Iraq election chaos exposes sectarian divide

BAGHDAD (Reuters) - The political battle over Iraq's election law has shown that the deep sectarian faultlines which led to years of bloodshed could once again provoke conflict.

Bitter disagreement over the allocation of seats among majority Shi'ites, minority Kurds and once dominant Sunnis is a sign of how much is at stake in the election due in January. The vote will decide who is in charge of Iraq as U.S. forces leave.

A decision by Shi'ite and Kurdish lawmakers to turn on Sunnis by passing a law that reduces Sunni voting clout -- seen by some as retaliation for Sunni Arab Vice President Tareq al-Hashemi's veto of the original election law -- may have long-term consequences, analysts said.

"To be sure, the election law chaos reveals a large number of potentially ominous signs with regards to Iraq's political condition," said analyst Gala Riani of IHS Global Insight.

"It has once again shown the degree of factionalism and the depth of divisions between the sectarian, religious and ethno-national groups which in turn are rooted in deep historical mistrust."

The general election, which is expected to be delayed, is a milestone moment for Iraq as it emerges from the worst of the sectarian violence unleashed by the 2003 U.S. invasion and seeks to entice international investors, especially oil companies.

Overall violence has fallen to levels not seen since the invasion, even though often devastating bomb attacks by Sunni Islamist insurgents and other violent groups continue.

Growing security has allowed the U.S. military to plan to end combat operations next August, ahead of a full withdrawal by December 31, 2011.

It has also helped the current Shi'ite-led government to persuade global oil firms, like Britain's BP Plc, to sign multibillion-dollar deals to develop Iraq's massive oilfields.

But any hint that the fragile security gains are unraveling and that widespread conflict could return may harm those deals.

Ominously, the debate over the election law in parliament may have deepened lingering sectarian mistrust that could possibly threaten the tense peace between Sunnis and Shi'ites.

Hashemi vetoed the election law on concerns that Iraqi voters abroad, including many Sunnis, were under-represented.

On Monday, lawmakers from the Shi'ite majority and Kurdish minority communities joined together to pass an amended law which would reduce Sunni voting power, a move some politicians said was a poke in the eye for Hashemi.

"That's a very short-sighted move," said Iraqi-born academic Sami Zubaida of Birkbeck College in London.

"That's not good (for reconciliation). And of course there are also Sunni elements that don't want reconciliation to succeed and this will give them encouragement to keep fighting."

'EXISTENTIAL IMPORTANCE'

Western diplomats say it is difficult to overstate the resentment that many Iraqi Sunnis feel at their loss of political dominance following the fall of Saddam Hussein.

Any sign that the Shi'ite-led government is intent on depriving them of their fair say in politics or in determining the future of Iraq could lead them to take up arms again.

The fierce struggle over the election law is symptomatic of the stakes. Whatever is decided today will determine the nature of the state in the future.

"At this point in Iraq's democratic experiment, every single significant law is considered by each group to be of existential importance -- that is to say that political losses incurred are often considered permanent and irreversible," said Riana.

For investors, the crucial question will be determining whether the disagreements mark the first steps back toward broader conflict.

The rewards of investing in Iraq, particularly its oilfields which hold the world's third largest reserves, are possibly attractive enough to justify a large dose of risk.

"I don't think anyone has any illusions that this election will be clean or run smoothly," said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Managers Limited.

"As far as the oil majors go, they've continued to do business in some pretty nasty places around the world, e.g. Nigeria, Venezuela, etc. So I would posit that they know what they're getting into." (Additional reporting by Aseel Kami; Editing by Samia Nakhoul)