The US economic sanctions on Iran will likely impinge on the economies of neighboring countries, particularly Iraq, undercutting commercial transactions and investments between the two countries. This seems to have prompted the Iraqi government, recently, to hold talks with US President Donald Trump’s administration to be exempted from the sanctions and continue its trade relations with Iran. However, numerous obstacles hinder the Iraqi ability to do so, thus, it will be left with limited options during the coming period. 

Multiple Measures

On August 7, 2018, the US administration re-imposed economic sanctions on Iran following the withdrawal from the nuclear deal in May. Those sanctions will not only stifle Iran’s economic activities, but also undermine its economic relations with the outside world, including neighbouring countries.

The first batch of sanctions includes prohibiting American individuals and entities from conducting financial and monetary transactions in US dollars with Iran. It further entails a ban on selling or holding of the Iranian rial in US banks, along with sanctions on the automotive sector in Iran.

The US sanctions on Iran will be ramped up by imposing another batch on November 4, including restricting the operation of Iranian port companies, shipping and shipbuilding, as well as restricting oil-related transactions including the purchase of oil, petroleum or petrochemical products from Iran, among other sanctions.

Furthermore, foreign entities are to be prohibited from conducting financial transactions with the Central bank of Iran and Iranian financial institutions, or conducting any trade and investment agreements with them in certain economic sectors, particularly oil and automobiles, among other sectors. Entities, which violate the previously mentioned regulations, will be subject to the US sanctions. Such sanctions may include financial fines, restricted access to the US banking system, or cutting off their trade and investments with the US, under the so-called “secondary sanctions.”

Vague Stances

Iraq has not yet taken a decisive stance concerning the US sanctions on Iran, which came into force last August. This was evident in the remarks of the Iraqi Prime Minister Haider al-Abadi on August 7, in which he said “we consider them (sanctions on Iran) a strategic mistake and incorrect but we will abide by them to protect the interests of our people,” as per Reuters. Then, he soon denied his government’s intention to stop all economic cooperation with Iran, saying that it would only respect the dollar ban in transactions with Iran.

Some Iraqi officials have pointed to the difficulty of complying with US sanctions, such as President Fouad Massoum, who, on August 6, stated that Iraq’s circumstances and the nature of its relations with Iran make it difficult to abide by the US sanctions. Besides, pro-Iran militias in Iraq refuse to abide by the US sanctions, such as Harakat al-Nujaba (Movement of the Noble Ones), which may prompt them to threaten the US interests in Iraq, if the tension between Washington and Tehran further escalates.

The Iraqi government realizes that there are broad political and economic interests with Iran that may be impaired, if it is fully committed to the US sanctions. In addition to the strong ideological, military and political ties between the two countries, Iran is a major trading partner of Iraq, providing it with vital goods such as food, electronics, medicines, among other things, at cheap prices. On the other hand, Iraq is one of the major markets for Iranian goods, with a non-oil export volume of 5.5 billion dollars a year.

Moreover, Iraq has long relied on Iran to meet part of its electricity needs, with Tehran supplying a capacity of 1,000 megawatts of electricity to Iraq through four electric lines. Iran also provides the Iraqi power plants with up to 25 million cubic meters of gas per day via the (IGAT-6) pipeline, which could increase to 50 million cubic meters per day, upon agreement.

On the other hand, Iraq continues to be one of the key conduits for the provision of the US dollar to the Iranian market. The funds are transferred to Iran via a network of merchants and smugglers operating at the many border crossings between the two countries, which are controlled by Shi’ite parties and militias spreading over more than 1,000 kilometers.

Possible Scenarios

In the meantime, the Iraqi government realizes that its failure to comply with the US sanctions will inflict greater damage to its economy, rather than its loss of economic relations with Iran. This was reflected in the assertion of the US State Department spokeswoman, Heather Nauert on August 15, who said: “we will continue to hold countries accountable for any violation of sanctions”.

This may be attributed to the fact that the US constitutes a considerable market for the Iraqi exports of 10.7 billion dollars a year, mostly from crude oil and its derivatives. The Iraqi government is also exposed to the US market with a significant financial amount of 21.7 billion dollars, the size of its investments in US Treasury bonds and bills in the past years. This means that if Baghdad does not comply with the sanctions, it may lose multi-billion dollar market and may expose its investments in the US market to big risks.

As such, the Iraqi government seems to be caught in real dilemma of whether to abide by the US sanctions and hence lose partnership with Iran, or to not abide by and lose partnership with the US. This may lead it to adopt a balanced policy, which has already begun to emerge, with the central Bank of Iraq notifying commercial banks of a ban on dollar transactions with Iranian banks, a preliminary indicator of complying with the US sanctions, but meanwhile it did not cease using the euro in its transactions with Iran. 

Besides, some estimates suggest that the Iraqi government may move towards holding further talks with the US Treasury to exempt it from the trade ban on Iran, especially as it may argue that it cannot prevent the flow of goods on the border between the two countries, due to the control of armed militias.

The tough choices facing Iraq at present suggest that Baghdad is in a crisis that will undoubtedly affect its relations with both Washington and Tehran, amid mounting tensions between the two sides. This dilemma is affected by the aftermath of the US withdrawal from the nuclear deal, along with the faltering efforts to form the new Iraqi government, which is yet to be agreed upon by the major political forces.