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Iran Claims Iraq Will Pay Its Debts, But U.S. Sanctions Make It Hard

Iran's central banker Abdolnaser Hemmati (L), with his Iraqi counterpart in Baghdad-- Feb 6 2019

One day after Iran's Oil Minister Bijan Zanganeh complained that Iraq has not paid billions of dollars for its imports from Iran after the re-imposition of U.S. sanctions, Iran's Central Bank Governor told reporters that he has reached an agreement with his Iraqi counterpart about the payments.

The chief banker Abdolnasser Hemmati arrived in Baghdad Tuesday evening for negotiations regarding bilateral banking relations and the payment of Iraq's debts for the electricity and natural gas provided by Tehran.

Hemmati told Tasnim news agency on Wednesday that a mechanism for the payments has been finalized thanks to an agreement he signed with his Iraqi counterpart Ali al-Alaq. The agreement, Hemmati said, also covers payments for Iraq's other imports from Iran.

He said that based on the arrangements made, payments for natural gas, electricity and other commodities sold to Iraq by Iran will be made based on "payment orders" issued by the Central Bank of Iran. Iran’s Tasnim news agency quoted Hemmati as saying that the central bank will create accounts in Euros and Iraqi dinars to facilitate payment for exported natural gas and electricity.

In addition, Iranian companies can work through Iraqi banks and Iranian banks can open dinar accounts in Iraq. He was quoted as emphasizing that these measures will expand banking cooperation between Iran and Iraq.

But no further explanation was provided as to the exact mechanism, if any, of actual fund transfers and a timetable for Iraqi late payments.

U.S. sanctions prohibit importers of Iranian products to repatriate cash money. Iran can sell its oil or natural gas but the money stays in the importing country and Iran can only use the funds to buy food and medicine as allowed under the sanctions’ regime.

What will Iran do with Iraqi dinars even if accounts are opened at Iraqi banks and payments made? This remains unclear. Iraq is not known as having surplus food or being a major medicine producer.

The Iranian Central Bank governor also said that "The U.S. has waged an economic war against Iran in order to disrupt Iran's economic and political situation," adding that sanctions have created problems for Iranian exporters.

On Tuesday, Iran's oil minister Bijan Zanganeh said Iraq imports monthly $200 million worth of natural gas from Iran but Baghdad has not been paying its debts after the United States re-imposed its sanctions on Iran last autumn.

Zanganeh added that Iraq owes Iran some two billion dollars but Iraqi officials say Baghdad is unable to pay its debts because of sanctions.

Speaking on Iran-Iraq cooperation in developing their shared oil fields, Zanganeh said: "We suggested to Iraqis that we could develop the Khorramshahr and Naftshahr oil fields together but they rejected the offer."

He said, "Iraq is not sanctioned and has no limitation for working with international companies," however, he doubted whether Iraq would sign an agreement with Iran as this might subject Baghdad to secondary sanctions.

He also said that Iraq has unilaterally terminated its oil swap arrangement with Iran based on which Iraq delivered oil from Erbil to Iran across the border and Iran sold some oil in the Persian Gulf on behalf of Iraq.

Iraq's total commercial transactions with various countries are around $190 billion per year, out of which 14 billion dollars is trade with Iran, which includes buying electricity and gas from Tehran.

The United States has given a waiver to Baghdad until the end of March, which makes it exempt from the ban on trading with Iran, so that Iraq could purchase its electricity and gas requirements from Iran. However, international energy market experts say Iraq needs a year before stopping its gas purchase from Iran and finding alternative suppliers. The question is that having waiver, why Iraq is not paying Iran.

Iraq buys 10 billion cubic meters of natural gas from Iran annually and more than 5 terawatts of electricity (5billion megawatts) for a total of nearly $3 billion a year. Since last March, Iraq has also imported $7.5 billion of Iranian rpoducts.

On January 1, the Iranian Parliament's National Security and Foreign Policy Committee Chief, Heshmatollah Falahatpisheh criticized Iran's "negative economic performance in Iraq and warned that Iran as a player will be replaced by Turkey and Saudi Arabia in Iraq's market.

Referring to the outcomes of a recent committee meeting entitled "Iran's economic strategy in Iraq and Syria," Falahatpisheh said that if Iran loses its economic links in those two countries, whatever Tehran has gained in the political and military arena there will be lost.