American Sanctions on Iran Will Seriously Impact Iraq

Abdulwahab Al-Qassab

On November 5, the Trump Administration imposed a new set of sanctions that aim to drastically curtail Iran’s ability to export its primary products of oil and gas to the world market. This decision has been developing since May, when President Donald Trump withdrew the United States from the Joint Comprehensive Plan of Action. The rationale for the new sanctions was spelled out in a speech by Secretary of State Mike Pompeo at the Heritage Foundation in the same month. It contained a set of 12 demands that Iran needed to address regarding its nuclear program and regional behavior. The new state of affairs has a major impact on regional political developments and security and will undoubtedly also affect Iraq’s domestic politics.

To be sure, Iraq was placed in a very difficult position when, like other countries in the region and around the world, it was asked to abide by the new set of US sanctions on Iran. Iraqi politicians are in a bind trying to accommodate this demand while living with the day-to-day situation of Iraqi dependence on Iran in such primary imported commodities as food, electricity, and natural gas and fuel. For now, the United States has granted a temporary waiver to Iraq regarding the importation of these commodities. There also are scores of Iranian financial exchange houses that Tehran uses to avoid the impact of monetary sanctions in addition to long borders that are open to smuggling contraband and sanctioned materiel. What makes this dependence especially dangerous is a large degree of sympathy among Shia political parties––some of which are part of the government––and militias associated with Iran’s Islamic Revolutionary Guard Corps, a primary target of American sanctions.

Bilateral trade between Iraq and Iran, over $8 billion, is skewed to Iran’s favor. Last October, the economic advisor at the Iranian embassy in Baghdad said that Iranian exports to Iraq in the prior six months alone totaled $4.5 billion. Iran tries to use Iraq as a conduit for increasing its trade volume and exports as well as for acquiring dollars, and this has resulted in the Iraqi dinar’s devaluation from previous levels.

Politically, Iraq today is not at all prepared to deal with the sanctions on Iran. Uncertainty about the new government of Adel Abdul-Mahdi adds to the seriousness of the situation. Some politicians have disparaged the sanctions against neighboring Iran while, simultaneously, Iraq’s Central Bank has already prohibited dollar-denominated transactions and informed financial institutions and banks to do the same. What is of concern, however, is the secret participation of Iran-connected financial institutions in a daily exchange held by Iraq’s central bank which results in the purchase of sizeable amounts of the American currency—amounts that are transferred illegally to Iran or used to purchase equipment that is subsequently smuggled to Iran.

Former Prime Minister Haider al-Abadi originally declared Iraq’s adherence to the sanctions when the Trump Administration reimposed some of them last August. But he was faced with criticism and opposition from Iran’s allies in the political system, which prompted him to seek relief for Iraq from Washington. Declaring that Iraq will pursue its own interests in the matter, Abdul-Mahdi appears to be following the same script; so far, however, he has not succeeded since Iraq is not included in the list of countries exempted from the sanctions.

One of the deleterious effects of the US sanctions is on Iraqi investors in Iran and on depositors in Iranian financial institutions. Two specific factors affected these investors: the collapse of the value of the Iranian rial, and the refusal of Iranian banks to return their deposits in dollars.

As Iran-friendly political factions in Iraq increase their influence in the country’s body politic, with assistance by Iran-supported militias, it is likely that Iraq’s parliament may try to blackmail the United States in order to escape the sanctions. One important tactic would be to ask the United States to withdraw its forces from the country. If this comes to pass, we can expect a crisis period in Iraqi-American relations which, in turn, may lead to more Iranian influence in Iraq.

While the new set of American sanctions will undoubtedly have a negative impact on Iran’s interactions with the world––witness the countries and companies retreating from previously signed contracts with the Islamic Republic––the fear is that Iraq will be an unintended victim. Suffering from ongoing political, economic, and security troubles, Iraq may not be sufficiently prepared to handle the additional sanctions and may indeed not be able to fully abide by them.

Abdulwahab Al-Qassab is a Visiting Scholar at Arab Center Washington DC. To learn more about Dr. Abdulwahab Al-Qassab and read his previous publications click here