After a couple of years of relative stability and economic revitalization, Iraq is signaling to the world that it is now open for business. As exhibited by Iraqi Foreign Minister Mohamed Ali Alhakim’s recent visit to Beijing, the country is specifically looking east for investment as China ramps up its ambitious Belt and Road Initiative. This latest push for Sino-Iraqi cooperation builds on an existing foundation: China is already Iraq’s largest trading partner, while Iraq is China’s second-biggest oil supplier.

Iraq’s focus on attracting Chinese investment, however, is as much a reflection of Western companies’ increased hesitation to invest in emerging, post-conflict markets as it is of Beijing’s largesse. As exemplified by the recent dispute involving a joint venture between French telecom titan Orange and Kuwaiti firm Agility’s investment in Iraqi mobile telecom firm Korek, a perception of lawlessness and corrupt local business practices constitutes a major barrier to Western investment in the Middle Eastern country.

A red flag: the Korek case

The debacle surrounding the telecom firm Korek serves as a warning to Western companies looking to invest in a post-conflict Iraq. In 2011, Agility and Orange formed a joint venture to pick up a 44% stake in Korek, an Iraqi mobile-telecom firm that counts among its shareholders Sirwan Barzani, an influential businessman and scion of Iraqi Kurdistan’s most powerful family. The French and Kuwaiti joint venture, held via Iraqi Telecom, invested US$1 billion in Korek with the hope of expanding the company’s profile in non-Kurdish regions of Iraq.

The partnership broke down amid allegations of mismanagement and misappropriation. Investigative reporting by the Financial Times found that Korek shareholders including Barzani had failed to disclose ownership interests in a rival company and had colluded with Lebanon’s IBL Bank to secure a $150 million loan at an interest rate of 13.25%. The loan was apparently taken out without the knowledge and consent of Orange and Agility, with the funds funneled between Korek and Barzani. These funds were allegedly misrepresented as an unsecured loan, when in fact it was secured; as such, the loan should only have had an annual interest of around 4%. Barzani has been accused of profiting from the difference in the interest rates.

This May, an Iraqi regulator stripped them of their stake in the venture, resulting in Barzani holding a 75% stake in the company. The Western firms now face a steep climb in recouping their investments, considering the immense political power the Barzani dynasty holds over the Kurdish region of northern Iraq. The case is emblematic of the continuing challenges that Iraqi society and foreign investors face in a political culture steeped in corruption and backroom dealing, and is sure to heighten hesitancy among other large Western corporations looking to establish a footprint in this particular emerging market.

Piquing China’s interest

In contrast, China – as it is doing elsewhere in the developing world – is seizing on these risky opportunities and capitalizing on the absence of Western competitors to establish formidable market presence for its own companies. Beijing has already made significant inroads into neighbor Iran, which has suffered from decades of Western embargoes and is particularly hurting under new sanctions imposed by the administration of US President Donald Trump.

In fact, Trump’s belligerent attitude toward Iran and attempts to strongarm the largest buyers of Tehran’s oil – including China and other major players such as India – has only served to increase China’s influence in the country. Defying pressure from Washington to abandon Iran as a supplier, President Xi Jinping’s government has instead boldly promised $280 billion in investment in the country’s sanctions-ravaged oil and gas sector. As a secure energy supplier and a captive business partner, Iran is a linchpin in China’s efforts to expand its influence in the region; in sharp contrast, European initiatives such as French President Emmanuel Macron’s proposed $15 billion credit line vehicle have been torpedoed by the Trump administration’s intransigence.

Iran is not the only place where China is expanding its regional footprint. Driven by its thirst for energy, China is the single largest customer for the region’s oil producers; whereas China receives 19% of crude-oil exports from the Persian Gulf, the US accounts for just 6%. Even in Israel, America’s staunch regional ally, the decision to entrust the management of a major seaport in Haifa – one used by the US Navy’s Sixth Fleet – to a Chinese company set off alarm bells in Washington. With Beijing pledging $23 billion in regional loans last year to the Middle East and signing a further $28 billion worth of business deals, the country is clearly committed to growing its long-term presence in the region.

While Chinese companies certainly have far more stomach for geopolitical risk than their Western counterparts, the Korek case helps demonstrate the pitfalls of emerging markets for any outside firm looking to invest. China’s more aggressive investment strategy has historically allowed it to exploit the opportunities created by Western reticence. If and when a Chinese company experiences an expropriation similar to that of Orange and Agility, however, could it come to regret its eagerness to fill the investment vacuum in the region? It is a lesson Beijing already learned amid the economic turmoil of Venezuela. Only time will tell whether events in markets such as Iraq will follow a similar pattern.