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

Energy tops agenda of Turkish FM's meetings in Iraq

Turkey’s Foreign Minister Mevlut Cavusoglu met with Iraqi Kurdish leaders recently on the last leg of an ambitious visit to Iraq, in which the Turkish diplomat unveiled plans to reopen consulates in Mosul and Basra and to establish new ones in Kirkuk and Najaf.

Cavusoglu also announced that Turkish President Recep Tayyip Erdogan would pay a formal visit to Iraq before the year's end.

The timing of the two-day tour, which took Cavusoglu from Baghdad to Basra and finally Erbil, prompted speculation that Turkey was turning to its oil-rich neighbor for help after the US administration announced it was ending waivers that allowed a clutch of countries including Turkey to continue buying oil from Iran effective May 2.

Click here to read the full story.

President Hassan Rouhani has called for Iran and neighbouring Iraq to expand their gas and electricity dealings and boost bilateral trade to $20 billion, state TV reported, despite difficulties caused by US sanctions against Tehran.

“The plans to export electricity and gas and hopefully oil continue and we are ready to expand these contacts not only for the two countries but also for other countries in the region,” Rouhani said after a meeting with visiting Iraqi Prime Minister Adel Abdul Mahdi, in remarks carried by state television.

In March, the United States granted Iraq a 90-day waiver exempting it from sanctions to buy energy from Iran, the latest extension allowing Baghdad to keep purchasing electricity from its neighbour.

“We hope that our plans to expand trade volume to $20 billion will be realised within the news few months or years,” Rouhani said. Iranian media reports have put the current level of trade at about $12 billion.

Rouhani expressed hope that work on building a railway linking the two countries, would begin within the next few months.

The railway project was part of deals reached during Rouhani’s March visit to Baghdad, meant to underline that Tehran still plays a dominant role in Iraq despite US efforts to isolate Iran.

Iran and Iraq fought a devastating 1980-88 war but the 2003 US-led invasion of Iraq that ousted Saddam Hussein prompted a long Sunni Islamist insurgency during which Iran’s regional sway rose at the expense of the United States.

Iraq on Saturday closed its Sheeb border crossing with Iran to travellers and trade until further notice, Iraqi security sources said, as flooding continues to submerge villages in southwestern Iran.

US President Donald Trump reimposed sanctions on Iran’s energy exports in November, citing its nuclear programme and meddling in the Middle East, but has granted waivers to several buyers to meet consumer energy needs.

Iraq relies heavily on Iranian gas to feed its power stations, importing roughly 1.5 billion standard cubic feet per day via pipelines in the south and east.

(Source: Middle East Monitor)

(Picture credit: Shana)

Genel Energy has announced that, at the bondholder meeting held today, the Company's proposal was adopted and the waiver of the dividend restriction in 2019 has been confirmed.

With respect to the 2018 financial year, a year in which free cash flow totalled $164 million, the Board has accordingly recommended a final dividend of 10¢ per share, a total distribution of $27.9 million.

As previously stated, given the strong free cash flow forecast of the business even after investment in growth opportunities, the Company intends to pay a minimum dividend of $40 million per annum. This will be split between an interim and final dividend, to be paid one-third/two-thirds. The final dividend reflects this split and will be subject to shareholder approval at the AGM on 16 May 2019.

Genel intends to announce an interim dividend of 5¢ per share as part of the 2019 half-year results, which are scheduled for 6 August 2019.

Bill Higgs, Chief Executive of Genel, said:

"Genel has highly cash generative assets and material growth opportunities in the portfolio. Even after drilling 20 wells in 2019 and progressing the exciting opportunities at Sarta and Qara Dagh, we still expect to generate over $100 million in free cash flow. We will continue to focus on delivering on our strategy as we begin the distribution of a material and sustainable dividend, and aim to provide investors with a compelling mix of growth and returns."

FINAL DIVIDEND PAYMENT TIMETABLE

• Annual General Meeting: 16 May 2019
• Ex-dividend date: 23 May 2019
• Record Date: 24 May 2019
• Payment Date: 24 June 2019

(Source: Genel Energy)

Iraqi Parliament Speaker Mohammed al-Halbusi said he hopes the United States will keep waiving sanctions on energy imports from neighboring Iran, noting that the Arab country will need to purchase electricity from the Islamic Republic for three years.

