Analysis

Trump's Catch-22: Iraq's Dependence on Iranian Gas

The U.S. president gave Iraq a three-month exemption from Iran's sanctions to buy the Iranian gas that powers the country. But it's economic and energy crisis opens its doors to foreign meddling

A worker walks at Nahr Bin Umar oil field, north of Basra, Iraq, December 21, 2015.
Essam Al Sudani/ REUTERS

It’s scorching in Basra. Temperatures there exceed 50 degrees Celsius (122 Farenheit), dropping to a tolerable 39 degrees only at night. The air conditioners suck up electricity and gas until it's gone; factory workers labor in undershirts, kids look for any possible source of water to cool their bodies and the government prays to the great god Trump, that he will extend the exemption granted to Iraq from the sanctions he imposed on Iran.

Iran is the primary supplier of electricity and gas to Iraq's southern districts. Last summer, riots broke out when Iran cut off Iraq's power due to the latter's enormous electricity debt. The Iranian consulate building was set ablaze and mortars were fired at the American consulate; residents decided to hold both countries responsible for the situation.

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This summer will be calmer. Iraq was granted a three-month exemption from the sanctions against doing business with Iran, so electricity and gas should continue to flow as usual, unless Iran decides to leverage Iraq’s dependence on its electricity and gas to try to influence the U.S. administration.

In the 15 years since the second Gulf War ended, Iraq has failed to build an efficient power grid to meet the needs of its population, although it has the largest oil reserves in the world and some $120 billion has been invested in its power industry since 2003. It is estimated that 60 percent of the electricity that flows through its power lines is lost along the way, either because the low quality of the lines or because of large-scale power theft by customers.

One of the most serious consequences of this is the national debt, which is estimated at more than $100 billion. Half of this is external debt to financial institutions and banks, including to foreign oil companies; the other half is an internal debt from loans granted by Iraqi banks to the government. Together, the debt accounts for more than 55 percent of the GDP, most of which is based on oil production and exports, which supply about 90 percent of the country’s total revenues.

Where is the money going? Some 60 percent of the state budget is earmarked for the salaries of civil servants, pension and national insurance payments. A few percentage points go to pay debts, 0.5 percent of oil revenues are paid to Kuwait for damages caused by Saddam Hussein’s regime when it occupied Kuwait in 1990, and 14 percent of the revenues go to the Kurds in northern Iraq. This is on the condition that the Kurds transfer 250,000 barrels of oil per day produced in the Kurdish territories to the Iraqi oil marketing company, and that the Kurdish government presents all the receipts for expenses it has incurred since 2004. The rest is meant to finance investment in and the rehabilitation of parts of the country that were destroyed while under Islamic State control.

The budget this year will be 45 percent higher than last year, but many sectors are unhappy with it, including the Kurds, who are demanding a return to the 17 percent of the budget they were getting more than three years ago, and are rejecting the conditions the government is setting to increase their share. The Sunni population wants an increase in the budget allocated to rebuild its destroyed cities, the army is demanding its share, and those close to power, with their deep pockets, won’t give up the commissions that have made them billionaires.

When excellent means of payment like oil are buried underground and can serve as collateral for debt repayment, and when the administration is in the midst of an economic crisis, the temptation has grown for foreign companies and countries to get involved in the Iraqi money industry – not just to generate profits, but to establish spheres of influence as well. Saudi Arabia, for example, has already announced that it plans to invest in rehabilitating Iraq and developing its oil fields. Saudi Arabia thus hopes to curb, or at least somewhat offset, the influence of Iran, which is Iraq’s most important trading partner.

In April, Russia signed 16 cooperation agreements with Iraq in energy, communications, trade, tourism and other areas, in addition to the two countries negotiating the acquisition of S-400 anti-aircraft systems. These are the same systems that Russia is expected to transfer to Turkey in July after it rejected Iran’s request to acquire similar systems. If Syria is Russia’s crucial strategic outpost in the Middle East, Iraq may be its economic anchor in the region.

The United States, which continues to keep boots on the ground in Iraq, is liable to find itself in a paradoxical situation in which its efforts to curb Iran’s influence play into the hands of Russia, which can exert influence in both Iran and Iraq. The irony is that Russia holds contracts and commitments that were signed in the time of Saddam Hussein, which they hoped to realize after sanctions were lifted from his regime. But history slapped Russia in the face, and it was left to gnash its teeth as it watched Iraq be handed over to American management. Now, thanks to a U.S.-backed Iraqi government, Russia will be able to gain the sphere of influence that had slipped out of its hands.

But the strategic calculations and grandiose plans for rebuilding the Iraqi economy and state will have to take into account the complex political reality in Iraq, which ranks high on the list of the most corrupt countries in the world. In Iraq, where tribes can be hired for a few thousand dollars to solve business and family conflicts, the channels of political influence do not move in a straight line, and the price of utilizing them is often much higher than the value of the goods that pass through them.