People walk across a busy pedestrian crossing in Tehran. (Photographer: Ali Mohammadi/Bloomberg)

Iraq and Iran Build Economic Ties With the U.S. on the Sidelines

(Bloomberg) -- In the contest for Iraq’s loyalty, geography is proving irresistible.

Baghdad is being urged to take sides in the U.S.-Iran confrontation that’s escalated into one of the Middle East’s top flash-points. President Donald Trump is pushing Iraq to stop buying natural gas and electricity from its neighbor. President Hassan Rouhani wants it to purchase more to ease the pain imposed by American sanctions.

So far, Rouhani’s winning. On a three-day state that ends Wednesday, he’s held a press conference alongside his Iraqi counterpart, addressed businessmen, visited important Muslim shrines and chatted with tribal leaders. In December, after a 16-year American military presence, Trump caused a diplomatic furor by arriving unannounced in the middle of the night at a U.S. base, speaking to troops and leaving without meeting top officials.

Iraq and Iran Build Economic Ties With the U.S. on the Sidelines

“The essential part of Rouhani’s message is addressed to the U.S. -- Iran’s on the ground in a major way,” said Ihsan Al-Shammari, an Iraqi political analyst. Tehran “is bolstering its relations in a broad way to support its political position inside Iraq.”

Visas, Trade

The two countries signed transportation and trade agreements, including one for the construction of a railroad link between the Iranian city of Shalamcheh and Iraq’s oil-hub at Basra. From next month, the neighbors will drop visa charges for each other’s citizens, Iran’s state-run Press TV reported. And Rouhani said officials planned to boost bilateral trade to $20 billion from the current $12 billion.

Obstacles to banking between the two nations have also been cleared, Secretary of the Iran-Iraq Chamber of Commerce Hamid Hosseini told state-run Tasnim news agency. Respective central bank governors signed an accord last month to make payments for oil and gas trade through non-U.S. dollar bank accounts, using euros and Iraqi dinars to skirt U.S. sanctions.

This week, Iraq paid the first installment of $2 billion it owes for the import of Iranian gas and electricity, according to a report by Iran’s Chamber of Commerce, which didn’t specify the amount transferred. The payment had been delayed by the re-imposition of U.S. sanctions last year.

Shiite Muslim Iran’s influence in Iraq has been deepening ever since the U.S. invasion of 2003 removed Sunni Muslim dictator, Saddam Hussein, and precipitated a shift in power to the country’s majority Shiites.

Iranian militias played a significant role in pushing Islamic State jihadists out of Iraqi territory -- a victory made possible by U.S. air power. And undeterred by an undercurrent of Iraqi nationalism, the three Shiite front-runners for the post of prime minister in last year’s elections trumpeted their good relations with the Islamic Republic.

Vague Offers

“We were standing by the Iraqi nation when times were hard and at a time of peace and security, we are at their side too,” Rouhani said in comments on Monday, according to Iranian state media.

Secretary of State Mike Pompeo visited Iraq in January amid Arab doubts over the U.S. commitment to their region following Trump’s announcement that he wanted to pull troops from Syria. While those talks focused on security issues, Pompeo also spoke about reducing Iraq’s reliance on imported energy that mostly comes from Iran.

He didn’t get far, it seems. In a February interview in Moscow, Abdulkarim Hashim Mustafa, special adviser to Iraq’s prime minister, put the record straight. “These are American sanctions and we have the right to protect our national interests,” he said. “We tell them always: we are your friends but we are not part of your policies in the region.”

Sunni Allies

Trump has made isolating Iran’s economy and curbing its military potential the cornerstone of his Middle East policy, finding grateful allies in Israel and among Sunni Gulf states led by Saudi Arabia.

Iranian oil production is languishing as foreign investors steer clear of the world’s fourth-largest holder of crude. Pledges by U.S. officials to tighten curbs on Iran’s oil sales and the expiration of waivers for several of the nation’s customers in early May are set to further restrict its exports.

Dhafir Al-Ani, an Iraqi Sunni lawmaker, regretted that his nation was caught in the middle of the standoff. “The U.S. has the ability to punish countries helping Iran bypass sanctions,” he said. “I hope Iraq will not be the victim of the U.S.-Iran conflict.”

©2019 Bloomberg L.P.