Once again, Iraq is in the news. The Western media has interrupted its 24-hour Kardashian coverage to bring stories of fearsome insurgents who appeared from nowhere to launch a relentless offensive toward Baghdad.
The past two weeks have been rife with images and stories of mass executions, geopolitical intrigue and general mayhem. One could be forgiven for thinking that we have slipped through a time warp back into the bad old days of regime change, Rumsfeld-style.
I have been following Iraq for a long time and the only thing I am certain of anymore, is that the obvious explanation is inevitably the wrong one. The latest ISIS (Islamic State in Iraq and the Levant) offensive has accomplished an astonishing amount in just two weeks, having routed the Iraqi army and seized Mosul and Tikrit, notable for being Saddam Hussein's birthplace. To me it all seems too easy – how can this ragtag group of foreign fighters, who have been waging a low-intensity conflict in western Iraq and Syria for the past three years, suddenly overwhelm the Iraqi Army with greater ease than the US 3rd Infantry Division's 2003 "Thunder Run" into Baghdad?
I've spent a fair amount of time slogging through conflict zones, and this isn't the first time that I have doubted the DC-approved narrative on a place that the current White House occupant doesn't like. Longtime readers will recall that in 2012 I was one of the first to openly dispute the Obama Administration's claim that the Benghazi attack was a reaction to an anti-Islamic film, for which I was quickly proven right.
I've grown tired of reading about the issue, and it will be some time before my schedule frees up enough to squeeze in an Iraq trip. Instead, I turned to Suha Najjar of Akkadia Partners, a London-based asset management and corporate advisory firm specializing in Iraq. For the past year she has been managing the Iraq Gate Fund, which deals in Iraqi equities and pre-IPO investments. I met with Suha at Akkadia's Knightsbridge office to discuss her views on current events:
Kevin: Suha, it's a pleasure to see you again. Can you provide us with a brief summary of your personal and work experience?
Suha: Of course. My background is somewhat different; I am Iraqi-Egyptian and am part of the Christian minority in Iraq. I am from Mosul but have lived most of my adult life in the United Kingdom, where I studied economics at Sussex University and the University of London.
After university I joined Flemings, which you may recall was one of the original "emerging market" banks. They were the first British financial institution to enter the Middle East, and they hired me to work as an equity analyst covering those markets. We did a lot of interesting work in those days; for example, we listed the first GDR (Global Depositary Receipt) in Lebanon. I was at Flemings for nearly ten years before moving onto positions at Nomura and National Bank of Kuwait, then a brief tenure with a private equity firm in Egypt, before founding Akkadia Partners in 2011. I normally spend as much as 70% of my time in Iraq with the remainder in London.
Kevin: Tell us about your current company, Akkadia Partners. When did you decide to focus exclusively on Iraq?
Suha: We formed the company in 2011 due to the high growth and surge in listed companies that we were seeing in Iraq. Akkadia has two functional areas; our corporate finance and advisory team works with Iraqi companies wishing to raise capital or with foreign investors seeking to enter the country. Our asset management team manages the Iraq Gate Fund, a long-only fund that invests in Iraqi-listed equities and also has a small mandate for private companies and pre-IPO opportunities. The IGF has been operating for nearly a year now, and we are +8% over that time in absolute terms with relative outperformance of +21% against our benchmark.
Kevin: That's impressive given the ongoing uncertainty and difficulty of doing business there. How have recent events in Iraq impacted business sentiment?
Suha: Our fund's performance was flat in May and we will likely be up slightly in June, barring any further negative events. One of our key positions, Baghdad Soft Drinks [comment: BSD, +101% in 2013, is frequently seen as Iraq's leading investment success story] has held up well since the ISIS offensive began earlier this month. Another of our positions, Bank of Baghdad, dropped to a price of 1.6 dinars (our entry point was 1.4) last week and has since recovered to 1.75. So for the most part the market has priced in the ongoing conflict.
