Iraq Expands Trade Horizon: Will Iran Be Affected?

The Iraqi Dinar and Foreign Trade

Since the U.S. Treasury imposed restrictions on several Iraqi banks, barring them from dealing in dollars, the Iraqi economy has experienced a noticeable downturn. The value of the Iraqi dinar plummeted to 1650 dinars per dollar, while its official selling price was only 1320 dinars.

In response, the Central Bank of Iraq implemented various measures to control the black market and prevent further devaluation of the dinar. These measures include scrutinizing import invoices through a compliance platform developed in collaboration with the U.S. Treasury, increasing outlets for cash dollar sales to citizens for travel purposes, monitoring the activities of exchange offices, and promoting electronic payments in most markets.

In recent weeks, the Iraqi dinar has shown a slight improvement, albeit with caution, reflecting the sensitivity of the Iraqi market to the course of events in the region and the world. Iraq fears that the Gaza war will spread to the entire region which means serious repercussions for everyone.

The United States has exerted significant pressure to monitor the exit of the dollar from the Iraqi economy through illicit means, suspecting Iran’s benefit in evading sanctions or financing some armed groups in Iraq.

The U.S. Treasury has repeatedly emphasized the necessity for Iraq to diversify its foreign trade and not rely on a specific market, as is the case with Iranian goods. The U.S. is concerned that an increase in trade between Iraq and Iran could deepen Iranian influence in Iraq, as Tehran seeks to double its current trade volume with Iraq to $20 billion.

Mahdi Zeighami, the head of the Iranian Trade Development Organization, envisions achieving this by increasing Iran’s contribution to Iraqi industrial projects, raising the figure to $40 billion by 2035. The Biden administration aims to dismantle Iraq’s dependence on Iran, starting from the energy sector. This involves investing Iraq’s substantial reserves in natural gas, estimated at 133 trillion cubic feet.

If successful, Iraq could achieve energy self-sufficiency within the next five years, saving approximately $8 billion annually, the value of gas imported from Iran for electricity generation. Washington recognizes the importance of Iraq’s economic stability in maintaining political stability and is working diligently to expand the base of trade and economic cooperation between Iraq and regional and global countries.

In this regard, the Central Bank of Iraq has been engaged in talks with several central banks in the region and the world to discuss expanding the basket of currencies used in Iraq’s foreign trade. These discussions are directly supervised by the U.S. Treasury, and agreements have been reached with the central banks of Iran, Turkey, the UAE, China, India, and the European Union regarding the currencies to be used in Iraq’s foreign trade.

Additionally, Washington has bolstered the dollar reserves of ten Iraqi banks in collaboration with JPMorgan and Citibank, attempting to broaden the use of the dollar in foreign trade without it leaking outside the Iraqi economy.

Implications of Iraq Expanding Trade: What It Means for Iran?

China leads the way in trade between Iraq and the world, with figures reaching $53.37 billion, primarily based on oil exports. Trade with India amounts to nearly $37 billion annually, driven by Delhi’s increased imports of Iraqi oil.

The exchange between Iraq and the European Union rose to €24 billion last year, and it is expected to double, especially as Iraq prepares to export natural gas as an alternative to Russian gas imports in Europe.

Iraq recently joined the European Bank for Reconstruction and Development, allowing the country to develop its banking sector and create a favorable investment climate.

As Iraq broadens its trade scope with the world, international interests become more intertwined with the Iraqi market, ensuring stability and global energy security.

Geography plays a crucial role in the trade relationship between Iraq and Iran. The long borders, numerous trade outlets, and lenient regulations on Iranian goods compared to Iraqi products contribute to an increase in Iranian exports to Iraq. Iraqi exports to Iran don’t match even a tenth of Iranian goods exported to Iraq, tipping the trade balance in favor of Tehran.

This leads to an increase in the Iraqi dinar’s cash flow in the Iranian market, later used to buy and withdraw dollars from the Iraqi market. Diversifying trade using a currency basket aims to mitigate this impact, ensuring the flow of needed goods to the Iraqi market without causing inflation or contributing to scarcity crises due to delayed arrivals.

Expanding Iraq’s trade with the world is expected to reduce the size of trade with Iran by 30% in the medium to long term. The expected trade volume between the two countries may decrease to $17 billion instead of the anticipated $20 billion in the next decade.

China, India, and Turkey are expected to dominate Iraq’s trade, superseding trade with Iran. Iraq’s developmental path, set to begin, will increase commerce between Europe and Asia through Turkey. It will also improve the delivery of goods to the Iraqi market, reducing costs, delivery times, and enhancing competition in favor of Iraqi consumers.

However, this may negatively impact local production in Iraq. If not ready to compete, local industries could become victims of an influx of imported products. To counter this, the Iraqi government is implementing a plan to support farmers, medium and small projects, establish industrial cities, and improve transportation and energy infrastructure. This aims to increase local production and diversify income sources away from oil.

Iran’s new strategy of integrating into the Iraqi market and expanding joint industrial projects, especially in the energy sector, could be an explanation for Tehran’s move. Iran recognizes the significant investment opportunities in Iraq and seeks to secure its position there.

The Challenging Task Ahead

The U.S. administration aims to curtail Iranian influence in the region and control Tehran’s reactions in the area. In this equation, Prime Minister Al-Sudani faces the daunting task of finding and maintaining a balance in international and regional relations.

The Iraqi banking sector stands as a crucial pillar for this policy, establishing trade relationships and economic partnerships with other nations. Enacting legislation for oil and gas is a significant factor in attracting investments to this foundational sector of the Iraqi economy.

Achieving this requires earnest efforts to rebuild trust between Baghdad and Erbil, alongside providing a common and transparent database that aligns with the Iraqi constitution.

Developing Iraq’s trade relations with the world will be a fundamental turning point in Iraq’s foreign policies, ensuring its ability to manage local affairs in line with national interests.

However, this won’t be an easy task, especially considering the need for private sector collaboration and contribution to developing these relationships. Additionally, activating Iraqi diplomacy towards more trade agreements will be essential in this endeavor.