In November last year, Washington granted a 45-day waiver on electricity to the Arab country and extended it by 90 days in December after US President Donald Trump’s administration reimposed sanctions on Iran in May, following walking out of the 2015 Iran nuclear deal.

Earlier this month, the US State Department extended the 90-day waiver for the second time to let Iraq continue energy imports from Iran. The original exemption granted in December expired on March 19.

“Hopefully this waiver will be extended until Iraq can stand on its feet economically,” said Halbusi at the US Institute of Peace on a visit to Washington, where he met senior officials, including Vice President Mike Pence.

Iraq is the biggest importer of electricity from Iran. It needs more than 23,000 megawatts of electricity to meet its domestic demand but years of war following the 2003 US invasion have left its power infrastructure in tatters and a deficit of some 7,000 megawatts.

“After these three years, maybe we can see Iraq as economically independent and we won't need to import power or electricity from a foreign country. Maybe we can address this issue after three years," he added, Press TV reported.

At a press conference held after his speech, Halbusi warned Washington of the negative effect of “any hasty, uncalculated step to adopt policies and procedures against countries in this region.”

The electricity shortfall in the war-torn country is especially acute in the sweltering summers, which led to violent protests in Basra in September and turned into a national crisis.

Iraq’s electricity demand is expected to increase again this summer and any cuts in Iranian supplies are set to trigger more protests and reignite unrest, destabilizing the Arab country.

In addition to natural gas and electricity, Iraq imports a wide range of goods from Iran including food, agricultural products, home appliances, and air conditioners.

(Source: Tasnim, under Creative Commons licence)

By John Lee.

Shares in Genel Energy were trading down four percent on Wednesday morning after the company announced its audited results for the year ended 31 December 2018, in which it wrote down its Miran asset by $424 million.

Despite this, Genel says it can now initiate "a material and sustainable dividend policy", with payments starting in 2020.

The company's shares are up 17 percent since the start of the year.

Murat Özgül, Chief Executive of Genel, said:

"Genel's strategy at the start of 2018 was clear - generate material free cash flow from producing assets, build and invest in a rich funnel of transformational development opportunities, and return capital to shareholders at the appropriate time. We are delivering on this strategy.

"2018 was another year of material free cash flow generation, we continued to transform our balance sheet and the addition of assets with the potential of Sarta and Qara Dagh led to a very successful delivery on the first two parts of our strategy. We will continue to develop opportunities and invest ingrowth. As we do so, a robust cash flow outlook and our confidence in Genel's future prospects underpins our initiation of a material and sustainable dividend policy."

Results summary ($ million unless stated)

	2018	2017
Production (bopd, working interest)	33,700	35,200
Revenue	355.1	228.9
EBITDAX1	304.1	475.5
Depreciation and amortisation	(136.2)	(117.4)
Exploration credit / (expense)	1.5	(1.9)
Impairment of property, plant and equipment	-	(58.2)
Impairment of intangible assets	(424.0)	-
Operating (loss) / profit	(254.6)	298.0
Cash flow from operating activities	299.2	221.0
Capital expenditure	95.5	94.1
Free cash flow2	164.2	99.1
Cash3	334.3	162.0
Total debt	300.0	300.0
Net cash / (debt)4	37.0	(134.8)
Basic EPS (¢ per share)	(101.6)	97.1
Underlying EPS (¢ per share)5	109.0	65.1

1. EBITDAX is operating profit / (loss) adjusted for the add back of depreciation and amortisation ($136.2 million), exploration credit ($1.5 million) and impairment of intangible assets ($424.0 million)
2. Free cash flow is net cash generated from operating activities less cash outflow due to purchase of intangible assets ($39.7 million), purchase of property, plant and equipment ($65.3 million) and interest paid ($30.0 million)
3. Cash reported at 31 December 2018 excludes $10.0 million of restricted cash
4. Reported cash less ($334.3 million) less reported balance sheet debt ($297.3 million)
5. EBITDAX less net gain arising from the Receivable Settlement Agreement ('RSA') divided by the weighted average number of ordinary shares