Kevin: Give us your assessment of what's currently happening with ISIS. Is the Western media's portrayal of events accurate?
Suha: First of all, I completely agree that the conventional explanations offered by the media do not make sense. I find it impossible to believe that ISIS is what the media claims it to be. How could this group achieve such astonishing results after fighting inconclusive battles for the past several years. Look, in the Arab world we love to talk about conspiracy theories – if only because our culture is rife with them.
Anyone can dream up these theories, and they are not helpful. So I won't speculate as to who is pulling the levers to enable these events to happen. But I am absolutely convinced that the only way that ISIS could have overcome its adversary so completely is for someone with influence over the Iraqi Army – and likely over the Maliki government – to decree that this offensive must be allowed to happen.
However, I am confident on one thing: speculation of another "Sunni uprising" or of sectarian conflict between Sunni and Shia is simply untrue. This is not a home-grown insurgency; many, if not most, of these fighters are not from Iraq. Most of the bombings and attacks in Iraq – particularly in Baghdad – are not targeted, but seek to maximize collateral damage. For example, look at the recent car bombing in the affluent Karada Market in Baghdad. Both Sunni and Shia visit this area. Or look at the recent ISIS capture of Mosul, which has a majority Sunni population. If the Sunnis in Mosul welcomed ISIS – as the media has led us to believe – then why is the city's indigenous population now homeless? Over 500,000 people – most of whom are Sunnis – fled the city in recent days. Iraqis are not viewing this conflict from a sectarian perspective – only the Western media is promoting this narrative. They do not understand the intricacies of the Iraqi culture, and my experience has been that, in our country, the media often creates more problems than it solves.
Kevin: That last statement is not unique to Iraq! Let's talk about the Kurds in northern Iraq. Last week the peshmerga (Kurdish armed forces) took control of the holy city of Kirkuk, long seen as the rightful capital of Kurdistan. Some say this is a critical step in their road to creating an independent state. Do you agree?
Suha: Here is another point that the media does not grasp. Since Saddam’s fall the Kurds have created a semi-autonomous state in Northern Iraq. There is much rhetoric about "independence", but this is simply a ploy by the [Kurdish president Masoud] Barzani government to maximize Kurdish influence and power with the central government of Iraq.
To put it bluntly, from an economic perspective the Kurds have not previously wanted independence. They are currently allocated 17% of the national budget. Remember that Iraq is one of the richest countries in the Middle East, with daily crude oil output of 3.5 million barrels per day (bpd). The vast majority of that output originates in the super-giant fields of southern Iraq; the Kurdish regions only produce around 120,000 bpd. Political intrigue aside, the powers that be in Kurdistan have done the math and known that they are better off if they tie their fortunes to the central government. However, last week’s seizure of Kirkuk might change this dynamic very quickly.
Kevin: How so?
Suha: Kirkuk and its surrounding areas contain more proven oil reserves than the rest of Kurdistan, and control over that region is going to provide a substantial boost to the KRG oil revenues, with estimates of up to 600,000 bpd routing through the Kirkuk pipeline when it is operating. It’s too soon to tell, but this may change the entire dynamic between the KRG and the Iraqi central government. I also note that, lately, Turkey’s position on an independent Kurdish state seems to be softening. My best guess – and the situation is changing so quickly that this may be outdated by the time you print it – is that we may soon see a deal struck between the Kurds and the Turks, where an independent Kurdistan agrees to route all of its outbound oil transport through Turkey.
Kevin: So then, in your opinion, what is really happening in Iraq right now? If it's not sectarian warfare, what do ISIS – or its controllers – want to accomplish?
Suha: I believe that we are not seeing disruption of equilibrium between the Sunnis, Shia and Kurds, as the media might have you believe. It is my opinion that we are in the midst of a reset of Iraq's borders and interaction within the Middle East.
Kevin: It sounds to me like you're describing a proxy war.
