US-Iran Relations to Hamper Iraq's 'Silk Road' Success

Published March 24th, 2019 - 10:36 GMT
If the raft of memorandums of understanding bear fruit, they could boost trade from the current $12 billion to $20 billion annually. (File/Photo)
If the raft of memorandums of understanding bear fruit, they could boost trade from the current $12 billion to $20 billion annually. (File/Photo)
After the 2003 US-led invasion that toppled Iraqi leader Saddam Hussein, Iran was involved in recycling scrap metal. The burned-out hulls of Saddam’s heavy armour headed east, including through the Bashmaq border crossing in Iraqi Kurdistan, to a factory near Isfahan.

This time, the wrecks of vehicles used by the Islamic State are being transported for recycling, either in Erbil or in the mainly Shia south, with the lucrative trade reportedly organised from Mosul by the Tehran-allied Popular Mobilisation Forces.

Scrap metal is a weighty example of the role of geography in both trade and politics. Iran and Iraq share a 1,458km border. Their shared history, whether peaceful or violent as in the 1980-88 war, has always involved business. With its economy in recession in the face of US sanctions, Tehran is oiling the wheels of commerce.

Brian Hook, the US State Department’s special representative for Iran, recently claimed sanctions on oil exports alone had cost Tehran $10 billion in revenue since the Trump administration tightened the squeeze in November. Curtailing Iraq’s trade with Iran, however, represents a serious challenge.

The principlist media in Tehran hailed the March 11-13 visit to Iraq by Iranian President Hassan Rohani not so much for his audience with Ayatollah Ali al-Sistani, Iraq’s pre-eminent Shia cleric, but for its economic significance.

If the raft of memorandums of understanding, including a railway link between Basra and Shalamcheh, north-west of Abadan, bear fruit, they could, as officials from both countries suggested, boost trade from the current $12 billion to $20 billion annually. Iran’s Chamber of Commerce has confidently bought an 11-storey building in Baghdad.

The shorter-term challenge is how Iraq pays, given problems using the US dollar. A barter system would be of limited use, given Iran’s huge surplus in the trade — 75%-80% of the $12 billion is Iranian exports. Souks in Iraq are adorned with Iranian goods, including food products, household wares and medicines, and there is a huge black market in smuggled Iranian petrol, the world’s second cheapest.

The larger amounts of money lie in energy: Iran’s supplies of electricity and natural gas help make Iraq its second-biggest export market after China.

Washington’s waiver allowing Iraq to import Iranian gas and electricity runs out this month. Washington has said the waiver is on the understanding that Baghdad “take steps towards energy independence.” Given it would take years for Iraq to reduce energy dependence, it seems likely the waiver will be extended.

“Despite its rhetoric to the contrary, the US is well aware that Iraq cannot abandon Iranian gas and electricity suppliers any time soon,” said Hussein Dawood, visiting fellow at the European Council on Foreign Relations. “This is especially so given that the Iraqi government fears such a move would risk a repeat of the unprecedented protests seen in Basra last summer.”

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Energy trade is readily monitored by the US Treasury, which already exerts pressure. Under the waiver, Iraq should pay for the electricity — 500 megawatts (MW) in winter, 1,200 MW in summer, costing annually $1.2 billion — in dinars, not US dollars. Also under the waiver, Iraq is required to hold Iran’s payments for gas, which produce another 1,000 MW of electricity, in an escrow account designated for bilateral trade.

Iranian officials have grumbled over Iraq’s tardiness in paying. The Rohani visit reportedly encouraged Baghdad to hand over $200 million of $2 billion outstanding.

The two central banks have signed an accord to facilitate payments through non-US dollar bank accounts, using euros and Iraqi dinars to skirt US sanctions but, as with the European special purpose vehicle, INSTEX, this may not escape US pressure nor overcome banks’ fears of US punishment. Last May, Washington sanctioned Iraq-based al-Bilad Bank for links with Iran.

Iraqi President Barham Salih has advanced a vision of Iraq as a regional economic powerhouse. In Rome in November at the Mediterranean Dialogues, a forum supported by the Italian Foreign Ministry, Salih spoke of “deep port facilities in Basra, railway networks, highway networks, airports, industrial cities, dams, irrigation projects in the Nineveh plains, Garmiyan and Erbil, as well as land reclamations in the south.”

Iraq, said Salih, could be an “important strategic hub that joins the Arab world with Iran and Turkey, and I will say to Europe, too, and connects the economies of the Gulf and Europe… the heart of a new Silk Road to the Mediterranean.”

Salih has a long record of friendship with the United States going back to his stint in the 1990s as Washington representative of the Patriotic Union of Kurdistan but it is hard to see how such plans can overcome current US-Iran tensions. Speaking at an inauguration March 16 at Assaluyeh for new phases of the South Pars gas-field, Iranian Oil Minister Bijan Zanganeh was blunt about future gas exports to Baghdad: “The Iraqis are always with us in words.”


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