Highlights

• $335 million of cash proceeds were received in 2018 (2017: $263 million)
• Strong cash flow generation, with free cash flow totalling $164 million in 2018 (2017: $99 million), an increase of 66%
• Financial strength continues to increase,with unrestricted cash balances at 28 February 2019 of $378 million, andnet cash at $81 million

• Addition of Sarta and Qara Dagh to the portfolio in 2019 brings further near-term production and material growth potential
• Increase in 1P and 2P reserves as of 31 December 2018 to 99 MMbbls (31 December 2017: 97 MMbbls) and 155 MMbbls (31 December 2017: 150 MMbbls) respectively, including Sarta
• As disclosed in our trading statement, the carrying value of the Miran licence has been under review. Due to the focus on the development of Bina Bawi, while Genel continues to see significant opportunity in the licence, this has resulted in an accounting impairment to the carrying value

Outlook

• Production guidance maintained - net production during 2019 is expected to be close to Q4 2018 levels of 36,900 bopd, an increase of c.10% year-on-year
• Capital expenditure guidance updated to include spend on Sarta and Qara Dagh, with net capital expenditure now forecast to be $150-170 million (from c.$115 million)
• Opex and G&A guidance unchanged at c.$30 million and c.$20 million respectively
• Genel expects to generate material free cash flow of over $100 million in 2019, inclusive of investment in Sarta and Qara Dagh
• Given the strong free cash flow forecast of the business, even after investment in growth opportunities, Genel is initiating a material and sustainable dividend policy
  • The Company intends to pay a minimum dividend of $40 million per annum starting in 2020, with the intention for this to grow
  • The dividend will be split between an interim and final dividend, to be paid one-third/two-thirds
  • The Company is set to approach bondholders to request a temporary waiver of the dividend restriction, which limits dividends to 50% of annual net profit, in relation to accelerating the start of distribution to 2019
• The Company continues to actively pursue growth and appraise opportunities to make value-accretive additions to the portfolio

More details - 40 pages of them! - here.

(Sources: Genel Energy, Yahoo!)

By John Lee.

The Trump administration has reportedly granted Iraq a further 90-day extension to the waiver exempting it from US sanctions on Iran.

CNBC quotes a senior State Department official as saying on condition of anonymity:

"While this waiver is intended to help Iraq mitigate energy shortages, we continue to discuss our Iran-related sanctions with our partners in Iraq."

According to some energy analysts, without continued sanctions exemptions, Iraq could lose more than a third of its power overnight.

More here.

(Source: CNBC)

From Al Jazeera. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

There is a fight over energy in Iraq between the US and Iran. Iraq relies on Iranian gas for nearly half of its energy - gas that is now subject to US sanctions on Iran.

The Iraqi government originally obtained a 45-day sanctions waiver from the US, but that waiver is set to expire next week.

Iraq is particularly sensitive to the issue after protests against electricity cuts rocked Basra earlier in the year and Iraq's new government is treading a thin line trying to keep both the US and Iran happy, and its people satisfied.

Al Jazeera's Charlotte Bellis reports:

The United States has told Iraq that it will be allowed to keep importing crucial gas, energy supplies and food items from Iran after Washington reimposes sanctions on Tehran’s oil sector, three Iraqi officials said.

The waiver is conditional on Iraq not paying Iran for the imports in US dollars, said the officials, who included a member of Iraq’s ministerial committee that oversees energy activities, Reuters reported.

The US sanctions take effect on Nov. 4.

The ministerial committee official said Iraq’s finance ministry had set up an account with a state-run bank where Baghdad would deposit in Iraqi dinars the amounts owed to Iran for the imports.

Central bank officials said in August that Iraq’s economy is so closely linked to Iran that Baghdad would ask Washington for permission to ignore some US sanctions.

Iraq imports crucial supplies from its neighbor including gas for power stations.

(Source: Tasnim, under Creative Commons licence)

Iraq is negotiating with the U.S. for exemptions from the impending snap-back of sanctions against Iran, arguing that it could not cut consumption of Iranian electricity and natural gas immediately without suffering serious economic harm and social instability.

An Iraqi delegation was in Washington last week seeking a waiver for its cross-border trade, meeting with senior officials in the State Department, Treasury Department, and National Security Council, according to multiple officials familiar with the talks.

