Stuck in the Middle With Iran

In late May, Saudi Arabia hosted three separate summit meetings in Mecca, in the hope of securing the region’s unequivocal condemnation of Iranian activities in the Middle East. But whether at the Organization of Islamic Cooperation, the Arab League, or the Gulf Cooperation Council, the Saudis, to their disappointment, found that not everyone shared their frame of mind about Iran.

One dissent particularly stood out. At the Arab League meeting, Iraqi President Barham Salih implored the region’s leaders to help sustain Iran’s stability. Should the United States and its allies go to war with Iran, he maintained, the conflict would have dangerous ramifications for Iraq and the entire Middle East. 

Salih’s statement was a reminder not just to the Saudis but also to the United States that Baghdad is uniquely vulnerable when it comes to Iranian pressure. And make no mistake: Iran has big plans for Iraq. Although relations between the neighbors have had their ups and downs, Tehran has invested deeply in Iraq, both politically and economically, and these investments will only multiply in the short term. After all, U.S. sanctions on Iran have made Iraq an essential link in Iran’s potential chain of commerce. How such plans play out will put the Iranians, the Iraqis, and the administration of U.S. President Donald Trump to the test.

PROXIMITY ON DIFFERENT LEVELS

The sanctions the Trump administration imposed on Iran in late 2018 are the most severe the country has ever experienced. By all accounts, Tehran was not only surprised but caught flatfooted without a backup plan. The Iranians had banked on their European and Asian economic partners saving them from President Trump’s wrath by keeping trade channels open under the framework of the 2015 nuclear deal that Tehran signed with the United States and five other world powers.

Instead, country after country opted to play it safe and avoid defying U.S. sanctions. The impact was swift and severe: Iran’s trade with the 28 European Union member states dropped by nearly 83 percent from January 2018 to January 2019. Most notably, the Europeans stopped buying Iran’s oil, historically the lifeline of the country’s trade with the continent. In need of a stopgap solution, Tehran turned to its immediate neighbors, such as Turkey, Afghanistan, and Iraq, as trading partners whose continued commerce could help offset the deep losses imposed by U.S. sanctions. 

When it comes to circumventing sanctions, geography matters.

When it comes to circumventing sanctions, geography matters. According to the Trade Promotion Organization of Iran, an advocacy group connected to the Interior Ministry, at this point U.S. sanctions cannot become any tougher, and Iran’s best option is to focus on boosting trade with its immediate neighbors. The group urged political leaders in Tehran to reorient the country’s non-oil trade away from distant customers in favor of those nearer to home. After all, among other problems U.S. sanctions have created for Iran’s long-distance commerce, they have inhibited shipping and impeded Iran from financing and insuring its commercial transactions—not to mention repatriating its export earnings.

Iraq is politically close to Tehran and hence comparatively open to Iranian exports. The bureaucracy of trade functions more smoothly between linked economies, and transactions that don’t use U.S. dollars don’t need to pass through financial institutions that are forbidden to transact with Iranian entities. Iraq is also geographically closer to Iran, which helps Iran avoid the difficulties it encounters with more distant trade. Hence the latest talk in Tehran suggests making immediate neighbors the country’s top economic priority, since engaging with them is simply that much less complicated than with others. 

FAIR-WEATHER FRIEND

In the case of Iraq, there is more to Iran’s relationship than just proximity. The Iranians have real influence over Baghdad and can garner support from officials at the highest level, as evidenced by President Salih’s comments at the Arab League meeting. Strong economic ties back this political leverage. In the last decade, Iraq has become Iran’s biggest export market for non-oil goods. Bilateral trade totals about $12 billion a year, and Tehran and Baghdad want to boost this to $20 billion.

Not everything goes Iran’s way, though. According to Iranian Oil Minister Bijan Zanganeh, Iraq won’t do anything to help Iran circumvent U.S. sanctions if it means risking American retaliation. For months, the Iraqis refused to pay Iran for natural gas, citing U.S. sanctions as the obstacle. The Iraqis are also refusing to do any joint oil exploration and development in the border areas where Tehran has offered to work on shared fields. Nor are they above a bit of opportunism when it comes to oil exports: as Iran’s oil exports have fallen from about 2.5 million barrels per day a year ago to around one million now, Baghdad has increased its own oil exports by 250,000 barrels a day to compensate—much to the Iranians’ chagrin.

And yet based on media reports from Tehran, Iranian merchants increasingly view Iraq as a potential hub through which to route their international trade—a role Dubai, in the United Arab Emirates, used to play. Out of respect for its relationship with the United States, and on account of its own tense relations with Iran, the UAE has cracked down on Iranian commerce, denying visas to Iranians and refusing them access to banking and insurance, among other measures.Bilateral trade between the two countries has plummeted as a result, and Tehran now looks to Iraq and, to a lesser extent, Oman as alternatives.

