Iraq wraps up the US sanctions mechanism to buy energy from Iran in an alternative solution

Allowing them continuing import process and avoid popular protests caused, more especially from the lack of electricity service without being subjected to US sanctions, The Iraqi government is seeking to create a financial “outlet” that will allow them to continue buy electricity and gas from Iran and circumvent US sanctions.

According to AFP which has learned from several sources, reflecting a European mechanism that went into effect on Friday.

This “special purpose mechanism” will allow Iraq to pay for Iranian imported energy in Iraqi dinars, which Iran can use to buy humanitarian goods exclusively, according to three Iraqi officials.

This alternative solution will allow Baghdad to continue the import process and avoid popular protests caused by the shortage of electric power, without being sanctioned, if it is on a dangerous rope between its major allies Tehran and Washington.

A senior government official told AFP that the mechanism was the result of months of talks between Iraqi officials, Iranians and Americans.

“The Iraqi government will continue to pay Iran in exchange for gas by depositing funds in a special bank account inside Iraq with the Iraqi dinar”.

“Iran will not be able to withdraw funds, but it will be able to use them to buy goods from outside Iraq”, he said.

Iraq has to pay an outstanding bill of about $ 2 billion for a previous gas and electricity purchase, according to Iranian Oil Minister Bijan Namdar Zangneh.

A US official told AFP that Washington was aware of the establishment of this mechanism, but the US embassy in Baghdad refused to comment on the subject, and was not able to AFP also get a comment from the Iranian embassy in Baghdad.

Two Iraqi officials assert that Baghdad is establishing a similar mechanism with the knowledge of the United States, didn’t specify whether the deposit in the account has begun.

But one of them says, “How can Iraq pay what it has to Iran?

We’ve no other choice”.

To overcome the chronic shortage of energy resources, Iraq imports up to 28 million cubic meters of natural gas from Tehran to its factories and directly buys about 1,400 megawatts of Iranian electricity.

This dependence is uncomfortable for the United States, which sought to curtail Tehran’s influence and re-impose sanctions on Iranian financial institutions, shipping lines, and the energy sector and oil products.

Washington re-imposed sanctions on Iran’s energy sector in November after it pulled out of a nuclear deal signed between the superpowers and Tehran in 2018, but gave Iraq several temporary exemptions to continue buying Iranian energy until October.

The United States insists that Iraq should stop its dependence on Iranian energy, but Baghdad says it could take up to four years to buy at least Iranian natural gas.

To do so, the central banks of Iraq and Iran agreed in February to establish a payment method to avoid US sanctions, the official Iranian news agency, IRNA reported.

This means not dealing with US dollars and buying only “humanitarian supplies” allowed by the United States, such as food and medicine.

“We will become an ATM for Iran”, another Iraqi official told AFP.

According to senior Iraqi officials, the account is likely to be created at the Commercial Bank of Iraq (TBI), which has been conducting most of the international transactions of the Iraqi government since it was established following the US invasion in 2003.

A source from the bank confirmed to AFP that the bank participated in the negotiations, but the account has not yet been established.

“The US Treasury has confidence in the operations of the Commercial Bank of Iraq.

We’re in discussions to reach an agreement, which will be entirely within US exemptions”.

Ahmed Al Tabakshli, who is a researcher at the Institute for Regional and International Studies in Sulaymaniyah, northern Iraq, said it would actually be a waiver of sanctions.

“As a book of accounts, the money is being paid, and Iran has this big asset in Iraq”, he told AFP.

Thus, this system will be similar to the recently introduced mechanism by Britain, Germany and France to trade with Iran without prejudice to US sanctions.

Nevertheless, the system is fraught with political, financial and operational complexities.

Iraq’s economy relies almost entirely on oil revenues, which are paid in US dollars, making Baghdad highly vulnerable to any punitive measures the United States can take in response to any violation.

It remains unclear what exactly Iran can buy from Iraq, because trade exchange tends in the other direction.

“Credit will develop for Iran, but how will it go?” he said, noting that the import of goods from outside Iraq requires a third party willing to take political and financial risks for a similar deal.

In the end, most of Iraq’s transactions with Iran are cash purchases of commercial goods, which the US sanctions authorities cannot impose, adding that, “Cash cannot be tracked”.