January 3, 2020 | Policy Brief

Time to Increase Economic Pressure on Iran’s Allies in Iraq

January 3, 2020 | Policy Brief

Time to Increase Economic Pressure on Iran’s Allies in Iraq

At Tehran’s direction, Iraqi Shiite militias laid siege to the U.S. Embassy in Baghdad this week, to which the United States responded with an airstrike that killed Iranian General Qassem Soleimani and several key associates. While this strike is consistent with Washington’s “maximum pressure” campaign against Tehran, the Trump administration has taken few measures to exert economic pressure on Iranian proxies in Iraq, or on the Iraqi officials who permit Iranian infiltration.

Both economic and political ties between Baghdad and Tehran have grown substantially since the United States toppled Saddam Hussein in 2003. Iranian proxy forces consisting mainly of Iraqi Shiites moved swiftly to establish their influence inside Iraqi institutions. Tehran has even exerted considerable influence over the choice of Iraqi prime ministers.

Meanwhile, trade between the two countries has grown by an order of magnitude. Iraq’s imports from Iran grew from $143 million in 2001 to $6.4 billion in 2017. While the United States imposed harsh sanctions on Iran from 2010 to 2013, this did not disrupt the growth of exports to Iraq, which rose from $5.2 billion in 2011 to $6.3 billion in 2012 and then remained stable during the negotiation and implementation of the Iran nuclear deal.

After the United States reimposed sanctions following its departure from the nuclear deal, exports from Iran to Iraq rose once again. During the previous year on the Persian calendar (March 2018 – March 2019), Iraq imported $9 billion of goods from Iran, up from $6.5 billion one year earlier. Thus, Iraq absorbed 20 percent of Iran’s total exports and was the number two destination for Iranian non-oil goods exports.

In the first eight months of the current Persian year (March 2019 – November 2019), Iraq imported $5.7 billion from Iran, on track for a total similar to last year’s. In contrast, the United States exported just $1.1 billion of goods to Iraq in 2019, down from $1.3 billion the year before.

Iraq’s appetite for Iranian gas and electricity is a major driver of imports. 30 to 40 percent of Iraq’s electrical power supply depends on trade with Iran. Three major power stations in Iraq, which generate 2500 megawatts of the country’s electricity, use Iranian natural gas. The chairman of the Iran-Iraq Chamber of Commerce puts the value of this gas around $3.5 billion per year. He also estimates that Iran exports 1200 to 1500 megawatts per day to Iraq, or close to $700 million worth of electricity per year. The precision of these figures is uncertain, since neither Iran nor Iraq published detailed data, and since gas and electricity contracts are generally opaque and priced locally.

Washington has issued waivers that permit Iraqi energy imports from Iran despite the return of sanctions. The waivers require renewal every 90 days, so the United States could refuse additional renewals until Baghdad ensures the security of all U.S. facilities in Iraq. The United States could also issue a conditional waiver, as it did for certain purchasers of Iranian oil, whose renewal depended on meeting certain benchmarks. In this case, these could be the removal of officials responsible for the embassy attack and a significant reduction in trade with Iran.

Washington should also insist that Baghdad comply with sanctions for which it has no waiver.  Iranian trade data show that between December 2018 and March 2019, Baghdad imported more than $200 million of Iranian petrochemical products, which U.S. sanctions prohibit. The United States should designate Iraqi sanction busters, the financial networks that enable them, and government officials who protect them.

The effectiveness of economic pressure is likely to depend on a coherent U.S. strategy that also employs diplomatic, military, and intelligence assets in a coordinated manner. If Washington escalates economic pressure, the Iraqi government will have all the more reason to confront Iranian infiltration.

Saeed Ghasseminejad is a senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP) and Center on Military and Political Power (CMPP). For more analysis by Saeed, CEFP, and CMPP, subscribe HERE. Follow Saeed on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP and @FDD_CMPP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.


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