Iraq’s government was long in the making, but its inclusive nature and the way in which it was formed offer hope that it can make progress in the struggle between Arabs and Kurds. The conflict, which has left a devastating imprint on the country’s twentieth-century history, could cause political paralysis or, worse, precipitate Iraq’s break-up. Coalition partners have a unique opportunity to make headway. Failure to seize it would be inexcusable. Both sides should build on the apparent goodwill generated by efforts to establish a government to lay the foundations for a negotiated and peaceful settlement. In particular, they should immediately resume talks over the status of Kirkuk and other disputed territories. They also should use their January 2011 agreement to export Kurdish oil through the national pipeline as a basis for negotiations over a revenue-sharing law and a comprehensive hydrocarbons law.

As protests throughout the country have shown, Iraq is not immune from the revolutionary fervour that is coursing through the Middle East and North Africa. Nor should it be, as successive governments’ inability to provide essential services, most importantly a steady supply of electrical power, has given rise to legitimate grievances. In what will be an early test for the new government, Prime Minister Nouri al-Maliki will have to find an effective response to protesters’ demands as a top priority, certainly before the arrival of the hot summer months. The same holds true for the Kurdistan regional government (KRG), which has long been buffeted by complaints concerning poor service delivery and widespread corruption. Protests in Suleimaniya in February and March 2011 show it is overdue in taking persuasive remedial action and thus faces the risk of escalating and spreading unrest.

Arab-Kurdish relations remain a tinderbox. In late February, the Kurdistan regional government sent military forces into Kirkuk in a transparent attempt to both deflect attention from events in Suleimaniya and rally the Kurdish population around the supremely emotive issue of Kir­kuk’s status. In doing so, it dangerously inflamed an already tense situation and exacerbated ethnic tensions. This should serve as a reminder of the need for leaders in Baghdad and Erbil to urgently attend to the structural Arab-Kurd fault line.

In joining the coalition government, Kurdish leaders presented conditions on power-sharing and outstanding claims over resources and territory. Maliki says he agreed to most, but to the Kurds the ultimate proof lies in whether and how he fulfils them. It is doubtful that the prime minister can or even would want to satisfy their every demand, and both sides will need to show flexibility in hammering out the required deals – notably on completing government formation, hydrocarbons and revenue-sharing legislation and the delineation of the Kurdistan region’s internal boundaries.

In the past, Crisis Group has argued that Kirkuk should gain special status as a stand-alone governorate, under neither Baghdad’s nor Erbil’s direct control, for an interim period, with a mechanism for ultimately resolving its status, and with a power-sharing arrangement in which political representatives of the main ethnic and religious groups are represented fairly. A deal along these lines appears within reach, and now is the time to pursue it. In January, building on their success in forming the coalition government, Baghdad and Erbil negotiated a tactical agreement on oil exports from the Kurdistan region whose implementation should prove beneficial to both. They ought to take this a step further by starting talks on the range of issues that have plagued their post-2003 relationship.

In June 2009, the UN Assistance Mission for Iraq (UNAMI) set up a high-level task force whose stated goal was to work toward a negotiated solution – initially through confidence-building mechanisms – for the disputed territories, the broad swathe of land from the Syrian to the Iranian border that Kurds claim as historically part of Kurdistan. UNAMI realised full well, however, that the task force was unlikely to make progress in the months leading up to and following legislative elections, so its real objective was to keep the parties at the table until a new government was formed. This period, which lasted a year and a half, has now come to an end; today, the initiative should be invested with new life.

At the core of the territorial dispute lies the disposition of Kirkuk, the name for three separate but overlapping entities – city, governorate and super-giant oil field – that are subject to competing claims. The 2005 constitution lays out a process for resolving the status of Kirkuk and other disputed areas, but it has run aground on profound differences over interpretation and lack of political will. Meanwhile, the situation in the disputed territories has been left to fester. In areas with a rich ethnic mix, such as Kirkuk city and several districts of Ninewa governorate, this has produced strong tensions and politically-motivated provocations aimed at sparking inter-communal conflict.

To prevent small incidents from escalating into a broader conflagration, the U.S. military in 2009 established so-called combined security mechanisms along the trigger line – the line of control between the Iraqi army and the Kurdish regional guard force, known as the peshmergas, that runs along the disputed region’s spine. The mechanisms’ key features are joint checkpoints and patrols involving army and guard force personnel with embedded U.S. officers, as well as coordination centres designed to improve communication and build trust between the two sides. Moreover, Baghdad and Erbil agreed to a set of rules governing the deployment of their respective security forces in these areas.

Together, these steps have reduced tensions, but the security forces’ presence and posture in their designated sectors remind a weary population the conflict is far from resolved. The standoff between the army and the peshmergas in Kirkuk’s environs, in particular, and provocative conduct of the Kurdish security police, the asaesh, inside the city augur trouble for the period after U.S. withdrawal, scheduled for the end of 2011. Events in late February-early March, when peshmerga forces deployed around Kirkuk city over the vehement protestations of local Arab and Turkoman leaders, were another warning that the security situation, relatively stable since 2003, may not hold.

The combined security mechanisms were intended to buy time for negotiations over the disputed territories’ status. So far, measures fashioned to break the deadlock, such as a process to organise provincial elections in Kirkuk, have reinforced it, increasing frustration and mutual recrimination. The impact has not been limited to the immediate area: a nationwide census has been postponed indefinitely because of disagreements over its application in the disputed territories. Without progress, conflict threatens to erupt as U.S. troops prepare to leave Iraq, including positions along the trigger line. This causes anxiety all around, especially among Kirkuk residents, who appear unanimous in calling for continued U.S. military protection.

There are no easy fixes. Although Maliki’s government might seek to negotiate a troop extension, the likelier scenario is that the U.S. troop presence in the north will be severely curtailed if not ended within a few months. UNAMI has begun to explore Baghdad’s and Erbil’s readiness to re-engage on core issues, but delays in filling key government posts, such as the defence and interior ministers, militate against an early resumption of talks.

The U.S. takes the position that its forces are leaving, so Iraqis will have to sort out problems along the trigger line without the psychological security blanket its military presence has provided. It also appears to believe the impending departure itself might concentrate Iraqi minds and produce political will to agree on the disposition of Kirkuk and other territories. That could be a logical wager, but it also is a risky one. At a minimum, the U.S. should provide strong diplomatic and financial support to UNAMI as it prepares for talks, including by making continued military aid conditional on stakeholders’ constructive participation in negotiations and commitment to refrain from unilateral military moves. UNAMI should propose specific confidence-building steps in the disputed territories based on its impressive (unpublished) April 2009 report. In so doing, it should make every effort to involve political representatives from the disputed territories. Both the Maliki and Kurdistan regional governments should encourage economic activity in the territories and, in Kirkuk, impartial use of extra revenue from oil sales on projects benefiting the entire community.

Most of all, leaders in Baghdad and Erbil need to ask themselves: will they be persuaded to pursue a negotiated solution by the realisation they cannot attain their objectives either by letting the matter linger or by using force? Or will they be prompted only by the outbreak of a violent conflict neither side wants and whose outcome they could not control?

Erbil/Baghdad/Brussels, 28 March 2011