ALACO DISPATCHES: Stability in Iraq undermined by US sanctions attack on Iran

ALACO DISPATCHES: Stability in Iraq undermined by US sanctions attack on Iran
A member of the Iraqi security forces hands pamphlets to voters in Nasarwasalam. The US and Iran are involved in a perennial battle for influence in Iraq’s government.
By Yigal Chazan of Alaco October 17, 2018

America’s reimposition of heavy sanctions on Iran following its withdrawal from the international nuclear deal risks undermining two of the central planks of Washington’s Middle East policy—the maintenance of stability in Iraq and the curbing of Iranian influence there.

The Baghdad authorities, concerned that Iraq may suffer collateral damage as a result of so-called snapback sanctions, are reportedly lobbying for exemptions. Yet while waivers might protect the country from unintended economic harm, they could also jeopardise US attempts to stem what it sees as Iranian belligerence.

In May this year, Washington withdrew from the 2015 nuclear deal (formally entitled the Joint Comprehensive Plan of Action, or JCPOA), which was drawn up to curb Tehran’s attempts to produce weapons-grade uranium. The Trump administration asserted that the deal failed to tackle Iran’s “malign influence” across the Middle East and its ballistic missile programme. The US is re-imposing sanctions to pressure Iran into renegotiating the agreement in order to address its perceived shortcomings.

The first batch of snapback sanctions came into force in August. They include restrictions on US dollar and Iranian rial transactions, trade in gold and other precious metals and the car industry. The second tranche, to be implemented from November 5, are more critical – the measures will hit oil, gas and petrochemical exports. They are Iran’s main foreign currency earners, without which its economy, already in recession according to the IMF, will nosedive.

Consequences felt already
Iraq is already suffering the consequences of renewed US sanctions.  They have led to the rial losing around half its value against the dollar in the year to date, significantly devaluing Iraqis’ deposits in Iran’s banks – made when their neighbour’s economy was picking up under the nuclear agreement – and reportedly deterring many Iranians from visiting Shia pilgrimage sites in Iraq, an important source of revenue for the country.

The economic hardship could worsen as sanctions against Iran kick in. Iraq imported some $6bn of Iranian goods – from air conditioners, agricultural products to car parts – in the year to March, amounting to about 15% of the country’s overall imports last year. Much of the trade is conducted by private Iraqi companies which are said to have limited exposure in and to the US and therefore little fear of being sanctioned. Of greater concern for Baghdad are state enterprises engaged in construction, the motor industry and energy, with the latter the biggest focus of attention. 

Iraq relies on Iranian natural gas and electricity imports for more than a third of its power.  An April deal with Baker Hughes and General Electric to capture gas flared from the Nassiriya and Al Gharraf oil fields seeks to reduce Iraq’s reliance on Iranian imports. However, its impact may not be felt for some time, and similar initiatives in the past have languished.

Violent protests in Basra
Meanwhile, Baghdad’s failure to pay its electricity bills led to Iranian supplies being cut off this summer. That contributed to violent protests over blackouts, polluted drinking water and perceived corruption in the southern city of Basra, an oil rich Shia area with high levels of poverty. Clashes between security forces and protesters left several dead. The episode, which rattled the government, offered a foretaste of the social tensions that might arise if Iraq is unable to secure an energy imports waiver.

The Baghdad authorities are under pressure from Iran-supporting Shia political blocs, and Tehran itself, not to comply with the US sanctions. The then caretaker premier Haider al-Abadi said in August that Iraq would abide by the measures. But he subsequently rowed back after protests from pro-Iranian quarters in Iraq, saying Baghdad will only adhere to the ban on dollar-denominated transactions. 

Representatives of Iraq’s majority Shia community are divided over Iranian influence, and the re-imposition of sanctions may polarise their positions even more. West-leaning Shia politicians value ties with the US, seen as a strategic partner that helped Iraqis overcome Islamic State and as offering continued support for the country. Those close to Iran tend to share its withering view of Washington, while Iraqi nationalists reject US and Iranian influence.

These divisions play out on the Iraqi political stage and are one of several factors – including tribal and religious affiliations – that fuel the factionalism, which accounts for Shia politicians’ struggle to put together governing coalitions. In the wake of the most recent poll in May, a nationalist alliance led by firebrand cleric Muqtada al-Sadr, Saeroon, won the most votes, followed by a pro-Iranian bloc, Fatih. Abadi, whose Victory Alliance came third, had hoped to form a government with Saeroon. But the authorities’ limited progress on public services delivery in the south, which the Basra protests highlighted, as well as their handling of the disturbances, effectively ended his ambitions for a second term. Saeroon chose instead to hold coalition talks with Fatih.

Both factions reportedly agreed to not put forward their own candidate for prime minister. Then, this month, parliament appointed a new president, Barham Salih, who asked Adel Abdul-Mahdi to form the next government.  Seen as a technocrat and independent adept at building alliances, Abdul-Mahdi was likely a compromise prime ministerial candidate agreed by Saeroon and Fatih. While the new premier may be a palatable appointment for Washington, a senior administration official reportedly suggested last month that America might reduce military support and other assistance to Iraq if pro-Iranian politicians are placed in “significant positions of responsibility”. Such appointments now seem quite likely.

American regional interests at stake
The US and Iran worked hard to try to influence the composition of the new government but have seemingly not got what they wanted.  Yet as Washington this month considers whether to grant Iraq sanctions waivers, it must bear in mind that failure to protect Iraq from collateral damage could threaten America’s regional interests by not only moving Baghdad closer to Tehran but also jeopardising Iraqi stability.

Further economic hardships might spark more disturbances in Basra as well as protests in volatile impoverished Shia districts of Baghdad, which may prove difficult to control. Iraqi nationalist politicians and their militias might also resist what they would see as increased Iranian interference in their country. In Basra, at the height of the troubles, Iran’s consulate was torched by protesters chanting “Iran out”.  While they have yet to significantly disrupt oil production in the province, local activists have repeatedly stated that extraction companies are in their crosshairs. 

For Trump, the exemptions issue is a tough one, although he has previously granted waivers. Alaco’s sanctions guide shows America’s August batch provided waivers for certain rial transactions. Washington does not want its renewed measures against Iran to destabilise Iraq, as that risks a return to the sectarian violence that led to the emergence of Islamic State, and could provide opportunities for further Iranian influence. But Washington also understands that offering Iraq exemptions would in effect grant Iran sanctions relief and make it harder to force Tehran back to the negotiating table.   

Yigal Chazan is the head of content at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.

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