As Iraq’s economy struggles to get back on the right track, the country has been dealt another formidable challenge in the form of Washington’s decision to renew sanctions on neighbouring Iran.

The first set of sanctions were re-imposed by the Trump Administration on 7 August and among other things cover: the buying or acquiring of US dollars; Iran’s trading gold and other metals including aluminium and steel; and ‘significant’ sales or purchases of Iranian Rials or the maintenance of significant funds or accounts outside the country using Rials.

These restrictions are to be followed up by a second, more extensive set of sanctions that will be imposed in November 2018. These include sanctions being imposed on: Iranian ports, as well as its shipping sector; on buying petroleum and petrochemical products; on foreign financial institutions transacting with the Iranian Central Bank or other Iranian financial institutions; and on the provision of underwriting services, insurance or reinsurance.

While these sanctions are already hitting Iran hard, they are also having a knock-on effect on Iraq’s economy with whom Iran shares a 1,458 kms border.

The two countries’ economies — like their politics — are bound tightly together, not least by the fact that Iraq is a major importer of Iranian goods. This includes food, agricultural products, household appliances, air conditioners, auto-parts and other items. Iraq’s economy is heavily reliant on Iran for a wide range of goods and products that move regularly across its many border crossings.

As an official in the Iraqi Ministry of Commerce told the media this month, ‘We rely heavily on Iran as a provider of building materials and vehicles, including automobile parts, due to low process and easy shipment across many of the common border crossings.’

With Iraq no longer able to pay in US$, this trade is going to be badly affected. The US has made it abundantly clear that anyone violating the sanctions would be at risk of having restrictions imposed upon them too. Consequently the Iraqi Central Bank has already banned trading in US$ with Iranian banks.

Not that all Iraqis are dismayed by the turn of events. Some are arguing that these sanctions represent an opportunity for Iraq to start to move away from its reliance on Iran and for it to diversify its economy away from its reliance on energy and to start producing locally. It is also an opportunity for Baghdad to start to look to other markets for trade.

Moving away from this economic reliance on Iran is something that requires time and money, as well as stability, to achieve. It also requires political will. With so many of Iraq’s political elite tied so closely to Tehran for historical, religious and ideological reasons, this in itself is going to be problematic.

Meanwhile, in the short term, this sudden hiatus in the flow of Iranian goods will have a negative effect on the Iraqi economy and on ordinary Iraqis who tend to buy Iranian goods because they tend to be cheaper than their Turkish counterparts.

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