More details here from Iraq Oil Report (subscription required)

(Source: Iraq Oil Report)

By Ahmed Tabaqchali. Originally published by Iraq in Context; re-published by Iraq Business News with permission. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Current analysis of renewed Iran sanctions often overlooks the wider context of Iraq's regional trading relations. 

The extent of Iraq’s compliance with US sanctions on Iran has raised concerns regarding the loss of Iranian exports to its economy. However, Iraq’s trade with Iran, when looked at in the context of the wider region, shows these concerns in a different light.

It is arguably smaller than is widely perceived, especially given the long border between the two nations and the supposedly strong influence of Iran in Iraq, something which is contested.

There are many variables, following the imposition of sanctions, that will influence Iraq’s economy and trading relationships, making it difficult to examine any change in Iraq-Iran trade in isolation. Some of these variables are China’s response to these sanctions – its continued or increased purchase of Iranian oil or to impose tariffs on US crude- in light of its escalating trade war with the US.

Add to this the effects on oil demand from a change in world growth prospects as a result of an intensifying US-China trade war. Balancing or complicating events is the success of Saudi Arabia in sustaining increased oil production, or Iraq’s ability to increase its oil production. Finally, the state of the Turkish economy and the declining value of the Turkish Lira (TL[i]), in light of recent events, will play essential roles given Turkey’s substantial trading relationship with Iraq.

Much of the recent coverage of Iran’s trading relationship with Iraq refers to the significant annual exports of USD 12bn- which while significant, should be taken in the framework of Iraq’s overall imports and the trend of these imports from 2003-2017 (chart below). Additionally, Iran’s trade like, all other neighbouring nations’ trade with Iraq, is one-sided to its benefit. Iranian exports to Iraq are made up of goods and services, with the goods element at about USD 6bn for the 12 months ending March 2018[ii], which corresponds to about 15% of Iraq’s imports for 2017.

Iraq’s imports exploded six-fold from 2003 until 2013 to satisfy the population’s demand for goods after the isolation of the years under the sanctions. All of Iraq’s neighbours: Turkey, Iran and Jordan saw massive growth of exports to Iraq during this period for all types of goods, from fresh foods to finished products, given the near destruction of Iraq’ capacity to produce during the 14 years of sanctions and the ensuing civil war.

Iraqi Imports 2003-2017

 

(Source: https://tradingeconomics.com/iraq/imports)

Iraq imports peaked in 2013, after which the twin shocks of the ISIS war and the collapse in oil prices crushed the economy and with-it Iraq’s demand for goods. The effects of the ensuing ISIS conflict on overland trade routes affected the relative performance in the following years of each country’s exports.

The transit routes and volumes for 2014 (before the full effects of conflict and economic contraction) show the relative importance for each route, not only for the trade with a particular country, but that country’s additional role as a source of re-exports (chart below). In particular, Turaybill for Jordanian exports and re-exports coming from Aqaba, Kuwait’s Safwan, and Basra as a route for world exports as well as for UAE exports and re-exports from Jebil Ali. By 2014 exports from Syria ceased with the exception of the Al Waleed crossing, until it too ended when it fell under ISIS control in May 2015[iii]. Trade with Saudi Arabia ended with the invasion of Kuwait in 1990.

Iraq: Trade transit routes & volumes 2014

 (Source: Chart taken from a World Bank Report[iv])

Iranian exports peaked in absolute terms in 2013, declining by about 6% by 2017, while Iraq’s imports declined by 36%, with the result that Iran increased its market share from 11% in 2013 to 15% in 2017. However, this has more to do with the trade routes than any special relationship that Iraq might have with Iran or Iran’s competitiveness. The ISIS occupation closed Iraq’s trade route with Jordan, Syria and degraded the value of the routes with Turkey given ISIS’s occupation of Mosul and surrounding areas.

The growth in Iran’s exports from 2004 is shown in the chart below (data are based on the Iranian calendar up to the year 1395, ending in March 2017). Latest reports indicate that the figure was almost unchanged for the year ending in March 2018. Yet, Iraq’s overall imports recovered by 13% in 2017 vs 2016, and its imports from Jordan and Turkey increased by 8% and 19% respectively. All of which put the relative value of trade with Iran in context.