Offsetting U.S. pressures was a top priority for Iranian President Hassan Rouhani when he visited Baghdad in March. The two countries signed a total of 22 agreements, but more important, Rouhani sent a message to Washington and its Arab allies—the Saudis and the Emiratis in particular—that Iran is in Iraq to stay. Rouhani’s personal meeting with Iraq’s most important religious figure, Ayatollah Ali al-Sistani, a man who rarely meets senior foreign leaders, again underscored the reach of Tehran’s political leverage. 

Rouhani’s visit came at a time when Arab allies of the United States are expanding their efforts to draw Baghdad away from Tehran. The view in Iran is that Saudi Arabia has decided that the best way to compete in Iraq is not in the realm of security or politics but in the economic sphere, where the Saudis have the most to offer and the freest hand compared with Iran. The Iranian news media have run a steady stream of stories about Saudi economic initiatives in Iraq, highlighting, for example, an April construction trade show in Erbil that attracted 400 companies from 30 countries, including 22 firms from Saudi Arabia. The Iranians sense that the Saudis are playing out a new anti-Iran agenda in Iraq—one that is relatively inconspicuous but complicates Tehran’s calculations at a time when Iran needs Iraq more than ever.

IRAN, THE ARAB WORLD, AND TRUMP

However good its relations with Iraq, Tehran always runs the risk of overplaying its hand. When Iraqi Prime Minister Adel Abdul-Mahdi visited Tehran in April, Iran’s supreme leader, Ayatollah Ali Khamenei, harangued him, reportedly urging Baghdad to kick out the U.S. military and to be careful about Saudi intentions. 

If Iraq is seen to be serving an Iranian agenda, it risks losing the confidence of the new Arab partners it has struggled to obtain.

Any Iraqi leader would find such foreign meddling unwelcome, particularly at a time when Baghdad is trying to improve its relations with Arab countries while maintaining close cooperation with Washington. Immediately prior to arriving in Tehran, Abdul-Mahdi had held separate meetings in Cairo and Amman with President Abdel Fattah el-Sisi of Egypt and King Abdullah II of Jordan. The Iraqis are intent on normalizing their country’s ties with the Arab world, and for this reason among others, Tehran should be careful what it demands from Iraq. If Iraq is seen to be serving an Iranian agenda—say, by reducing the U.S. military presence within its borders at Tehran’s behest—it risks losing the confidence of the new Arab partners it has struggled to obtain.

The Trump administration’s “maximum pressure” campaign against Iran has already taken a toll on third-party countries, many of which are U.S. allies. But no country has been more affected than Iraq, and its predicament deserves Washington’s full attention, not least because the United States has continuing interests in Iraq. Washington must be very clear-eyed about the balance of political power in Baghdad and should not underestimate how many allies Tehran has cultivated among Iraqi political groups since 2003. Forcing the Iraqi government into a stark choice between the United States and Iran could seriously backfire against Washington.

The Trump administration appears cognizant of this reality. Take the most recent sanctions waiver that Washington issued for Iraq. Iran supplies much of Iraq’s natural gas and electricity. When the United States decided not to renew sanctions waivers for trade with Iran in April, the Iraqis simply shrugged and said that complying with U.S. sanctions wasn’t an option. But they also let Washington know that they wished they hadn’t been put in this position. Washington responded by issuing Iraq a new waiver—the only one it allowed—so that Baghdad could continue buying Iranian natural gas and electricity until at least the end of June. And yet on June 11 Washington sanctioned an Iraqi company on the grounds that it maintained ties to Iran’s Islamic Revolutionary Guard Corps. Here was a case in which the Trump administration chose to nudge Iraq away from Iran rather than forcing Baghdad to make a zero-sum decision that might entail turning Washington down. 

Nonetheless, as Iran attempts to circumvent U.S. sanctions, Iraq could find itself the unenviable middle ground. After all, Tehran is deeply embedded in Iraq’s political, economic, and security sectors, and to say that Iran is today the most powerful foreign actor in Baghdad requires no exaggeration. That the United States is the second most powerful foreign player on the Iraqi stage is equally true. 

In the worst-case scenario, Iran and Iraq will find new channels that allow trade between the two countries to continue—an arrangement tantamount to sanctions busting, which would leave the Iraqis vulnerable to penalties and to the loss of U.S. support for its beleaguered security apparatus. Such collateral damage would undermine everything the United States has done in Iraq since toppling Saddam Hussein’s regime in 2003. U.S. policies should not leave Iraq with no better option than becoming Iran’s accomplice, an outcome that would only further burden a weak Iraqi state while also hurting long-term U.S. interests in the Middle East.