* Graft and secretive governance may deter investors
* Opposition made gains on anti-corruption message
By Tim Cocks
BAGHDAD, Sept 25 (Reuters) - A murky stock deal between Iraqi Kurdish officials and a foreign oil company has shone an embarrassing spotlight on widespread graft that may threaten investment and growth in the prosperous northern region.
Kurdish officials are not accused of breaking any laws, but their secret stock purchase from Norway’s oil firm DNO International (DNO.OL) last year raises new doubts about the northern enclave’s new initiative to curtail corruption, boost transparency and loosen close political ties to business.
Talk about widespread graft and the commercial clout of two parties dominating the Kurdistan Regional Government (KRG) could ultimately deter business in a region seen as a stable corner of a nation otherwise plagued by legal and security risk.
While the KRG rejects systematic corruption, it unveiled the drive before regional polls in July, when wide discontent gave opposition groups unprecedented gains in the Kurds’ parliament.
No top officials have been charged of corruption, but ordinary Kurds say they need no proof of the failure to track money spent on public works, of contracts awarded to close associates rather than on the basis of competitive bidding or palms that need to be greased before deals can be closed.
"There’s outright corruption: officials making money from contracts ... and the other one, which is more subtle: the way two political parties run the show. You have to belong to one to get jobs, to get influence," said Henri J. Barkey, analyst at Washington’s Carnegie Endowment for International Peace.
The new initiative was thrust into the spotlight this week when the KRG suspended DNO’s oil operations in Kurdistan due to a disclosure from Norway the KRG had bought DNO shares that were then passed on to DNO’s Turkish partner Genel Enerji.
The transaction last October was not disclosed to the Oslo Stock Exchange, and Norway’s financial watchdog has now urged a police investigation. The KRG says no officials benefited from the sale but said the flap caused it "unjustifiable ... harm".
The KRG hired accounting firm PriceWaterhouseCoopers to implement its new transparency strategy, a bid which reflects in part discontent from voters increasingly worried about at-home issues rather than age-old feuds with Baghdad over land and oil.
KRG officials admit it could be years before they root out a pervasive culture of graft, which some say is partly the result of an intersection of a traditional, tribal society based on patronage with modern institutions that handle big sums of cash.
"Some things that are seen as corrupt are very, very normal ... part of the natural culture here," Jhilwan Qazzaz, an advisor in the KRG prime minister’s office, told Reuters.
"We’re not looking at changing anything overnight. We’re looking at the next 4-5 to 10 years, even ... Frankly, this is a brave step. There’s going to be lots of opposition to it."
The KRG website says the aim of the initiative is "tackling corruption, fraud, waste and abuse" and wooing investors.
"We’re going to draw a line in the sand and say ‘From now on, this is the new way of working’", said Qazzaz. "Those that are not on board, we’re going to be hitting you with the stick."
Yet analysts are sceptical of whether the ruling alliance of Kurdish President Masoud Barzani’s Kurdistan Democratic Party (KDP) and Iraqi President Jalal Talabani’s Patriotic Union of Kurdistan (PUK) really have the political will to go after anyone bigger than low-level, bribe-taking officials.
The two presidents hail from Kurdistan’s two most powerful families, which are influential in business circles.
Foreign investors complain of having to partner with local firms which invariably have strong ties to one of them.
"Corruption ... is part of the ruling elite’s way of doing business," said Toby Dodge, an Iraq expert at the University of London. "To actually stop the corruption surrounding the two dominant families would be to put their survival in doubt."
Dodge said Washington, from which Kurds still feel they need protection after Saddam’s persecution, could pressure reform.
There are also new internal pressures. Change, an opposition group led by Noshirwan Mustafa, was virtually unknown until it won a quarter of seats in parliament on an anti-graft message.
KRG officials deny cronyism and blame a few bad apples.
"The issue is exaggerated," said Mohammed Ihsan, KRG minister for extra-regional affairs. "Any country where you have such rapid change, expect some corruption. As political parties, KDP and PUK are not going to give someone a high position like a minister if he’s not in the party. That’s normal everywhere."
Ultimately, Kurdistan’s best hope could be the incoming Prime Minister, Barham Salih, a widely respected former Iraqi deputy PM who has been vocal about the need to curb graft.
"He’s clean as a whistle," said Barkey. "That the opposition did well in a way strengthens his hand. He’ll be able say: look, we got almost hung by these guys because of corruption and I need to do something about it."
(Editing by Samia Nakhoul)