Given Iran’s natural geographical advantages from the long border and its supposed hegemony over Iraq, it can be argued that it should have accounted for much more of Iraq’s imports or at least cemented its conflict enhanced position when Iraq’s imports recovered. Instead it lost market share from 2016 to 2017, implying that it would continue to lose market share without the imposition of sanctions, and as such the sanctions would only accelerate this trend.

Iranian exports to Iraq 2004 – 2016

 

(Source: http://www.iraqbase.com/trade_with_iraq/iraq_tradition.aspx#c_31)

While Turkey’s exports of around USD 12bn in 2013 were twice Iran’s levels, most of these exports were destined for the Kurdistan Region of Iraq (KRI) in which Turkish goods and companies played a significant role in the economic boom the region witnessed until 2014.  The KRI, in 2017, accounted for 67% of all Turkey’s exports to Iraq up from 50% in 2007[v].

Turkish exports to Iraq suffered significantly due to the triple shock to the KRI’s economy – the loss of federal budget transfers, the ISIS conflict and the oil price collapse – as well as from the contraction of the Iraqi economy. Turkish exports declined 36% in 2013-2016 vs a decline of 43% in Iraq’s total imports, increasing its market share from 20% to 22%. The effective gain in market share is more significant than that, as most of these exports were for Iraq overall as opposed to being concentrated in the KRI. Turkish exports’ 18% recovery in 2017 and total imports’ 13% increase vs flat Iranian exports emphasises the competitiveness of Turkey’s exports whether due to quality or currency competitiveness vs the Iranian Rial.

Finally, the value of Turkish exports actually increased by about 25% in TL terms[vi], as the TL exchange rate against the USD decreased from TL 2.15 by end of 2013 to TL 3.79 by the end of 2017. All of which underlines the importance to Turkey of its exports to Iraq, especially in light of the 40% decline in the TL vs the USD so far in 2018. The significance of these exports might very well increase Iraq’s bargaining power with Turkey over many issues, particularly the water flow of the Tigris and Euphrates. Iraq’s relative bargaining power is further enhanced by the fees -converted to TL- collected for the oil that is shipped through Turkey to its port of Cihan, especially if Iraq resumes the Kirkuk oil exports of 250,000-300,000 barrels per day (bbl/d) that were cut after it reasserted feral authority over these fields in October 2017[vii].

Turkish exports to Iraq 2004 – 2017

 

(Source: https://tradingeconomics.com/turkey/exports/iraq)

Jordan’s exports and re-exports to Iraq suffered a great deal due to the closure of the land routes as a result of the ISIS occupation and subsequent conflict. The chart below shows a decline of 64% from 2013 to 2016 in Jordan’s exports, and probably a similar decline for re-exports. The mild recovery of 8% by 2017 from 2016’s low levels should be seen in the context that the trade route only reopened in October 2017, which argues well for meaningful growth in 2018[viii]. While Jordan’s economy is too small to fully replace Iran’s exports, its fresh foods[ix] would fill some of the gap and its much larger re-exports through Aqaba will make a difference.

Jordan’s exports to Iraq 2003-2016

 

(Source: https://tradingeconomics.com/jordan/exports/iraq)

Kuwait’s exports to Iraq recovered meaningfully in 2017 after a decline in 2013-2016, yet overall volumes are small. Most of these are re-exports through Safwan as Kuwait’s ports complement Basra.

Kuwait’s exports to Iraq 2003-2017

 

(Source: https://tradingeconomics.com/kuwait/exports/iraq)

The biggest potential beneficiaries from the sanctions would be Saudi Arabia and the UAE. Developing their relationship and influence in Iraq through trade and investments is magnified without competition from Iranian goods. Their economies would benefit from both the opportunity to replace Iranian products and from a sizeable recovering market. Even though 2016[x] was a low point for UAE’s total exports to Iraq, exports accounted for 53% of the mix making Iraq the seventh largest export market, while re-exports accounted for 47% of the mix, with Iraq as the fourth largest re-export market.  All of which highlights Iraq’s importance to both the UAE’s economy and its vital re-export business.

UAE’s exports to Iraq 2003-2016

 

(Source: https://tradingeconomics.com/united-arab-emirates/exports/iraq)

Trading with Saudi Arabia ended with the occupation of Kuwait, and while it saw a recovery since 2003, it remained tiny compared to the sizes of the two economies. The re-opening of the Arar border crossing in late 2017, coupled with the re-setting of the relationship, will change this significantly with Saudi expectations that trading values would approach those of Iran in ten years’ time[xi].

