Iraq, Iran, and the specter of US sanctions

The Trump administration’s “maximum pressure” campaign now appears to have Iraq in its sights, aiming to increase the economic pain experienced by Iran. European capitals should be alarmed at this new US trajectory – not least given the fragility of the Iraqi government and its efforts to prevent a resurgence of the Islamic State group (ISIS).

Following a flurry of military exchanges between US forces and Iranian-backed groups in Iraq in January, the violence in the country escalated again last week. These groups launched attacks on Camp Taji that killed American and British troops, leading to retaliatory airstrikes by the United States. The episode could prompt the Trump administration to place Iraq under greater economic pressure, in the hope that this will force the country to distance itself from Iran.

It is no surprise that the administration views Iraq as a medium through which it can squeeze the Iranian economy. Iraq and Iran have become increasingly interlinked with each other in recent years; as such, their economies may well rise and fall together. For some time now, Iran has used Iraq to try to ease the economic pressure it is under due to US sanctions. According to one senior European official (who spoke on condition of anonymity), these measures have turned Iraq into Iran’s “economic lungs”. Since 2018, Iraq has become a top export destination for Iranian goods. Indeed, trade between the countries is now worth $12 billion annually. The two sides want to increase this to $20 billion per year from 2021.

Despite moves to diversify its suppliers, Iraq remains dependent on imports of Iranian gas and electricity to meet peak electricity demand in summer. Moreover, around three million Iraqis travel to Iran every year for tourism, medical treatment, trade, and other purposes, spending hard currency such as US dollars – which Iran values highly in its current circumstances.

Iraq now finds itself caught between Iran and the US, despite its stated willingness to strike a careful balance between these key external partners. Washington not only looks unfavourably upon Iraqi economic engagement with Iran but it is also increasingly concerned that the political winds in Iraq are shifting against it. Since the US assassination of Abu Mahdi al-Muhandis (the former leader of Iraq’s Popular Mobilisation Forces) and Iranian General Qassem Soleimani in January, there has been an intensifying debate in Iraq over the presence of the US military. The Iraqi parliament responded to the killings by passing a resolution that called for the departure of all foreign troops – primarily in reference to US forces – and pro-Iran political parties seem intent on seeing this through by the end of the year. The outbreak of violence this month will further inflame the debate.

Washington wants to prevent this outcome. The US administration has signalled that it is willing to use economic measures to coerce Iraq into taking up a more favourable stance on American forces. This is a step that some hawkish elements within the administration – primarily those in the White House – have wanted to take for a long time, with the aim of forcing Iraq to reduce its reliance on Iran. President Donald Trump has warned Iraq that, if the country expels American troops, the US “will charge them sanctions like they’ve never seen before … It’ll make Iranian sanctions look tame”. Reportedly, the US has already drafted new sanctions intended to dissuade the Iraqi government from ordering the withdrawal of American troops.

A key pressure point on Iraq is US waivers on secondary sanctions, which allow Baghdad to import much-needed gas and electricity from Iran. The US has floated the idea of allowing the waivers to lapse, which would subject Iraq to US penalties for importing Iranian energy. For now, the US and Iraq have agreed to a middle ground in which the duration of the waivers falls from 120 days to 45 days. But the issue looms over the Iraqi state, given its dependence on Iranian energy and the manner in which supply disruptions could hit the population.

Iraq is also vulnerable to US pressure because its foreign exchange reserves are located in New York. The US administration has openly warned that it could restrict or even block Iraq’s access to these revenues. Indeed, there is some speculation that the US may already have sought to do so by delaying the flow of funds to Iraq in January, when Iraqi politicians were debating the future of foreign troops in the country. At a time of falling oil prices, which will significantly hit Iraqi revenues, a lack of access to foreign exchange reserves could be devastating.

Iraq is, of course, no stranger to US sanctions. Following the 1990-1991 Gulf War, the US imposed UN-mandated sanctions on Iraq that crippled the country’s economy. These measures had a dramatic impact on Iraq’s infrastructure and forced many Iraqis into a struggle for survival. There were widespread shortages of food, and severe restrictions on access to medicines and healthcare. But this pressure did not weaken Saddam Hussein or loosen his grip on the country; it took an invasion to remove him from power. For Iraqis, the spectre of sanctions heralds a return to those days.

One decisive factor in the development of US-Iraq relations will be the makeup of the new Iraqi government, particularly the next prime minister’s attitude towards ties with the US. The current nominee is Adnan al-Zurfi, an Iraqi-American politician who worked closely with the Coalition Provisional Authority in post-2003 Iraq. He is attempting to form a government by mid-April. And it is widely believed that, if he succeeds in becoming prime minister, he will attempt to rebuild relations with Washington. If the US intensifies its economic pressure on Iraq now, this will not only amount to collective punishment but also risk empowering hawkish Iraqi leaders who work against US objectives.

European governments also have significant interests in Iraq, particularly in countering terrorism, stabilising the country, and improving living conditions in ways that reduce refugee flows to Europe. As such, they should urgently increase their efforts to dissuade the US from applying further economic pressure on Iraq – by reaching out to not just the White House but also the US Treasury, Congress, and the Pentagon. European capitals that are involved in the anti-ISIS coalition should emphasise the interest they share with Washington and Baghdad in preventing the resurgence of the group.

If the US intensifies its economic pressure on Iraq, this will deprive state institutions of the resources they need to provide security and basic services to an increasingly frustrated population. The effect would be particularly severe at a time of incredibly low oil prices. It is fair of Washington to encourage Baghdad to assert its sovereignty and weaken its reliance on external actors such as Tehran, especially in the wake of protests across Iraq. Europeans should look to support this process by further assisting Iraq’s push for economic diversification. But Europeans should also warn the Trump administration that the more it tries to coerce Baghdad into acting as it wishes, the more likely it is feed instability that pushes Iraq closer to Iran.

This article has been republished with permission from the European Council on Foreign Relations.