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Iraq To Establish Special Financial Mechanism For Trade With Iran

File photo - Iraqi President Barham Salih (right) stands with Iranian President Hassan Rohani during a welcome ceremony at Salam Palace in Baghdad, March 11, 2019

Iraq is planning to introduce a new financial mechanism that will enable it to continue gas and electricity imports from Iran, Iraqi sources said on July 2.

The mechanism is said to be similar to Europe's INSTEX, a system that would help Iran purchase food and medicine, the two items not covered by U.S. sanctions on Tehran.

A U.S. official has told reporters that Washington is aware of the financial mechanism to be used by Iran and Iraq. Iraqi officials say they have let Washington know about their deals with Iran.

Iran exports non-oil commodities such as cement as well as gas and electricity to Iraq. In the year between March 2018 to March 2019, Iran exported close to $9 billions of products to Iraq, which was 37 percent higher than in the previous year.

The two countries' officials have said earlier that they aim for a volume of trade around $20 billion per year.

The United States recently extended sanction waivers for Iraq, enabling Baghdad to import natural gas from Iran for another three months while sanctions on importing electricity were waivers for another four months.

Given the decreasing amount of Iran's electricity production and its need for maintaining some exports, the Iraqi market is extremely important.

Iran’s electricity trade during last and the previous fiscal years (GWh/month):
Iran’s electricity trade during last and the previous fiscal years (GWh/month):

Iraq's power sector is in disrepair and doesn't generate enough electricity to meet domestic demand, especially during the scorching summer months.

Based on their bilateral contract, Iraq should pay for its imports from Iran in Euros, however, the financial mechanism allows payments in Iraqi dinars.

According to a senior Iraqi official, following months of negotiations, Iran and Iraq agreed to deposit the price for imported Iranian gas and electricity in a special account in an Iraqi bank.

Iran is not allowed to withdraw cash from the account, but it can use the money to purchase food and medical supplies, based on agreements made during a visit to Baghdad by the governor of Iran's Central Bank Abdolnasser Hemmati some two months ago.

In the meantime, Iran and Iraq agreed to jointly develop two natural gas fields at their border areas. Official Iranian news agency IRNA quoted Oil Minister Bijan Zanganeh in April as saying "initial agreements have been made on developing the two natural gas fields in Naft Shahr and Khorramshahr."

According to Zanganeh, Baghdad owes Tehran more than $2 billion for its electricity import from Iran.

Iraq is the second biggest importer of Iranian non-oil commodities; however, the volume of Iran's imports from Iraq is very small. On the other hand, during the past year Iran exported more than five terawatt / hours of electricity and in excess of 4.8 billion cubic meters of natural gas to Iraq with an estimated value of $1.3 billion.

Iraqi officials have said that the country will still need to buy electricity from Iran for at least another four years. Iraq buys more than 80 percent of Iran's exported electricity.

Meanwhile, Iraq imported more than 16 million cubic meters of natural gas from Iran and Iraqi official say that the figure will rise to 35 million in the summer.

Although the new financial mechanism between Iran and Iraq is going to be modelled after Europe's INSTEX, there is still no certainty about how the mechanism can work. INSTEX which was made operational only a few days ago, has not totally satisfied Iran.

Iranian officials insist that INSTEX should also cover oil trade, an idea which would go against the terms of U.S. sanctions on Iran's oil exports and international banking operations.