Saudi Arabia’s exports to Iraq 2003-2016

 

(Source: https://tradingeconomics.com/saudi-arabia/exports/iraq)

However, there is more to Iraq’s trade with Iran other than its exports of goods, as the relationship includes the export of electricity and gas, as well religious tourism in the form of at least three million religious tourists a year, especially during the annual Arbaeen pilgrimage.

Iran’s recent exports of electricity have been about 1.0 gigawatts[xii] (GW) increasing available domestic supply to 18.91 GW[xiii] by end of 2016. However, the supply has been frequently interrupted since 2015 as Iraq has failed to make the required contractual payments to Iran[xiv]. The supply cut in July 2018 being the latest case - which was a combination of over-due bills of about USD 1bn[xv] and Iran’s increased domestic needs for electricity. The argument over the importance of this supply has been made moot as Iran would not be able to resume exports in the near future, due to its own domestic needs[xvi]. Short-term solutions to replace this lost supply from Kuwait and Saudi Arabia have the potential to become long-term solutions that will further cement the relationship.

For instance, Kuwait supplying fuel for some of the inactive power stations would go some way for Iraq to increase the utilization of its available but unutilized generating capacity due to lack of fuel. This relationship could be developed to one of mutual benefits with Kuwait supplying electricity in return for Iraq supplying gas[xvii], which while mutually beneficial would help the rebuilding of trust. Similarly, discussions with Saudi Arabia for the supply of electricity, possibly under much more advantageous commercial terms[xviii] than those with Iran, would further develop this relationship.

Much more troublesome and very difficult to replace would be the supply of Iranian gas to power stations in Baghdad and Basra - these were based on deals signed in 2013 to supply 9.1 Billion Cubic Meter (BCM) a year to each city. Exports to Baghdad started in June 2017 and totalled 1.2 BCM by November 2017[xix], while exports to Basra were supposed to start after May 2018[xx].  Both sides have been silent on this recently, as media reports have only covered Iraq’s implementation of the sanctions in the form of banking transactions and closing access to Iranian goods. While details could be delayed until the November implementation of the oil sanctions or Iraq would seek waivers. Either way, there are no easy or short-term solutions for the replacement of this vital supply apart from increased focus and spending on capturing flared gas. However, this gas has been only available recently, and in relatively small quantities, while its eventual replacement, i.e. gas recovered from flaring, is substantially cheaper as the Iraqi government pays the Basra Gas Company (BGC) about USD 2.50 per MMBtu vs for Iranian USD 6.6 - 7.2 per MMBtu[xxi] (data as of early 2018).

Religious tourism is an important sector, employing about 160,000 people directly, extending to 447,000 beneficiaries (2014 data[xxii]). While, Iranian pilgrims and visitors are an essential component in religious tourism, yet a significant percentage of pilgrims or visitors are Iraqis. Moreover, the importance to Iraq’s economy from the spending of Iran’s pilgrims is somewhat misunderstood or overstated. For instance, during the Arbaeen, Iraqis provide hospitality through offering accommodation in their homes and providing free food as part of their religious duties towards the pilgrims[xxiii]. As such, the extra consumer spending during the most prominent religious event comes from Iraqis. The spending by regular Iranian religious visitors, throughout the year, will not be so easily replaced- although it is mitigated by the fact that almost all those visitors use Iranian airlines and employ Iranian tour operators.

Finally, the effects, of the loss of USD access for Iran, on Iraq would take a long time to assess. In 2012, the governor of the Central Bank of Iraq[xxiv] suggested that there were increased demands of 40-50% for the USD following the imposition of sanctions on Syria and Iran, which led to an increase in the market price of the USD vs the Iraqi Dinar (IQD) as can be seen from the chart below.

