In March 2019, President Hassan Rouhani made his first official trip to Iraq to conclude agreements to help Iran fight renewed US sanctions and its growing economic isolation. Iraq is anxious to work with Iran to keep the country stable amid rising US-Iranian tensions.
Iran says it relies on Iraq to mitigate the impact of US-led sanctions put in place after President Donald J. Trump withdrew the United States from the Joint Comprehensive Plan of Action (JCPOA) in May 2018. Also, Tehran wants Iraq to pave the way for the departure of US forces from its territories. The Iranian-backed Conquest Alliance won a significant majority in Iraq’s parliamentary elections last year, and it could eventually vote to force US troops out of Iraq.
Baghdad has increased its efforts to resolve tensions between the United States and Iran. It has demanded that no hostile step against Iran is taken by the United States from inside its territories. In November 2018, after Iran told Iraqi President Barham Saleh that it expected the Hashd al-Shaabi to operate as a popular mobilization force, Baghdad asked the US Embassy to delete a tweet calling on Iran to respect Iraqi sovereignty and to dismantle its Shia militia force. In February 2019, when President Trump vowed to retain US forces in Iraq to watch over Iran, President Saleh said that he had not been asked to grant permission to the US to monitor Iran from inside Iraq.
Iran hopes that Iraq will take additional steps to defuse US-Iranian tensions as a way to bring the region together. President Rouhani insists that Iraq could play a key role in bringing regional countries closer. In response, when President Saleh traveled to Iran in November 2018, he made a point of visiting Saudi Arabia right after. In April 2019, Iraq’s Prime Minister Adil Abdul-Mahdi traveled to Iran and Saudi Arabia, while Iraq hosted a regional parliamentary conference that included delegations from Riyadh and Tehran. President Saleh said that the conference showed that Iraq’s neighbors were in favor of keeping his country stable. Iraqis fear that any tensions with Iran could destabilize Iraq.
Whether Iraq can revive the process of regional reconciliation with Iran is unclear. Similar meetings including one held in Kuwait last year to pledge reconstruction aid to help rebuild Iraq failed to bring Saudi Arabia and Iran closer though both countries participated in the meeting.
Iran insists on building up its influence in Iraq to force the United States to accept that Baghdad needs Tehran. Baghdad owes Tehran money for its gas and electricity imports. Iran cut energy exports to Iraq last summer, causing riots in southern Iraq. Even when Saudi Arabia stepped in to offer an alternative solar power plant to Iraq with the capacity to produce 3,000 megawatts of power, Baghdad repaid a portion of what it owed to Tehran to resume its electricity imports from Iran. Iran has asked Baghdad to pay its debts regardless of the sanctions regime, which prohibits the transfer of cash to Tehran. It says Baghdad owes $200 million per month to Iran for the gas that it imports. Iraq imports 600 million cubic meters of gas from Iran annually, and owes a total of $2 billion for its gas and electricity imports
Until recently, Iraq refused to transfer the money it owed to Iran though Tehran and Baghdad has abandoned the dollar in trade transactions in favor of other currencies like the rial, dinar, and the euro after the US sanctions kicked in. Iran has offered new options to Iraq to pay back what it owes by establishing joint banking mechanisms. Confident that Iraq will repay its debts, Iran has also extended its electricity exports to Iraq by a year. Iraq imports 1,300 megawatts of electricity from Iran annually.
There are limits on how far Iraq can go to ease rising tensions between the United States and Iran. Iraq has told the United States that it cannot replace Iranian gas imports, but Washington is keen to boost Iraq’s oil production at Iran’s cost. As the United States aims to drive Iran’s oil exports to zero, Iraq has stepped up its oil exploration in joint oil fields with Iran, allowing Baghdad to reap twice as much than Iran is able to due to its outdated technological capacity. The two share the Azadeghan, Yadavaran, Azar, Naft Shahr-Dehloran, West Paydar, Yaran and Arvand oil fields. Iraq also stopped oil swaps between Iran and Kirkuk. The move came after the United States helped Iraq boost its oil exports from Kirkuk after the defeat of ISIS in the area.
Last June, Iraq also handed the operation of several oil fields close to Iran’s borders to the Emirati company Al Hilal, while Iran increased its efforts to double oil extraction from the nearby joint field of Karoun. The West Karoun field, which includes the North and South Azadeghan as well as the North and South Yaran oil fields, holds an estimated 64 billion barrels of oil on Iran’s side of the field.
Iran is still very keen to keep Iraq as a top trade partner. Iranian goods offer Iraqis cheap and affordable products. Iran exported $6.5 billion to Iraq in non-oil commodities last year, including plastic, industrial, and agricultural products, as well as dairy products, building material, tiles/ceramics, detergents, sweets/chocolates, tomato paste and automobile spare parts. The value of technical and engineering projects that Iran undertook in Iraq was estimated at $3 billion, according to the Joint Iran-Iraq Chamber of Commerce. The value of power and energy exports to Iraq was $2 billion. Last year, Iraq was Iran’s third largest trade destination after China and the United Arab Emirates. By most indications, Iraq will remain a key trade partner for Iran this year. Trade between Iran and Iraq stood at $12 billion in 2018, and it is expected to rise to $20 billion this year.
During President Rouhani’s trip, Iran and Iraq negotiated new agreements to increase trade, develop common markets, aid pilgrimage, generate power, and establish a railway system to connect the two countries via the ports of Khorramshahr and Basra. Also, Iran signaled that it might agree to renegotiate the 1975 Algiers Agreement which divided in half the Shatt al-Arab, the waterway between Iran and Iraq. Iraqi officials have contested the agreement ever since.
This move to accommodate Iraq points to the fact that Iran wants to keep regional tensions under control. Since a stable and unified Iraq seems to be critical to the United States as well, Iran will work with Iraq to signal to the world that it seeks to preserve good neighborly relations within the region. A measure of whether Iran will succeed or not in this mission will depend on the United States and on how well it can isolate the Iranians.