Turkey’s military strikes against the PKK in northern Iraq were a tactical and political success.  Applying military pressure catalyzed Ankara’s decision to offer Iraqi Kurdistan political and economic rewards in exchange for cooperation against the PKK, a U.S.-listed terrorist organization that Turkey holds responsible for 30,000 deaths since 1984. As a result, Turkey and Iraqi Kurdistan are fast becoming indispensible strategic partners collaborating commercially, working together on energy development, and strengthening security cooperation.

Annual trade volume between Turkey and Iraqi Kurdistan has rebounded to $5 billion since the overthrow of Saddam Hussein. Trade volume will increase to $10 billion this year and $20 billion in 2010. About 80% of goods sold in Iraqi Kurdistan are made in Turkey. There are hundreds of Turkish companies in Iraqi Kurdistan, including construction firms that stand to benefit when the Kurdistan Regional Government (KRG) launches $100 billion in new infrastructure projects.

Turkey also reaps rewards from transport fees of Iraqi oil through pipelines connecting Kirkuk to the eastern Mediterranean port of Ceyhan. Additionally, Turkish energy companies are well-positioned to secure lucrative Production Sharing Agreements as new fields come on-line in Iraqi Kurdistan.

Yet more can be done to maximize cross-border trade and energy cooperation. The Habur Gate at Zakho is the major trans-shipment point for trucks carrying goods between Turkey and Iraqi Kurdistan. It needs upgrading on both sides of the border. Streamlined transit procedures and a second border crossing would also reduce congestion. Exchanging trade promotion offices would further encourage commercial contact and facilitate a range of contacts.

Until Baghdad and the KRG agree on national Hydrocarbons and Revenue Sharing Laws, the Iraqi government refuses to issue export licenses for energy supplies from Iraqi Kurdistan. The impasse also impedes badly needed investment to develop oil fields in Tawke and Tak Tak and gas fields east of Sulaymania. 

The KRG has shown flexibility by initiating a recent arrangement enabling the export of some oil from Iraqi Kurdistan via the Iraqi State Oil Marketing Organization (SOMO). It is important to build on this momentum. Finalizing national Hydrocarbons and Revenue Sharing laws would generate revenue from existing oil facilities. It would also accelerate the production of Iraqi gas as an alternative to gas from Russia for Turkey and other countries Europe. Iraqi gas supplies would also enhance the profitability of the Nabucco pipeline that will connect central Asia’s gas fields with western markets.

Progress in Turkey-KRG relations is dramatic, but tenuous. If tensions between Arabs and Iraqi Kurds over Kirkuk and other disputed territories spark violence, Turkey could also become embroiled. Some Turkish officials are concerned that an economically viable Iraqi Kurdistan with Kirkuk as its capitol would lay the ground for independence and inspire demands for more rights by Kurds in Turkey.

It is clear from m y recent discussions in Erbil that giving away Kirkuk is a red-line that no Kurdish politician can cross. Public pressure to resolve Kirkuk’s status is especially intense during the run-up to elections in Iraqi Kurdistan on July 25.

By demanding a referendum on Kirkuk’s status, Masoud Barzani insists he is merely upholding the rule of law enshrined in Article 140 of the 2005 Iraqi constitution. Though the constitution requires a referendum on Kirkuk by December 31, 2007, its implementation has been repeatedly postponed. US officials want to delay it again. They caution the KRG not to push too hard lest it cause conflict with Baghdad and provide pretext for military action by front-line states. With patience and statesmanship, there is still room to peacefully resolve the status of Kirkuk and other disputed territories within the parameters of Article 140 in Iraq’s 2005 constitution. 

No issue is more important to Turkey than the PKK’s presence in Iraqi Kurdistan. Ankara wants the KRG to join its forces in an all-out assault on PKK bases in the rugged Qandil Mountains. Though the KRG will not take up arms against the PKK, there are steps it can take to further pressure the PKK by further cracking down on PKK logistics, arresting senior commanders, interdicting funds hand-carried by cash couriers flying into Erbil, and tightening check points on roadways and mountain passes leading to Qandil.

Ankara must recognize, however, that the PKK problem cannot be solved with security measures alone. The ultimate solution lies in Turkey’s continued democratization and development, as well as some amnesty arrangement for the PKK rank and file. To diminish public support for the PKK by Kurds in Turkey, Ankara can take additional steps to recognize Kurdish identity by, for example, eliminating “Turkishness” as the basis for citizenship in the constitution and abolishing statutory provisions, such as Article 301 of the Penal Code, that are used to limit freedom of expression. Targeted investments in job creation and social services would also help drain the swamp of public support for the PKK among Kurds in Turkey.

Both Turkey and Iraqi Kurdistan have a lot to lose should their rapprochement lose momentum. Turkish companies risk their dominant market share, as well as preferential terms for future energy development in Iraqi Kurdistan. Interrupted energy flows would impact European consumers and erode Turkey’s reliability as a transit country for energy supplies. Violence would torpedo Turkey’s EU candidacy and tilt the balance of Turkish domestic politics towards the security establishment and other ultranationalists.

Iraqi Kurdistan also risks losing its hard-fought gains since the 1991 Gulf War. Iraqi Kurds do not want to live in a rump state with ties to the outside world via Iran. Their only outlet to the West is via Turkey fully integrated into European institutions.

The U.S. also has a big stake. “Responsible redeployment” from Iraq requires a state that is stable, able to govern itself, and at peace with its neighbors. The Obama administration must use skillful and focused diplomacy to leverage its uniquely good relations with Ankara and the KRG. Renewed conflict in Iraq would increase regional tensions and heighten Iran’s influence. It would also underscore the diminished power of the United States at a time when U.S. leadership is urgently required to address other crises.

David Phillips is a senior fellow at the Atlantic Council and visiting scholar at Columbia University. He is author of Losing Iraq: Inside the Postwar Reconstruction Fiasco.  This essay appeared in the Turkish Daily News.