Iraqi Dinar (IQD) exchange rate versus the USD Jan 2011 – August 2018

 

(Source: Central Bank of Iraq, Iraqi currency exchange houses, Asia Frontier Capital)

(Note: The sharp pikes in 2012, 2013 & 2015 were due to CBI policies that restricted the sale of USD, but abandoned after causing a rise in market rates)

The convergence of the market price of the USD and the official exchange rate vs the IQD came to an end in 2011 and diverged in 2012 due to the increased demand for the USD. Apart from the spikes due to policies to limit the official supply of the USD, the normal range was 2-4% premium of the market price over the official rate. This increased up to a 10% premium during the worst of the crisis as oil revenues were substantially below expenditures and exports were less than imports. This divergence came to an end with the recovery in oil prices and the declining cost of war until it stabilized at around 1.5% premium to the official exchange rate.

It’s difficult to make the same argument today about the increased demand, or at least a sharp increase, from the current round of sanctions given that the re-integration of Iran with the world economy following the signing of the JCPOA (The Joint Comprehensive Plan of Action) still suffered from the reluctance[xxv] of most banks to deal with Iran. In particular, Iran’s access to the USD continued to be severely limited. All of which might explain that the signing of the JCPOA had not affected the market price of the USD vs the IQD.

However, it is worth noting that after a stabilization over the last few months, the premium of the market price over the official rate increased in early August from about 1.5% to over 2%. This might be related to the sanctions effect or to the signs of recovery of the local economy from increased consumer spending and the resultant increase in demand for imports. A full recovery in consumer demand for imported products would likely take the premium to a range of 2-4%.

It can be argued, that while Iraq genuinely disapproves of the Iranian sanctions given its own bitter 14 years’ experience with them, yet it stands to benefit from their imposition as they will fast-track a number of positive trends that are already taking place.

Iraq’s new-found ability to self-fund its reconstruction, estimated at about USD 18.8bn by end of 2018[xxvi], will accelerate its economic recovery through a liquidity injection of 14.5% into the non-oil economy once reconstruction projects are underway. In the process making the country extremely attractive for its neighbours’ economies, both as a goods export destination and for re-construction businesses. The opportunity to replace Iranian goods increases the benefit for these exporters. Ultimately, this will cement the USD 30bn pledged for the reconstruction of Iraq at the Kuwait Conference[xxvii] from promises into actual spending that will benefit the economies of the providers as much as Iraq’s economy. The deeper implication is a change in their relationship from that of benefactors into partners which will ensure its sustainability- in the process speeding Iraq’s re-integration in the region and ensure a balanced relationship with its neighbours.

The re-opening of the Iraq-Saudi Arabia border crossing and the Iraq-Jordan border crossings will accelerate the rehabilitation of Anbar (arguably disenfranchised after 2003 and a seat of resentment for the post-2003 political order), and the southern governorates (neglected by both the current and the prior regimes). The resumption of trade-links with their associated economic activities would provide a huge boost to the local economies, which while contributing meaningfully to the healing process, will build upon and magnify the economic revival until it becomes self-sustaining with the boost from reconstruction.

Meanwhile, the relationship with Iran might mature if the Iranians look beyond their frustration at Iraq’s compliance with the sanctions and listen closely the anti-government sentiment within Iran following the December 2017 demonstrations. What is vital here, and something that would increase stability within Iraq, is a complete rethinking the relationship to that of a state to state basis from the current relationship involving sub-state actors. This would subsequently benefit Iran by making another Iraqi security crisis less likely, and ensuring the relationship is based on national sentiment, rather than non state actors.

Disclaimer

Ahmed Tabaqchali’s comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

[i] The code for Turkish Lira is TYR, but TL is used widely. https://en.wikipedia.org/wiki/Turkish_lira

[ii] The 12 months ending in March 2018 correspond to the Iranian year 1396. Iranian data are provided using this calendar.

 https://financialtribune.com/articles/economy-business-and-markets/81287/iran-third-biggest-trading-partner-of-iraq-with-16-share

[iii] Al Waleed crossing was freed by Iraqi forces in June 2017. https://www.reuters.com/article/us-mideast-crisis-iraq-syria/iraqi-forces-remove-islamic-state-fighters-from-vicinity-of-u-s-base-in-syria-idUSKBN19807Y

[iv] http://documents.worldbank.org/curated/en/672671468196766598/pdf/106132-v2-main-report-P159972-PUBLIC-KRG-Economic-Reform-Roadmap-post-Decision-Review-05-30-16.pdf

[v] https://www.washingtoninstitute.org/policy-analysis/view/turkey-and-the-krg-signs-of-booming-economic-ties-infographic

[vi] Arrived at by diving the value of exports by the year end value of the TL.

