A landmark flight from Baghdad that touched down in February 2013 at Kuwait International Airport looks set to usher in a new era of stronger economic ties between the two Gulf neighbours. The resumption of direct air travel between Iraq’s capital and Kuwait, which is building on a steadily rising flow of traffic between the two countries, is good news for business leaders. The arrival of the Iraqi Airways Airbus 320 in Kuwait on February 27, 2013 signalled the continuation of regular air links between the two countries after a break of more than two decades dating back to the 1990-91 Gulf War. Kuwait-based Jazeera Airways first resumed air travel between Kuwait and Iraq in April 2012 when it began flying to and from Al Najah International Airport. Relations between the countries, which have warmed considerably over the past year, moved up a level in January when the Kuwaiti parliament agreed to a compensation payment of KD142m ($498m) from Iraq for damage and losses incurred by its national carrier Kuwait Airways during the invasion and occupation. Kuwait initially sought up to KD340m ($1.2bn) to cover the loss of 10 aircraft and ground-based equipment in a reparation claim that dragged on long after a number of other disputes dating back to the era of Saddam Hussein had been settled. Its willingness to accept a lower figure is seen by many as an indication that Kuwait is keen to open up to Iraq and explore new business links with its neighbour. In a reciprocal move, Kuwait Airways has indicated it is considering resuming flights to Iraq. The airline plans to add to its fleet ahead of a proposed partial privatisation by buying or leasing up to 21 new aircraft over the next two years, which will enable it to serve new routes.

LAYING THE GROUNDWORK: In addition to the compensation payments discussed above, the resumption of flights is a direct result of increased cooperation between Baghdad and Kuwait City. Both governments have worked to boost diplomatic ties in recent years, for example. In early January 2011 Sheikh Nasser Mohammad Al Ahmad Al Sabah, then prime minister of Kuwait, visited Iraq for the first time since the 1990-91 Gulf War. The visit was widely thought to signal the beginning of a period of cooperation between the two countries. Since then a series of events have further strengthened the relationship. In mid-April 2013 Iraqi government officials and business leaders visited Kuwait as part of a trade delegation hosted by the Kuwait Chamber of Commerce and Industry. Later that same month the Gulf Studies Centre at the American University of Kuwait hosted a seminar entitled “Kuwait and Iraq Together Towards a Bright Future”, which brought together officials, academics and business leaders from both countries. Then, in mid-June 2013 Kuwait’s current prime minister, Sheikh Jaber Mubarak Al Sabah, flew to Baghdad to meet with Nouri Al Maliki, Iraq’s prime minister. In addition to discussing outstanding Gulf War-related issues, the two premiers signed bilateral agreements on topics including economic cooperation, education and the environment.

ASSET AGREEMENT: One key outcome of the meeting was a petition, signed by both countries, requesting that Iraq be released from UN Chapter VII sanctions, which have been imposed on the country since 1991. Under the sanctions all Iraqi assets in international banks were frozen, and the UN took on a central role in budgeting and the development of economic policy. In July 2013, as a result of the joint petition filed the previous month, the UN Security Council voted unanimously to release Iraq from its Chapter VII obligations. Consequently, according to data from Iraq’s central bank, the government stands to collect around $82bn in previously frozen assets, and it will once again be allowed to control its own economic development and financial affairs. With this in mind, Iraq expects to pay off all its debts – including, as of mid-2013, an additional $11bn owed to Kuwait – by 2015.

These recent developments bode well for further economic cooperation between Iraq and Kuwait. Iraq is increasingly considered to be a key investment destination among Kuwait’s business community. Under Iraq’s Investment Law No. 13, which was amended in 2009, the country offers a number of incentives, including 100% foreign ownership, exemption from certain taxes and a three-year import duty holiday, among others. In addition to the hydrocarbons sector, which is widely regarded as a lucrative area for foreign investment, Iraq’s National Investment Commission has identified a handful of other sectors that would benefit from investment, including agriculture, manufacturing, health care, construction, telecoms and education.

With these benefits in mind, a number of Kuwaiti firms are in the process of expanding their activities in Iraq, including telecommunications giant Zain and finance house National Bank of Kuwait (NBK), which are both well established in the Iraqi market through their local majority-owned subsidiaries.

STOCK SALE: Zain Iraq plans to launch an initial public offering (IPO) on the Iraq Stock Exchange (ISE), which will see the parent company sell off 25% of its 76% stake in the Iraqi operation. The sale forms part of the conditions of Zain’s licence agreement, although the Kuwaiti firm will retain a controlling interest in the mobile phone service provider, which made a profit of KD104.9m ($368m) in 2012. Some of the proceeds from the IPO are expected to be used to expand Zain Iraq’s operations, which could include obtaining more bandwidth for 3G services. The IPO, which local media reports have said will likely be concluded by the middle of 2013, should attract plenty of interest, with observers expecting it to net Zain significantly more than the partial float of its rival, Asiacell, in February. That IPO was the largest in Iraq to date and raised $1.27bn.

GETTING INVOLVED: NBK is also boosting its operations in Iraq through its subsidiary, the Credit Bank of Iraq. In a move seen as key for the expansion of the ISE, Credit Bank was given authorisation in January 2013 to act as a custodian bank, permitting it to manage settlements, receive or deliver securities purchased or sold and report on clients’ marketable securities and funds. NBK, which holds an 80% stake in Credit Bank and is acting as advisor to Zain, will be well placed to take advantage of the expected rise in activity on the ISE, which is likely to be fuelled, in part, by the Zain IPO.

Kuwait Energy is also participating in the Iraqi economy, laying the groundwork to develop blocks in the south of the country. In a recent interview with news agency Reuters, the company’s CEO, Sara Akbar, said maintaining close ties with the central government in Baghdad was key to the firm’s operations. “From an economic point of view, it is a very logical project that will tie the two countries together,” she said.

Even though unrest in Iraq still gives cause for concern, the country’s outlook is promising, with the IMF forecasting growth of 14.7% this year, up from 10.2% in 2012. Kuwaiti businesses, aware of their neighbour’s development and improved bilateral relations, are in a favourable position as Iraq edges towards greater participation in the regional and the international market.