An Iraqi peddler displays Iranian currency for sale in the capital Baghdad, on August 9, 2018. Caught in the crossfire between its key allies Tehran and Washington, Iraq's economy could suffer the heaviest collateral damage from the US reimposing sanctions against Iran. AFP / AHMAD AL-RUBAYE
An Iraqi peddler displays Iranian currency for sale in the capital Baghdad, on August 9, 2018. Caught in the crossfire between its key allies Tehran and Washington, Iraq's economy could suffer the heaviest collateral damage from the US reimposing sanctions against Iran. AFP / AHMAD AL-RUBAYE

Iraqi Prime Minister Haider al-Abadi has raised the level of uncertainty over how Iraq will handle long-expected US sanctions on Iran.

In the span of less than a week, Abadi went from pledging to abide by the sanctions the day after they were imposed, to backtracking on his statement.

“I said yes, we will abide … but abide when it comes to dollar transactions,” Abadi told reporters Monday. The confusion for Iraqi citizens and political parties is even greater for the Central Bank of Iraq.

“Dealing in dollars with Iran has been banned for a very long time,” the bank’s director general of financial operations, Mahmoud Dagher, told the media. “Neither the bank nor the banking system deals with Iran in dollars when it comes to foreign trade.”

Iran is not only a neighbor to Iraq, with a land border of more than 1,000 kilometers. It dominates the Iraqi market and political scene.

Prime Minister Abadi’s vocal opposition to the US sanctions stems from this hegemony, especially as he is seeking a second term in office. His coalition placed third in the May parliamentary elections and he will need Tehran’s support moving forward.

Politically, Iran has influence on a large number of Shiite parties in the government and parliament. Some of these parties have announced they will mount a “break the siege” campaign to counter the US sanctions on Iran.

Militarily, Tehran supports and trains dozens of militias in Iraq, and these groups sharply criticized Abadi over his initial acquiescence to the sanctions. The United States also holds major influence in the military and economic spheres.

As in the past, Abadi is walking a tightrope between Tehran and Washington, both of which have their share of clout in green lighting the next prime minister.

Iranian dairy, Iranian cars

Where there is political and military influence in Iraq, there is economic reverberation.

Hamid Hosseini, the secretary-general of the Iran-Iraq Chamber of Commerce, said in December that “Iraq, for Iran, equals the markets of three continents: Europe, America and Africa.”

Iranian goods account for about 17% of the Iraqi market, making it the second largest destination for exports after Turkey in this respect. Iranian exports to Iraq have risen exponentially over the past decade.

Before US sanctions were reimposed, Iran said it was seeking to control a quarter of the Iraqi market and increase the volume of trade from $13 billion in 2017 to $20 billion in the coming years.

In the markets of central and southern Iraq, one can clearly observe how Iranian goods dominate shop shelves and how dairy products occupy a large place in the refrigerators.

On the streets, the Iranian-made SAIPA and Samand cars are too many to count. The cheap, poor-quality vehicles have not only entered Iraq by highway — they are assembled at factories in the heart of the country.

Iraq’s power plants are heavily reliant on diesel and gas to operate, and in this regard, Tehran has an agreement to export diesel and about 25 million cubic meters of gas per day to Iraqi power plants.

Even so, Iraq continues to suffer from major power shortages, which this summer prompted major waves of protests as temperature hovered around 50 degrees Celsius. The Iraqi government since 2005 has been compelled to conclude successive deals with Iran to ease the shortfall, importing 1,500 to 2,500 megawatts of electricity per year.

For Iraq, Iranian religious tourism is a major source of income.

Each year, about three million Iranian pilgrims flock to the shrines of the descendants of the the Prophet Mohammad in the provinces of central and southern Iraq.

Baghdad charges a $40 visa fee per tourist, but Abadi’s government quickly announced it would reduce that amount for pilgrims as sanctions on Tehran came into effect.

Iranian goods are often the source of ridicule in Iraq for their lack of quality. But they are hugely popular in the central and southern provinces of the country, as a much more affordable option than goods made in Turkey. Not to mention the foodstuffs Iraqis depend on for their daily diet.

For much of the population, those low prices make a major difference in the household budget, especially with the rise of unemployment and poverty following the price of oil – the key export on which Baghdad relies to conduct about 97% of its economic activities.

Iran’s trade surplus with the Iraqi private sector is more than $7 billion.

Against this backdrop, the Iraqi government appears at a loss, with scant plans in place to deal with the first package of US sanctions against Iran, which is light compared to the second round coming in November.

Dr. Mohammed Saleh, an economic adviser to the prime minister, says Iraq faces a dilemma in the coming period.

“Given the closed border with Syria and the dangerous situation [on the border] with Jordan, for Iraq only Turkey remains” to compensate for the shortage in Iranian goods when the second tranche of US sanctions comes into force. “But also [Turkey] is in a vague position as a result of the US sanctions,” he added, with a note of desperation.

“Iraq will have to comply with the US sanctions on Iran and it will have to compensate for the loss of Iranian goods by producing some of them,” Saleh told Asia Times, adding that this goes especially for the gas sector.

“We will also have to revive the manufacturing of oil products by  reactivating refineries suspended from work. The same goes for agriculture, if Iraq can persuade the Turkish side to up Iraq’s water quotas.”

Asked whether Iraq had immediate plans to implement what he had referred to, he said: “Unfortunately, so far there are no actual plans on the ground,” stressing that Iraq was still reeling from the war against ISIS and the failure to form a government after the latest elections.

Made in Iraq?

Falah al-Rubaie, professor of economics at the Faculty of Management and Economics at Mustansiriya University in Baghdad, said the sanctions should be seen as an opportunity for Iraq. An opportunity to reconsider its economic policy in the fields of industry and agriculture, and to start competing with Iranian goods through local production.

“Iraq has the space to activate such a policy,” Rubaie told Asia Times. “But such a decision requires political will and belief in achieving development.”

He said Iraq’s economic predicament was not for a lack of strategies. “There have been more than 16 strategies developed by successive governments related to industry, agriculture, trade and others sectors, in addition to the existence of four development plans since 2003.

“All these plans sit on the shelf because of the confusion of political decision-makers and many of them are linked to Iran politically, which facilitates the import of their products at the expense of Iraqi development plans.

“The absence of development and the return to oil revenue is what Iraqi politicians have been doing since 2003 in order to secure their personal benefits at the expense of the country’s interest,” Rubaie added.

Up till now, Iraq has not faced major issues with Tehran or Washington over the latest US sanctions.

“Trade between the two countries (Iraq and Iran) is proceeding normally,” said Nasir Behrouz, Iran’s trade adviser in Baghdad. “The import and export process with Iraq continues at all ports.

“Iran is determined to expand its presence in the Iraqi market to suit the interests of the two countries,” Behrouz was quoted as saying by the official IRNA news agency.

The US, for its part, has not flagged any sanctions violations by Iraq to date, despite alarmist reports in the local press.

The US embassy in Baghdad issued a statement of clarification after State Department spokesperson Heather Nauret warned Tuesday that Washington would “continue to hold countries accountable for any violations.”

The embassy said Nauret’s statement had been misinterpreted and stated categorically that there was “no breach of sanctions” by Iraq in dealing with Iran.

The economic adviser to PM Abadi described the sanctions against Iran as “the curse” and said that the second round was an impending disaster that Iran must redress.

He did not say whether Iraq would be able to tackle this curse and find a substitute for Iranian imports.

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