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By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund. This article was originally published by the LSE Middle East Centre.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Demands for the expulsion of US troops following the killing of Iranian general Qassem Soleimani, have scaled down considerably since the initial strident calls. What started as high theatrics in parliament demanding an end to US presence, ended with a typical Iraqi fudge in that parliament passed a resolution requiring the government to cancel the request for global coalition support made in 2014, and for it to work towards ending the presence of all foreign troops.

These were further rolled back as reports emerged that the government’s vision of implementing the withdrawal of foreign forces was for the withdrawal of combat forces only and did not include those conducting training and logistical support. Threats of US sanctions have undoubtedly played a role in deflating the illusions of power, especially by those in the axis of resistance, and contributed to this climbdown.

Iraq’s economy is not only vulnerable to US sanctions, but to any disengagement from the US dollar-based global financial and economic system. In fact, the US could affect far worse damage to Iraq than it did to Iran without the need to implement sanctions, let alone sanctions that would ‘make Iranian sanctions seem somewhat tame’. This vulnerability stems from the failures of successive Iraqi administrations from 2003 to reconstruct the country following decades of conflict, or to create the foundations for a diversified economy driven by the private sector, and not by the state.

Instead, successive administrations have deepened the country’s dependence on oil, pursued policies that fostered a structural imbalance between the government’s current and investment expenditures, in which the public sector consumed an ever-increasing share of government revenues. The sole dependence on oil income for these revenues, and the dreadful twins of a dominant public sector and stunted private sector, are the primary reasons why the country is vulnerable to external shocks.[1]

The extent of the damage to the Iraqi economy would depend on the three broad categories of a US response to a hostile Iraq. The first category would be the imposition of primary US sanctions, and secondary sanctions on non-US entities that conduct commercial or financial dealings with Iraq. Their effects would be along the lines to those suffered by Iran due to the imposition in 2018 of similar US sanctions.

For Iran, these included a major drop in oil exports, a severe economic contraction, a significant drop in the value of the currency, a substantial rise in inflation, a lowering of living standards, and a rise in unemployment especially among the youth and the most vulnerable segments of society.

However, the consequences for Iraq would be on a much worse scale than those suffered by Iran. Firstly, because oil exports constitute the bulk of the Iraqi budget’s revenues (about 90 percent of the 2019 budget) unlike those for Iran’s budget (about 30 percent of its fiscal 2019–20 budget). The loss of this income for Iraq would severely restrict the government’s ability to pay for salaries and pensions, social security, goods and services, in addition to reducing any funds available for the reconstruction of the country, the development of its oil sector or the development of its power generation.

Secondly, Iraq depends almost completely on imports for its consumption of goods and services, unlike Iran which has a well-diversified economy, and a more developed industrial, agricultural and financial sectors. Iraq’s small industrial and agricultural sectors cannot meet even a small percentage of its domestic demand, while its under-developed financial sector cannot provide the financing for the development of these two sectors.

Thirdly, Iraq’s cash-reliant economy depends on access to physical USD notes for it to function. Such a disruption in the supply of USD notes would raise the price of the USD against the IQD, and with it a rise in the value of imported goods. In 2015 the country felt some of these effects due to a restriction in the supply of USD notes from the US Federal Reserve as a result of the US Treasury’s concerns that sanctioned entities (Iran & Daesh) had access to these notes. Any effects of a sizeable loss of access to USD notes would be significantly worse than in 2015. Making things worse is that Iraq cannot access USD notes from a third country, unlike Iran, whose need for notes is met through Iraq.

The second category of US responses would be the loss of waivers for the purchase of Iranian gas, which presents Iraq with a Sophie’s choice. Continue with the purchase of Iranian gas and suffer the consequences of US secondary sanctions, which would be only marginally less painful than any possible imposition of full sanctions, discussed earlier. Or, discontinue buying Iranian gas, lose about a third of Iraq’s domestic power supply and enrage a population that is already incensed over a chronic inadequate supply of power.

A less discussed point is that these waivers were granted on the conditions that Iraq develops a credible plan to reduce its dependence on Iranian gas, and in the long term end those imports. The US could still grant these waivers, but impose more stringent conditions on plans to reduce dependence and a tougher monitoring regime with associated penalties for failures in making progress.

The third category, and the most likely US reaction, would be to gradually end its treatment of Iraq as a close ally and therefore subject to increased US treasury scrutiny its financial system, which would negatively affect the functioning of the Iraqi Central Bank and the banking system. The most obvious result would be a disruption of Iraq’s cash-heavy economy, which relies on the access of physical USD notes for the conduct of commercial and financial transactions as discussed earlier.

Unlike the fictional Duchy of Grand Fenwick, in Leonard Wibberley’s satirical cold war novel The Mouse That Roared, Iraq cannot expect any sort of victory from a conflict or strained relationship with the US.

[1] An upcoming piece by the author examines the structural imbalances in the economy as a inevitable consequence of successive post-2003 political system, i.e, the “Muhasasa Ta’ifia”. This imbalance was first explored in: https://auis.edu.krd/iris/latest-iris-publications/iraqs-investment-spending-deficit-analysis-chronic-failures and subsequently in a series of tweets: https://twitter.com/AMTabaqchali/status/1181559159453564928?s=20 and https://twitter.com/AMTabaqchali/status/1182253543144771584?s=20

By John Lee.