Suha: I really and truly hope that this is not the case, but yes that is what this looks like at the moment. Look, historically Iraq has always been the crossroads of the Middle East. For centuries our cities were the centers of higher education and Arab culture. Now, unfortunately, we remain at the crossroads, but we are the territory that separates two powerful countries – Iran and Saudi Arabia – that are also bitter enemies. We also share a border with Turkey, which is in the midst of a long and bitter conflict with Kurdish separatists in the north.
The commonly held belief in Iraq is that the recent success of ISIS has been facilitated. Again, this idea that the people of Mosul would welcome ISIS with open arms is simply inaccurate. In 2003, after Saddam was deposed many people in Mosul waved pro-Saddam flags and were promptly shot by ISIS. Of course alliances shift in the Middle East all the time, but it is unrealistic to believe that the people of Mosul would spontaneously welcome ISIS into their city.
I believe that the main contributing factor in today's events is frustration and anger toward the Maliki government. He is widely reviled and in my opinion has destroyed Iraq. I hate to say this, but after eight years of Maliki the Iraqi people now believe that they were better off under Saddam. He must go in order for Iraq to improve; unfortunately he won the recent election and may soon be in position to serve another four-year term if he can gain enough seats in our parliament. He is completely corrupt; we have heard many accounts of how, during elections earlier this year, he sent armed troops into election centers to intimidate voters and stuff the ballot boxes.
Love him or hate him, Saddam Hussein was a strong leader and his elimination created a vacuum that has still not been filled. Saddam was a dictator, but when he ruled the people had reliable water, power and infrastructure. All of that stopped when the Americans removed him. Think about how different the Middle East would be today if Saddam had not been forcibly removed. All of the catastrophes of the past ten years in Iraq would not have happened, and it is almost certain that Syria would not have descended into civil war.
Kevin: That's an opinion I've heard many times before. So then, what is your outlook for Iraq – say on a five-year time horizon?
Suha: Despite all of the negative events we have discussed, my outlook for Iraq is quite positive. We may be located in a difficult neighborhood, but we are blessed with a rich history and enormous wealth.
You're well aware of the terrible perception that the world has of Iraq, as a sectarian war zone. I am telling you that this is not the case. I have been very encouraged by the talking I see between Iraqis of different faiths. No one in a position of influence, either in politics or government, truly believes that we are in the midst of a sectarian conflict. Most of the violence you see is perpetrated by the ignorant, who are manipulated by foreign influencers who stand to gain from chaos in Iraq. The vast majority of Sunnis are not supportive of what is happening, even if they hate Maliki.
The world has assumed the worst about Iraq for decades now. You know, when Paul Bremer and the US Coalition Provisional Authority (CPA) ran the country in 2004 they expected the country to break into three parts and governed accordingly. They would issue licenses not at the national level, but based on the three regions – Kurdish north, Sunni central, and Shia south – that fit their worldview. But the country has still held together. Historically Iraqis have always been tolerant of other religious views – most tension today is directly attributable to media manipulation.
You asked for my outlook, and it's this – Maliki must, and will, go. His replacement will have to be a Shia given the country’s Shiite majority and Iran’s influence. I don't yet know who this will be; many people expect to see [cleric Moqtada] al-Sadr assume the role, but he claims that he is retired from politics now. Of course he has made these claims before, so we shall see. Barzani in Kurdistan is regionally strong but does not have sufficient influence in Baghdad to rule. If we could create a real power-sharing agreement with Sunni and Kurdish participation then we will begin to see true and lasting change.
Kevin: What are the key issues that must be addressed in order for Iraq to move beyond its problems?
Suha: Kirkuk is now a top priority. The Kurdish have finally seized it after years of waiting, and they will never give it back. Maliki is too weak to challenge the KRG and some form of agreement must be reached to avoid further conflict over that city.
