Iraq to Pay Iran with Oil for Billions of Dollars in Debt

Latest Developments

Iraq announced this week it would repay billions of dollars in natural gas debts owed to Iran using Iraqi oil instead of cash — a move that would likely violate U.S. sanctions absent authorization from Washington. The news follows weeks of reporting related to a U.S. offer to free up cash for Tehran so long as Iran does not produce weapons-grade uranium.

Iraq reportedly owes Iran $11 billion for gas imports — payment for which is complicated by U.S. sanctions. Last week, an Iranian official claimed the United States had authorized Iran to access $10 billion of its escrowed funds trapped in Iraq due to those sanctions, but Tehran then reportedly cut gas supplies to Iraq to protest its inability to fully repatriate those funds. By authorizing a new oil-for-gas swap arrangement, Washington is opening the door to increased Iranian and potentially Russian sanctions evasion schemes.

Expert Analysis

“Contrary to Iraqi statements, U.S. sanctions treat oil payments like cash payments, including those that involve the Central Bank of Iran, the National Iranian Oil Company, or any Iraqi financial institution. It’s difficult to imagine this scheme being implemented without approval from Washington.” — Richard Goldberg, FDD Senior Advisor

“While allowing the Islamic Republic to use billions of dollars to pay its debt from accounts in Iraq was already a bailout for Tehran, it will be nearly impossible to monitor and verify participants and quantities involved in an oil-for-gas scheme — which will allow Iran to exploit the channel to even greater benefit and invite other illicit actors like Russia to participate clandestinely in the scheme.” — Saeed Ghasseminejad, FDD Senior Iran and Financial Economics Advisor

Iran Sanctions May Prohibit Arrangement

While a narrow natural gas exemption exists for U.S. sanctions targeting Iran’s energy sector (Section 1244 of the Iran Freedom and Counterproliferation Act of 2012), the caveats to that exemption make a barter scheme like this difficult to implement without authorization from the U.S. Treasury Department. Treasury considers oil payment for debts and barter trades involving the Central Bank of Iran to be prohibited “financial transactions.” U.S. law mandates sanctions on any financial institution taking part in a natural gas-related financial transaction with Iran that involves goods otherwise subject to U.S. sanctions — in this case oil. A U.S. official speaking to Al-Hurrah on July 13 reportedly had “no comment at this time on reports of an arrangement between Iraq and Iran.”

Related Analysis

“Non-Enforcement of U.S. Oil Sanctions on Iran Hits New High,” FDD Flash Brief

“U.S. Releases Funds to Pay Iran’s Debts,” FDD Flash Brief