A recent decision by the United States to extend sanctions waivers by four months to Iraq will enable it to continue trading in gas and electricity with Iran. Washington had granted Iraq sanctions exemptions in May 2018, after the Trump administration pulled Washington out of the nuclear deal with Iran known as the Joint Comprehensive Plan of Action (JCPOA).
The Trump administration’s decision to withdraw from the JCPOA, and the subsequent enforcement of US-led sanctions on Iran, forced Iraq to delay payments on its energy debts to Iran. While Iranian contractors have faced delayed payment problems with Iraq on a regular basis since 2018, most energy debts are owed to the Iranian government. Tehran has confirmed that the sanctions as well as Iraq’s massive internal financial problems have prevented timely payment of debts owed.
In response, Iran cut gas exports to Iraq this year by some 20 million cubic meters daily, despite an agreement that obligated it to supply 30 million cubic meters of gas to Iraq on a daily basis. To put things into perspective, for every reduction of 10 million cubic meters of gas supply to Iraq, the country loses 6,000 megawatts of electricity supply. Iraq spends approximately $4 billion annually to import Iranian gas and electricity but on a daily basis, it still needs some 70 million cubic meters of natural gas to meet local demand. Iraq is making plans to invest in its associated gas and natural gas fields to meet energy needs and reduce dependence on imports from Iran. Iraqi natural gas reserves have increased by 8 trillion cubic feet, raising its proven natural gas to roughly 140 trillion cubic feet, although the numbers are yet to be confirmed independently. Until then, Iraq will depend on Iran to meet its gas and electricity needs.
This pushed the Iraqi government to call for an oil-for-gas barter deal with Tehran in the summer, despite the sanctions. By July 12, Iraq confirmed that it would pay its debt back by giving Iran crude oil. This Iraqi step aimed to diffuse tensions with Iran, and the Iraqi side is also mindful of the fact that it depends on its neighbor for up to 40% of its gas and electricity needs. Earlier in the year, it was estimated that Iraq owed Iran some $11 billion and against this backdrop, the United States granted Iraq waivers to help it pay Iran some $3 billion in debt owed. Iran’s embassy in Baghdad put the figure of debt owed at $11 billion, but the Iranian Central Bank said it was closer to $10 billion.
Before the United States stepped in to extend the latest sanctions waivers to Iraq in mid-November, Baghdad had already expressed its willingness to settle its outstanding debt by engaging in financial transactions with the Iranian banking system. A delegation from Iraq’s Central Bank and the Trade Bank of Iraq (TBI) went to Oman to work on a formula with the US Treasury Department, whereby Muscat would act as an intermediary and transfer the debt payments to Iran. Washington was reportedly adamant on getting the money out of Iraq to bar Iran from accessing the available financial resources, mindful of Tehran’s influence over Baghdad.
As per the latest partial debt payment arrangements, Iraq will continue to receive gas and electricity from Iran. But moving forward, any financial compensation made to Iran through debt payments will likely be conditioned on Tehran using them to address the country’s dire humanitarian needs.. Otherwise, the United States believes that Tehran may use these funds to finance its regional proxies and escalate tensions in the region, especially given that the Gaza conflict is likely to take time to defuse and Iran may use this opportunity to expand the scope of the conflict to undermine US interests in the region and expand its spheres of influence.
Meanwhile, Republican lawmakers in the US Congress are adamantly opposed to releasing any money to Iran. As a result, despite the fact that Washington had earlier granted a green light to release $6 billion of Iran’s previously frozen assets abroad, via Qatar, to encourage Tehran to release dual-national prisoners including Iranian-Americans back in September of this year, under Republican pressure, and after Iranian ally Hamas attacked Israel in October, Iran was blocked from withdrawing the money.
To date, previous Iraqi debt payments had gone directly into two Iranian companies, Tavanir and the National Iranian Gas Company, through their accounts in the Iraqi TBI Bank. But the United States’ green light now to Iraq to repay its debt owed to Iran may prevent payments even in Iraqi dinars to Tehran unless the local currency is first converted into US dollars, the main business currency used by Iraqis and over which Washington holds tight control.
By all indications, the United States might use this financial leverage to pressure Iran to reduce regional tensions. Washington is simultaneously targeting Iran’s regional strongholds to signal displeasure over its behavior. Over a month after Hamas attacked Israel, on November 21, US forces attacked two sites in Iraq linked to Iran, in retaliation for some 66 attacks carried out by Iran-linked groups against US coalition forces in the region. The Iraqi militant group linked to Iran, Kata’ib Hezbollah, was involved in these attacks.
