US sanctions against Iran could prove to be an opportunity for Iraq

Iraq’s internal problems will negatively affect how much the country will profit from a changed business environment created by the sanctions against Iran.
Sunday 17/02/2019
A shop worker arranges cans of Iranian tomato paste at a supermarket in the Iraqi city of Najaf, last October. (Reuters)
Cheaper imports. A shop worker arranges cans of Iranian tomato paste at a supermarket in the Iraqi city of Najaf, last October. (Reuters)

LONDON - When Iranian Foreign Minister Mohammad Javad Zarif visited Baghdad in January, his entourage included representatives of more than 50 companies. The trip to Iraq came at a pivotal time for Iran’s economy, only months after the US reimposed sanctions against Tehran as a result of US President Donald Trump’s decision to withdraw from the Iran nuclear deal.

In Baghdad, Zarif argued that the United States had failed to derail the expansion of cooperation between Iran and Iraq. Several days earlier, US Secretary of State Mike Pompeo was in the Iraqi capital to shore up support for the sanctions and broader efforts against Iran.

The high-level visits highlighted the importance of Iraq for the Trump administration’s campaign to push back Iran’s influence in the region. Iraq’s economy plays a crucial role in this, being the biggest non-oil export market for Iran with an annual trade volume of $9 billion. Iranian goods, including agricultural products, fruit, poultry and construction materials, are a common sight in Iraq. Iran also provides about 40% of Iraq’s electricity.

“Iran is an influential factor in the Iraqi business world,” said Anas Morshed, founder of Morshed Business Development in Baghdad, adding that Iran had “flooded the market” with products and goods.

“Instead of looking at the sanctions as a problem for Iraq they should be looked at as an opportunity,” said Entifadh Qanbar, president of the Future Foundation in Washington. He said Iraq’s reliance on Iranian imports was a mistake that had weakened Iraqi industry.

The sanctions, said Muhanad Seloom, an Iraq analyst at the University of Exeter, are “good for Iraq” because they give Iraqi traders a “chance to breathe.” Iranian goods, he said, were cheaper due to Iran’s superior resources and infrastructure, while Iraqi businesses suffered from electricity cuts and water shortages in the agricultural sector.

Iran was “taking advantage of the disorganisation and weaknesses of the system in Iraq,” Seloom argued. In this environment, Iraqi farmers, for example, “would have a chance to catch up and stand on their own feet,” he said, “if supported by the government.”

However, as the sanctions weakened the Iranian rial, cheaper goods from Iran have continued to flow into Iraq, the Wall Street Journal reported in January.

Not everyone agreed that the sanctions would have a positive effect on Iraq. In an interview, Baroness Emma Nicholson, UK trade envoy to Iraq and president of the Iraq Britain Business Council, said sanctions were “generally not helpful to business and industry since they interfere with the market.”

“I, therefore, doubt that sanctions… can enhance Iraq’s industrial and commercial opportunities,” she said.

Ali Sameer, a supermarket owner in Baghdad, said sanctions would have a negative effect on his shop because most of his dairy products were from Iran and shoppers did not know the quality of new Iraqi products. “My only hope is that the Iraqi government will improve the Iraqi industry and products,” Sameer said.

Other shop owners said the sanctions would not have a major effect on their business.

As Iran’s western neighbour, Morshed predicted, Iraq would become a “transit point for the smuggling of Iranian goods and will be a platform for international conflict.” Seloom added that the border between the two countries was not well-controlled.

Despite years of battles against Islamic State militants, Iraq’s economic outlook is positive. The country’s GDP product is expected to grow 6.2% in 2019, said the World Bank, which noted a strong rebound in non-oil growth.

However, as mass protests last year in oil-rich southern Iraq showed, frustration at high levels of corruption and a lack of jobs and services remain high. The new government under Prime Minister Adel Abdul-Mahdi is under pressure to deliver results before another hot summer strikes.

Observers said Iraq’s internal problems will negatively affect how much the country will profit from a changed business environment created by the sanctions against Iran. Nicholson said that “only the free market and private investment can turn the economic corner for the nation,” calling bribery and corruption the “most difficult challenge” for the new government.

Qanbar cited a lack of infrastructure, which was deterring investors. Another issue, he argued, was a persistent attitude in the government bureaucracy of seeing foreign investors as enemies. “When the investor comes to Iraq, he gets drained, embezzled, blackmailed in every direction possible,” Qanbar said.

Iraq was ranked 169th out of 180 on Transparency International’s “Corruption Perceptions Index 2017.”

Morshed added that the government had improved the process of registering companies and regulating taxes but more work to create a favourable business environment was needed. Nicholson said it was the government’s task to set and hold up “the best parameters for international companies to partner with local companies and invest.”

Much will depend on how the Iraqi government manages the balancing act of maintaining good relations with both Washington and Tehran. Iraq has sought to be exempt from the US sanctions but stated that it is complying due to American pressure.

Seloom said the sanctions came “handy for the short term, not the long term.” “For the long term,” he concluded, “we definitely prefer to have a stable, prosperous Iran that we can do business with on an equal footing.”

In the US-Iranian conflict, Iraq will continue to be a pivotal player.