And of course, ISIS must be neutralized. In order for that to happen, we must learn who is pulling the strings and supporting the insurgents. I am convinced that we will find this out soon. So many players stand to gain from de-stabilizing Iraq; the Kurds have already achieved their primary goal as they now control Kirkuk. The Saudis can prove to their Iranian enemies that they have the ability to influence insurgents in Iran’s backyard. And Iran can use ISIS as leverage in their ongoing nuclear negotiations with the West.
Kevin: Let's talk about daily life for the "average" Iraqi. Do you spend your day dodging drones and car bombs?
Suha: (Laughs) No, definitely not. Of course there is the occasional incident, but for 99% of the population our daily routine is quite normal. The Iraqi people have dealt with a lot since 2003 and I compare their outlook to that of the Lebanese. There are frequently problems in Beirut, but people choose not to worry and focus on living. This is how the "average" Iraqi thinks.
Life in Baghdad can be quite pleasant. Our infrastructure is not that great – we routinely experience power and water shortages, and our roads are in bad shape. Plus, Baghdad drivers have to navigate through numerous checkpoints every day which can be quite frustrating. For the most part though, life there is like any other Middle Eastern city. Upscale neighborhoods like Mansour and Karada are now filling up with cinemas, bars and crowded restaurants. The security situation is much better than it was four years ago; back then people were normally home by 6pm, whereas now it is quite common to stay out until 10-11pm.
As with any large city, there are neighborhoods that should be avoided. But, there are no longer really any "hot" areas in Baghdad as there were in 2006-08. Your "average Iraqi" is relatively wealthy and able to travel; I should point out that both Turkish and Malaysian Airlines have tripled their scheduled flights into Iraq in recent years.
Kevin: Let's talk about the Iraq Gate Fund. What is your investment philosophy and what do you look for when evaluating companies?
Suha: The IGF is a Cayman-domiciled, long-only equity fund. We are approaching the end of our first year of operations, and are up +8% since inception in absolute terms, and +21% against our benchmark index which is the Iraq Stock Exchange index.
We look at the entire stock market, and pay a lot of attention to small-cap stocks, however most of our positions are with banks and industrials. Our investment process is somewhat different to what you will find here in the UK; when analyzing a stock the first thing we look at are the management team and shareholders. If we don't know who controls the stock, we don't invest – period. We are quite particular about whom we choose to work with.
Our second step is to look at the company’s asset base and operating income. We stay away from companies that have significant non-core businesses, unless they make a commitment to divest those assets. Only after these steps are satisfactorily completed will we begin to employ fundamental analysis.
Kevin: So what is your advice to those who may consider taking a contrarian punt on Iraqi equities now?
Suha: Wait until the ISIS threat has been dealt with. Many Iraqi stocks have performed extremely well in recent years, and it may be tempting to buy after a market downturn. I probably shouldn't say this, given that I am seeking new investors for my fund, but I would prefer to see new investors wait until there is less uncertainty in the market. Yes, we may now be at a market bottom – but we could just as easily see a significant move downward if the current conflict becomes more serious. Of course, I would always recommend an investment with the Iraq Gate Fund!
Kevin: Suha, it has been a pleasure. Thank you for your time.
Suha: Thank you.
Suha is an excellent resource on Iraq and on business in the broader Middle East (she and her fund were recently featured in a Financial Times profile on Iraq). With a minimum subscription of USD 250,000 it's mostly limited to institutions; contact me if you would like to be introduced.
I have followed Iraq for years with the knowledge that like most post-war economies, the country needs to make enormous expenditures on infrastructure. However unlike most frontier markets, they have the financial resources to do so and an economic upturn is inevitable. When investing in frontier markets it's relatively easy to predict an economy's direction – the devil is in getting the timing right. Staying in touch with well-connected insiders like Suha is the right way to go about it.
"CNN said that after the war, there is a plan to divide Iraq into three parts ... regular, premium and unleaded." - Jay Leno
Disclosure: As of this writing, I am not invested with the Iraq Gate Fund, either personally or through my firm. I do own shares in certain Iraqi stocks; however, none of my holdings were mentioned in this article.