

Mubarak al-Kabir became a trigger for violence. In July 2011, soon after building work on the Kuwait terminal began, two Katyusha rockets were fired into the Green Zone in Baghdad near the Kuwaiti embassy. Days later, a Shia militia, Kataeb Hezbollah, issued a warning to project contractor Hyundai Engineering & Construction of South Korea to halt work at the port, accusing Kuwait of seeking to strangle Iraq economically. Despite growing business ties between Kuwait and Iraq, they are still clearly hostages to fortune.

Unlike most other regional states, Kuwait and Iraq have independent legislatures with a reputation for speaking out. This can make corporate and political cooperation more challenging, say analysts. “Both have parliamentary systems where people denounce actions very quickly. This removes the freedom of manoeuvre from governments as they risked being outflanked by political movements,” says Kristian Coates-Ulrichsen, a Gulf expert at the London School of Economics.  

Both sides have areas on which their nationalist constituencies are unwilling to compromise. For Kuwait, it is Gulf war compensation and people missing from 1991. For Iraq, it is its removal from Chapter 7 restrictions at the UN – which froze some of the country’s financial assets – and the issue of payments to Kuwait, which currently absorb 5 per cent of Baghdad’s crude sales.

By 2012, Iraq had paid about $27bn in reparations. Baghdad claims just $13bn remains to be paid. Until that is resolved, it cannot emerge from Chapter 7. Iraqi calls to write off the tens of billions in debt and reparations have been dismissed by Kuwaiti MPs.

Warming relations between Kuwait and Iraq

Despite these major sticking points, the past year has witnessed a warming in bilateral relations. Kuwait’s Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah was the only GCC head of state to attend the Arab League Summit in March 2012 held in Baghdad. Iraq’s Prime Minister Nouri al-Maliki – distrusted by Gulf political leaders – has visited Kuwait for high-level talks in the past year.

With increased revenues into the exchequer, as crude output rises above pre-Saddam levels, Iraq has made greater efforts to settle outstanding compensation claims with Kuwait. 

The atmosphere is now far more conducive for cooperation. In December 2012, while visiting Kuwait, UN Secretary-General Ban Ki-Moon said he was encouraged by the country’s recent progress in relations with Iraq, stating that the two nations had a “historic” opportunity to begin a new era of cooperation.

That same month, Kuwait Airways dropped its legal claims against Iraqi Airways in return for compensation of $500m paid by Baghdad.

The encouraging diplomatic noises have been accompanied by Iraq’s efforts to afford Kuwaiti investors red carpet treatment.

Of all the Gulf states, Kuwait has been the most prominent investor and trading partner with Iraq, building on long-standing commercial relationships that go back centuries.

Kuwait’s ruling Al-Sabah family was once one of the largest landowners in Basra and the Shatt al-Arab area, holding sizeable date plantations. These contributed significantly to Kuwait’s economic development in the years before the discovery of oil.

The investment was not unidirectional. Leading Basra merchant families also established branches in Kuwait.

“Iraq is a magnet for strategic investors and those who understand it well. And the Kuwaitis understand Iraq very well,” says Suha Najjar, founder of Akkadia Partners, an Iraqi investment advisory firm.

Kuwait is a major investor in Iraq, led by Zain – Iraq’s largest telecoms operator – National Bank of Kuwait (NBK) and Kuwait Projects Company (Kipco). Zain Iraq is this year planning to follow rival Gulf-owned mobile operator Asiacell with an initial public offering. Boasting a market share in excess of 50 per cent, Iraq makes a sizeable contribution to Zain’s corporate coffers, accounting for 13.7 million of the group’s 42.7 million total customer base at the end of 2012. Iraq is also the source of 35 per cent of consolidated group revenues.

Cross-border investments

Kipco Group also boasts extensive investments in Iraq covering banking, insurance and media sectors. Overall, Iraq accounts for just 4 per cent of group revenues, but this could rise as expansion is on the agenda.

In 2011, Kipco affiliate Gulf Insurance Company acquired a 51 per cent stake in Dar es Salaam Insurance in Iraq, attracted by the market’s mix of high population density and low levels of insurance penetration.

Another Kipco affiliate, Burgan Bank, holds a 52 per cent stake in Bank of Baghdad (BoB), which operates Iraq’s largest network with 34 branches. BoB accounted for nearly 6 per cent of Burgan Bank group loans last year. 

NBK is a further Kuwait financial institution with a sizeable Iraqi footprint through its 80 per cent holding in Credit Bank of Iraq. In February 2013, the bank announced a breakthrough by offering its clients custody services for Iraq Stock Exchange-listed shares – potentially paving the way for larger institutional funds into Iraq.

Meanwhile, exploration and production firm Kuwait Energy made a strategic entry into Iraq in the 2010 oil and gas licensing round, acquiring the Siba and Mansuriya gas fields, in which it has 45 per cent and 22.5 per cent stakes respectively. Production from Siba and Mansuriya is on track to start in the first half of 2014, with the company planning to spend $400m over the next two years in well drilling and pipe laying.

With Kuwait’s consumption of natural gas exceeding supply, there is scope for Kuwait Energy to send Iraqi gas south of the border, from the non-associated Siba field in Basra province. This is a long-term ambition, says Kuwait Energy’s chief executive officer Sara Akbar. The priority for now is to supply Iraqi power stations.

“Power demand in Iraq is huge and all the gas we will be producing from Siba and Mansuriya will be consumed inside Iraq,” she says.

Kuwait Energy aims to bid in future licensing rounds. “Iraq is one of best productive areas in the world, operations there are becoming smoother and more streamlined, with improvements in logistics and manpower,” says Akbar.

In time, she expects Iraq to emerge as the largest portion of the company’s portfolio. Late last year, the firm picked up an oil block straddling the border with Kuwait, where it plans to spend $125m in developing the asset.

Kuwait Energy’s strategy of investing in Iraq – steering clear of the politically sensitive Kurdistan Regional Government-controlled areas – is helping to bolster bilateral ties with Baghdad, both commercially and politically.

“Kuwait Energy is spearheading the relationship between Kuwait and Iraq and we hope to develop economic ties between the two countries,” says Akbar. “Because we are from the region, we understand the mindset of Iraq – there are no culture barriers for us.” 

Joint progress

Investment opportunities are just one side of the equation; just as vital is Iraq’s potential as a market for Kuwait’s goods and services. Kuwait’s non-oil exports to Iraq are still minimal, amounting to just KD24m in 2010, the last year for which figure are available. This is down from KD37.7m in 2009, so there is room for growth.

“In Iraq, you will find gross domestic product growth rates that you won’t see anywhere in the world,” says Najjar. “Income standards have increased six-fold within the past five years. When the US invaded, the Iraq economy was about $30bn – now [its] a $130bn economy.”

The opportunities for joint economic projects that benefit both sides are ample – but then so are the risks. Kuwait’s willingness to engage with the Al-Maliki government on both political and commercial levels suggests it has a greater risk appetite than some of its GCC neighbours – but there is a long road before the Gulf emirate is in step with its larger, rehabilitating northern neighbour.