The head of Trade Bank of Iraq (TBI) has reportedly said that the bank would stop processing payments for Iranian gas imports if a US sanctions exemption expires next month.

Faisal al-Haimus told AFP:

"As a bank, the most important thing we have is that we are compliant (with international regulations). That's why people trust us."

Iraq relies heavily on Iran to support its struggling electricity sector.

When the United States imposed sanctions on Iran's energy sector in 2018, it granted Iraq a series of temporary waivers to allow it to buy gas from Iran.

More here.

(Source: AFP)

By John Lee.

The US has granted Iraq another 120-day waiver from its sanctions on Iran.

According to S&P Global, a State Department spokesman said the waiver ensures that Iraq is able to meet its short-term energy needs while it takes steps to reduce its dependence on Iranian energy imports.

(Source: S&P Global)

By Mustafa Saadoun for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

Basra protests build in Iraq as sub-standard services persist

In an exclusive interview with Al-Monitor, Iraqi Minister of Electricity Luay al-Khatteeb talked about the situation of Iraq’s electricity sector amid tense US-Iran relations.

He discussed the waiver timeline that Washington granted Baghdad to keep buying Iranian gas and mentioned his fear that some parties are politicizing the electricity sector in Iraq.

Click here to read the full story.

By John Lee.

The Trump administration has reportedly granted Iraq a 120-day waiver from its sanctions against Iran, to allow it to continue importing electricity from the country during the hottest of the summer weather.

The decision followed a phone call on Friday between Secretary of State Michael Pompeo (pictured) and Iraqi Prime Minister Adel Abdul Mahdi.

The State Dept said it is continuing to work with Iraq to end its dependence on Iranian natural gas and electricity.

(Sources: Bloomberg, The National)

Iran Has Taken Invaluable Steps to Cement Ties with Iraq: Envoy

Iran’s Ambassador to Iraq Iraj Masjedi highlighted the importance of bilateral relations between the two neighboring countries and said Tehran has taken major strides to strengthen ties with Baghdad.

“We are trying to boost our relations with Iraq in all areas,” Masjedi said, addressing an appreciation ceremony for the outgoing Iranian consuls in the Iraqi cities of Sulaymaniyah and Karbala.

“The embassy of the Islamic Republic of Iran in Baghdad, as well as the affiliated organizations and consulates and other governmental agencies of Iran in Iraq, have taken invaluable strides and actions at various political, economic and security levels to strengthen relations between the two countries in recent years,” the diplomat noted.

Masjedi further pointed to historical, cultural and ideological commonalities of the two countries and said closer ties in all fields are in line with the interests of both Iran and Iraq.

Iran and Iraq enjoy cordial political, security and cultural ties but due to some internal and regional problems including Daesh (also known as ISIS or ISIL) terrorism in Iraq, they have not been able to increase their trade volume.

Heading a high-ranking delegation, Iranian Foreign Minister Mohammad Javad Zarif recently paid an official visit to Iraq to boost ties with the Arab country in the sanctions era.

US President Donald Trump’s administration announced plans in March to extend a 90-day waiver for the second time to let Iraq continue energy imports from Iran.

(Source: Tasnim, under Creative Commons licence)

By John Lee.

Contrary to recent reports that the US had granted a waiver to Iraq to allow it to continue buying power from Iran, a State Department spokeswoman reportedly said on Wednesday that this was not the case.

Reuters quotes Morgan Ortagus as telling reporters that Secretary of State Mike Pompeo has not made a decision on this issue.

(Source: Reuters)

By Mustafa Saadoun for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

US grants Iraq reprieve to continue buying Iranian gas

The United States has decided to grant Iraq a third 90-day sanctions waiver so it can continue to purchase gas from its sole provider, Iran, giving Baghdad some much-needed breathing room.

On May 22 in Baghdad, Joey Hood, US chargé d'affaires in Iraq, stressed to reporters that the waivers will not continue indefinitely, so the United States is working with Iraq to reduce its dependence on Iran.

Click here to read the full story.

Washington has exempted Baghdad from some of its unilateral sanctions against Tehran, allowing Iraq to continue importing energy from Iran, according to the US envoy to Baghdad.

Baghdad can now buy energy from Iran, US charge d’affaires Joey Hood told reporters on Wednesday, Iran's Press TV reported.

The waiver will allow Iraq to continue buying gas and electricity from Iran.

The administration of US President Donald Trump said in March it was extending a 90-day waiver for the second time to let Iraq continue energy imports from Iran.

The US envoy did not explain whether he was referring to the same waiver Washington gave Baghdad in March or he was declaring the issuance of new exemptions.

Gas imports from Iran generate as much as 45 percent of Iraq's 14,000 megawatts of electricity consumed daily. Iran transmits another 1,000 megawatts directly, making itself an indispensable energy source for its Arab neighbor.

Iraq and Iran share a 1,400-kilometer-long border. For their run-of-the-mill maintenance, Iraqis depend on Iranian companies for many things from food to machinery, electricity, natural gas, fruits and vegetables.

(Source: Tasnim, under Creative Commons licence)