[vii] Iraq’s bargaining power is further enhanced if it links this with plans to double Kirkuk’s output over the next few yeaes

 The Kurdistan Regional Government (KRG) exported an average of 550,000 bbl/d in 2017 until October 2017. After which they ranged between about 240,000-370,000 bb/d for an average of 311,000.

http://auis.edu.krd/iris/sites/default/files/Statehood in KRI through an Economic Lens_ FINAL.pdf pages 6 & 7, page 7 footnote 15.

The #JODIData report is out for the month of May. Let's begin with #SaudiArabia.

Once again, we're not on the same page when it comes to exports. They posted a FAR LOWER figure than what we tracked. Off by half a million barrels a day, or >15 million barrels for the month. #OOTT pic.twitter.com/5wtBw3d3Rm

— TankerTrackers.com, Inc. (@TankerTrackers) July 18, 2018

[viii] http://www.jordantimes.com/news/local/industrial-exports-iraq-resume-after-border-reopening

[ix] Although most of Jordan’s exports are currently value-add products. In 2016, Pharmaceutical Products accounted for 16% of total exports, Electrical & Electronic Equipment for 13%; Fertilizers for 12%; plastics for 11%. While Vegetable, Fruits & Nut food preparation accounted for only 2.3%, and Edible Vegetables, certain roots and Tubers accounted for 2.2% for a total under 5%.

[x] http://iraqieconomists.net/en/2017/09/19/uae-iraq-trade-touches-7-billion-2016/

[xi] https://www.thenational.ae/world/mena/saudi-iraqi-trade-to-reach-23-billion-saudi-riyals-within-10-years-1.706487

[xii] https://en.mehrnews.com/news/122562/Iran-to-resume-electricity-exports-to-Iraq-within-weeks

[xiii] Table 3, page 79 ““A New Hope: Iraq Oil’s Way Forward” http://www.bayancenter.org/en/2018/02/1435/

   Figures from the Ministry of Electricity show that available capacity, was 16.0 GW by end of July 2018, which does not include the lost Iranian supply. https://moelc.gov.iq/index.php?name=News&file=article&sid=4212

[xiv] This article explains the nature of the relationship and the history of the under-payments https://www.washingtoninstitute.org/policy-analysis/view/the-irgc-may-try-to-divert-iraqs-electricity-payments

[xv] https://theiranproject.com/blog/2018/07/08/iran-cuts-electricity-supplies-to-iraq-over-unpaid-bills/

[xvi] https://theiranproject.com/blog/2018/07/17/govt-spox-iran-not-to-resume-electricity-supplies-to-iraq-in-near-future/

[xvii] https://www.middleeastmonitor.com/20170202-kuwait-considers-export-of-electricity-to-iraq/

[xviii] https://www.bloomberg.com/news/articles/2018-07-29/iraq-says-saudis-to-sell-it-power-at-a-fraction-of-iran-s-price

[xix] Page 82 “A New Hope: Iraq Oil’s Way Forward” http://www.bayancenter.org/en/2018/02/1435/

[xx] http://www.irna.ir/en/News/82906994

[xxi] Page 82 “A New Hope: Iraq Oil’s Way Forward” http://www.bayancenter.org/en/2018/02/1435/

[xxii] http://documents.worldbank.org/curated/en/255111529495871846/pdf/Jobs-in-Iraq-a-primer-on-job-creation-in-the-short-term.pdf

[xxiii] http://www.bbc.com/travel/gallery/20171220-the-iraq-city-that-opens-its-doors

[xxiv] https://www.alarabiya.net/articles/2012/04/12/207233.html

[xxv] https://www.reuters.com/article/us-iran-banks-kerry-idUSKCN0Y30OJ

[xxvi] A recent report by the author covers this in further detail.https://www.iraq-businessnews.com/2018/06/15/forget-the-donations-stupid-new-dynamics-in-funding-reconstruction/

[xxvii] https://uk.reuters.com/article/mideast-crisis-iraq-reconstruction/factbox-pledges-made-for-iraqs-reconstruction-in-kuwait-idUKL8N1Q55RY