Iraq to feel the pinch
Iraq will likely feel the pinch of the tightening international embargo on Iran, writes Salah Nasrawi
Even though they have not yet been fully implemented, the prospect of tough new international sanctions on Iran has already made Iraqis feel concerned that the embargo on the neighbouring country will have a negative impact on their own country's fledgling economy.
The US and European governments have imposed sanctions on Tehran in an attempt to force the Iranians to abandon their nuclear ambitions, with both Americans and Europeans stepping up sanctions imposed on the Central Bank of Iran and the Iranian oil sector.
Under new measures to be passed by Congress, bank transactions with Iran and finance for its oil shipments could come under fiercer US supervision. The European Union has also imposed an embargo on Iranian oil that will take effect in July.
Countries and companies trading with Iran risk being barred from the US financial system under the terms of the sanctions. For neighbouring Iraq, tightening international sanctions against Iran look set to wreak serious damage on its economy.
The impact could even be devastating in the event of a military conflict in the Arabian Gulf if the embargo fails to stop Iran's nuclear programme.
The prospect of stricter measures has led Iraq to consider seeking a waiver from the US from the sanctions on Iran, because of its high volume of trade with the country and the need to protect its own oil industry and foreign reserves from penalties.
Ali al-Dabbagh, an Iraqi government spokesman, said that Baghdad was in the process of presenting an official request to the United States to exclude it from the sanctions system.
The embargo is a delicate issue for Baghdad, which has strong political ties with neighbouring Iran. Iraq's Shia-led government has moved closer to Tehran since the 2003 US-led invasion of the country that toppled the Sunni-led regime of former Iraqi president Saddam Hussein.
Iran is now Iraq's main trading partner after neighbouring Turkey, with bilateral trade estimated at US$10 billion in 2011. Iranian exports to Iraq cover goods ranging from cars and air conditioners to tomatoes and milk products. Iranian commercial banks have also established branches in Iraq.
Iran is also a major investor in Iraq's post-war reconstruction, with Iran investing heavily in factories and power plants. At present, Iran exports some 750 MW of electricity to Iraq, and Iraq relies on Iranian gasoline in the event of shortages.
Iraq is a hub for Iranian Shia pilgrims who flock by their hundreds of thousands every year to visit Shia holy sites in the country.
As sanction-hit Iranians start feeling the bite of the international measures, they have been reportedly turning increasingly to Iraq for hard currency after their own national currency, the riyal, plunged to record lows against the dollar over the past couple of weeks.
Iraqi officials and media have been reporting a vast movement of US dollars from Iraq to Iran, either through business ties that have grown rapidly since the fall of Saddam, or by smuggling across the 1,200 km-long border.
Sales of dollars in currency auctions held by Iraq's central bank rose to as much as US$400 million on some days in December from a previous average of US$150 million. The Iraqi media have suggested that many of these dollars have been bought by Iraqi traders for resale in Iran.
Iraq has some US$60 billion in foreign reserves, most of which has been generated by the country's oil revenues and should be used for financing Iraq's trade and business transactions.
The flow of dollars to Iran, and also to Iraq's sanctions-hit neighbour Syria, has impacted on the Iraqi dinar, which has been losing value and has been the victim of increased speculation abroad.
These developments are expected to affect trade, as Iraq relies on imports for almost all its goods and commodities, including foodstuffs.
In a bid to stop the bleeding of hard currency, the Iraqi central bank recently enacted measures to identify those buying dollars, some of whom are believed to be front men for Iran.
The new procedures, coming into effect on 1 February, require banks that buy dollars from the Iraqi central bank to provide the identities and transaction details of those placing the order.
Central bank officials said transactions had experienced a dramatic fall in the first two days of February, ranging from US$3-4 million.
Meanwhile, reports in the Iraqi press have suggested a sharp decline in the number of Iranian travelers in the country in recent weeks, due to a shortage of hard currency. Iraqi traders have been refusing to accept Iranian currency from travelers, demanding dollars instead.
For Iraq, further sanctions on Iran would mean greater international pressure on the country to close a window for the economy, itself devastated by 13 years of UN-imposed economic sanctions following Saddam's 1990 invasion of Kuwait and nine years of US occupation.
Among issues cited about the failings of Iraq's economy are the country's over-dependence on oil, high unemployment, endemic corruption, lack of basic services and ill-conceived economic policies.
Iraq is also concerned about the tensions between the US and Iran. If the sanctions fail to deliver the knock-out blow that forces Tehran to compromise on its nuclear ambitions, the United States and Israel might resort to military strikes against Iran.
On the economic level, Iraq will be among the most-affected countries in the region if the Straits of Hormuz in the Gulf are shut to shipments of crude oil.
Most of Iraq's oil exports pass through this strategic waterway, and oil exports account for most of Iraq's government income.
Labeed Abawi, under-secretary at the Iraqi foreign ministry, told the local Aswat al-Iraq news agency on Monday that Iraq "will be the country most affected if a crisis erupts."
If Iraq is not able to sell its oil for a long time because of a crisis with Iran, the pain will be felt throughout the country and could increase discontent with the government and instability.
There is growing concern that Tehran will increase its intervention in Iraqi affairs if it is attacked, including fears that it may try to involve Iraq in any conflict.
Last month, general Qasem Soleimani, commander of Iran's powerful Revolutionary Guards, was quoted by Iraqi media outlets as saying that his country wielded influence over parts of Iraq, boasting that Iran controls Iraq "one way or another."
Iranian supreme leader Ali Khamenei also issued an indirect warning this week to the effect that if tighter sanctions are imposed, or Iran is attacked, US oil interests in Iraq could be in jeopardy.
"Of course, they [the Americans] still interfere in oil and security issues, and the Iraqi people and government will do something about it in the future," Khamenei said.
Although neither Soleimani nor Khamenei were specific in their comments, the remarks clearly indicate threats that Iraq may constitute part of the frontline in any coming conflict between Iran and the West.
The stakes are high for Iraq, and not only because an end to Iran's dispute with the US and Israel is not in sight. Iraq has become so vulnerable since the 2003 US-led invasion that regional struggles could well determine its future.