Will US sanctions on Iran really end up hurting Iraq's economy?

From November 5, the United States will begin enforcing its second round of sanctions on Iran that targets its energy exports, raising worries that it will have a fallout on neighbouring Iraq. 

Internal political turmoil and years of conflict have left Iraq dependent on imports ranging from shoes and cars to grains for meeting the needs of its 38 million people. 

It has also come to depend on Iran to meet part of its electricity and gas demand, which has steadily grown after the defeat of Daesh last year, and the relative calm that has followed. 

The gas conundrum 

Beginning in June 2017, Iraq started importing Iranian gas via a pipeline to run its power plants in Baghdad and Basra. 

That was part of a 2013 agreement between the two countries that envisaged a supply of as much as 9 billion cubic meters a year. 

From July to November last year only 1.2 BCM was exported to Iran, making it unlikely that the whole contractual quantity would be supplied.

Yet this gas has come to play an important role for Iraq’s power sector as it helps generate around 20 percent of its electricity, according to estimates. 

That’s important considering the violent protests that hit Basra in September were partly fueled by prolonged power outages. 

Iraq, OPEC’s second-largest oil producer, does not produce enough natural gas to meet its needs. 

Its gas comes as a by-product from oil fields that is flared off because it doesn’t have the necessary processing facilities.

Gas flaring, which means burning it into the air, cost Iraq more than $2.5 billion a year in lost revenue. 

Now it needs the fuel more than ever to feed its idle power plants, which run on gas, as the demand for electricity has soared.

“The continuous wastage of gas despite the pressing domestic requirement is basically due to mismanagement,” says Ahmed Tabaqchali, an Iraqi investment banker and a regular commenter on economic issues. 

A project launched a few years ago to capture flare gas, which is enough to meet the needs of Iraqi gas-fired power generators, got embroiled in a controversy over the involvement of foreign companies, he told TRT World. 

Iraq plans to end gas flaring by 2021. 

Two types of power 

Iraq has struggled to generate enough electricity to meet the soaring demand, which in summer can exceed supply by up to 50 percent. 

Under-investment in power transmission and distribution systems has further compounded the problems and led to violent protests on the outskirts of Baghdad and Basra during the summer.  

Iraq imports around 1 gigawatt of electricity from Iran, but the supply has seen disruptions as Baghdad fails to pay the bill on time.

Iraq’s embattled power sector has also become a battleground for American and German companies which want a share of the multi-billion dollar business. 

Germany’s Siemens was in advanced talks with Iraqi authorities for a $15 billion contract, which was reportedly awarded to US-based General Electric after the intervention of US President Donald Trump. 

But just adding more gigawatts to the system might not solve the power crisis if people don’t have the money to pay bills and the government has to foot the bill.

Iraq’s private sector, in its infancy, and the country's bloated state institutions—which eat most of the country’s revenue—don’t have the capacity to hire more people. 

The stifling sanctions that Iraq faced after it invaded Kuwait in 1990 and the conflict after its invasion by the US-led forces in 2003 has left the country wanting for greater investment. 

Oil continues to play an outsized role in Iraq. It accounts for 90 percent of government revenue, almost all its exports, and adds 55 percent to the GDP.

Successive Iraqi governments since 2005 have been fragile, with many political parties sharing power, and rewarding their people with jobs in government. 

“That often resulted in different political parties holding sway over different departments and ministries which led to a power struggle and delay in vital projects,” says Tabaqchali, the investment banker. 

“Hopefully, it’s going to be different this time around as we are seeing a lot of pressure on the political elite,” he said, referring to the newly formed government of Prime Minister Adel Abdul Mahdi.

A more indirect impact on Iraq could come if Iranian entities try to meddle in its domestic financial markets to buy US dollars. The Iraqi economy is mostly cash-based, making it relatively easier for Iranians to buy dollars from Iraqi businesspeople. 

But Baghdad has increased surveillance of dollar transactions in recent years to avoid US penalties. 

Not as bad as it seems 

Notwithstanding the importance of Iranian gas, trade between the two countries despite sharing a 1,450 km-long border. 

“In the 12 months ending March, Iran’s exports to Iraq were $6 billion, which is just 15 percent of Iraq’s total non-oil imports,” says Tabaqchali. 

Iran alongside Turkey, Jordan and Syria were the countries in the region that saw an increase in their sales to Iraq before the oil prices plunged in 2014 and Daesh took over vast swathes of land, cutting off some of the trade routes. 

“Any reduction in trade with Iran could easily be made up by other regional partners. So if you ask me, I don’t think the sanctions will have any major impact on Iraq.”