Will Iraq’s Economy Escape the Ramifications of the Gaza War?

Confronting the factions

The aftermath of the recent war in Gaza has quickly expanded to encompass other countries in the region, including Lebanon, Syria, Iraq, and Yemen.
American bases in both Syria and Iraq witnessed multiple missile and drone attacks claimed by factions of the Iraqi resistance.
Shiite leader Muqtada al-Sadr also called for the closure of the U.S. embassy in Baghdad, a move deemed by the official spokesperson of the Iraqi government as a potentially devastating option for Iraq.
Iraqi Prime Minister Muhamad Shia Al-Sudani, in his capacity as the Commander-in-Chief of the armed forces, had previously directed the pursuit and punishment of elements attacking U.S. bases, emphasizing that the international coalition was present in Iraq at the official invitation of the Iraqi government.
In response to attacks on military bases, the U.S. military carried out a series of strikes targeting factions described as being supported by Iran.
This situation of tension and complexity places Iraqi government in the face of extremely difficult and sensitive choices. It must either confront factions attacking U.S. military bases or face the United States, with ensuing consequences that affect the relationship between Baghdad and Washington.
Iraqi Foreign Minister Fuad Hussein clarified that linking the presence of coalition forces in Iraq to the war on Gaza would lead to significant problems within Iraq, including Kurdistan. He raised questions about the political, economic, and security implications of such a connection.
The targeting of U.S. bases in Erbil embarrasses the government of Al-Sudani in front of its Kurdish partners and poses a threat to the alliances formed, especially after the crisis of excluding Speaker of Parliament Mohammed Al-Halbousi from the presidency of the parliament, affecting the Sunni component’s direction in that government.

What is the fate of foreign investments in Iraq?

Iraq needs to attract foreign investments to support and develop its various economic sectors. However, the escalating situation in Gaza is likely to significantly impact the security situation in Iraq and the region, resulting in international reactions.
If factions targeting U.S. military bases decide to broaden their list of targets, it is feared that this will include a large part of Western interests in Iraq. This explains the warnings issued by the U.S. Department of State advising its citizens not to travel to Iraq for security reasons.
If the situation develops in this direction, the Iraqi government will face challenges in maintaining control over the country’s administration or ensuring the security of missions and companies alike.
This could lead many foreign companies to reconsider their decisions to enter the Iraqi market, negatively affecting Iraq’s economic future.
Considering Iraq’s size in the global oil market, any targeting oil and gas companies operating there would undoubtedly lead to a decline in oil production and delays in gas field development plans. This, in turn, would impact its financial revenues and result in the loss of billions of dollars.
However, this would also reflect on oil prices, causing an increase that wouldn’t serve the global economy already grappling with inflation and slowed growth.
The United States regards Iraq as a significant economic partner, aiming to keep it away from potential tensions. The U.S. market imported around 10% of Iraq’s oil exports this year, with those exports increasing by 13.51% from January to August compared to the same period last year, reaching 84.049 million barrels.

The future of the energy sector in Iraq

Iraq involves several American companies, especially in the electricity sector, such as General Electric, working on Iraq’s electricity sector development. Additionally, Baker Hughes is involved in harnessing associated gas from oil production operations in the south of the country.
Despite Iraq having a massive gas reserve of approximately 126 trillion cubic feet, it burns $8 billion worth annually. Moreover, Iraq’s import of Iranian gas amounts to $4 billion annually.
Prime Minister Al-Sudani has emphasized his government’s interest in having American companies in Iraq, highlighting the need to diversify the country’s economy beyond oil.
The Biden administration seeks to accelerate Iraq’s energy self-sufficiency over the next three years, attracting significant foreign investments in the energy sector. The U.S. administration grants Iraq exemptions allowing it to import electricity from Iran for periods of up to four months.
Furthermore, Washington aims to mediate in the issue of the resumption of oil exports from the Kurdistan region through Turkish ports. This move could increase Iraq’s financial revenues by a billion dollars monthly, avoiding losses that have exceeded seven billion dollars since the halt in March last year.
However, recent political and security tensions, if they escalate, may hinder Iraq’s plans to achieve energy self-sufficiency within the specified period.

Protecting Iraq’s money

Protecting Iraq’s finances is a crucial consideration for Washington, given its awareness of Iran’s significant influence in Iraq. The U.S. strives to diversify Iraq’s sources for its external trade, as Tehran aims to increase its trade volume with Iraq to $20 billion.
The U.S. Treasury Department closely monitors the movement of funds leaving Iraq for imports, suspecting a significant portion goes to fund Iran-affiliated armed factions.
The Iraqi government fears that further military targeting of U.S. bases in Iraq could trigger strong reactions from Washington, extending beyond military responses to include economic measures.
If Washington withdraws its support for Iraq, the negative repercussions will accelerate politically and economically. Protecting Iraq’s finances from creditors would raise significant questions, leading creditors to demand their funds back, causing a substantial increase in the dollar’s value and noticeable hikes in commodity prices.

This, in turn, would elevate inflation levels and poverty rates in the country.
Politically, a clash between Baghdad and Washington will undoubtedly lead to the isolation of Iraq from the international community, which will pose serious consequences for the government of Muhammad Shiaa Al-Sudani, who aspires to increase investments in the energy sector and diversify sources of income.

The delicate balance between Washington and Tehran

The U.S. administration avoids framing Iraq, its current partner, as an adversary, especially considering Washington’s role in shaping Iraq’s political system since 2003.
With Iraq being one of the world’s major oil exporters, the U.S. refrains from escalating tensions, mindful of global energy supplies and potential negative impacts on the U.S. economy.
Additionally, Washington fears Iraq aligning more with the Russian-Iranian axis, potentially backed by China.
Such a shift would be a significant strategic loss and a profound transformation in the regional alliance map.
The Biden administration acknowledges that government of Al-Sudani cannot afford a confrontation with Iran-backed factions. Therefore, the U.S. State Department has repeatedly stated its unwillingness to escalate the situation.
Iran, too, recognizes the importance of reaching a resolution in the Gaza crisis, especially given its geographical and temporal dimensions’ adverse effects on Tehran’s interests.
There is a possibility of a specific settlement with Washington, although some Iranian politicians may state otherwise.
Both the U.S. and Iran are keen not to compromise their interests in Iraq. This delicate balance ensures a steady flow of Iraqi oil for Washington and an expansion of investments in the gas sector. Meanwhile, it provides Tehran with relief from sanctions and a market for its goods, reaching up to $10 billion annually.
Therefore, Al-Sudani must find the right equation to satisfy its Kurdish and Sunni partners, contain armed factions, and devise a formula for understanding between Washington and Tehran. This would bring all parties closer and distance the region from further tension and escalation.
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