Full compliance with reactivated Iran sanctions, while unlikely, would raise violent unrest risks, particularly in southern Iraq

On 13 November, Iraqi Prime Minister Adel Abdul Mahdi reportedly told the US ambassador in Iraq that it could not find alternatives to Iranian gas and electricity, in the context of the reimposition, as of 5 November, of secondary sanctions on Iran following the US’s withdrawal from the Joint Comprehensive Plan of Action (see Iran: 9 May 2018: US to reimpose secondary sanctions affecting most sectors as it fully withdraws from Iranian nuclear agreement). The US Department of Treasury granted Iraq a 45-day waiver, as confirmed on 8 November by the US embassy in Baghdad, allowing it to temporarily continue the import of natural gas and electricity. This was probably intended to prevent further outbreaks of destabilising unrest in southern Iraq prompted by electricity shortages (see Iraq: 10 October 2018: Iraq’s oil, power and port facilities in Basra at high risk of operational disruption from recurring protests into 2019). According to Iraqi news reports, Abdul Mehdi is seeking a permanent exemption from US sanctions. Despite his earlier statement saying that Iraq would prioritise its own interests first and foremost, Abdul Mehdi received pushback from Iraqi political leaders – Shia and Sunni alike – who have expressed their opposition to the sanctions. Trade between Iran and Iraq, according to figures presented by Finance Minister Fuad Hussein, amounts to USD8.5 billion annually, with 79 Iranian companies operating across a variety of sectors in the country. Iraq is dependent on Iranian imports, including gas, food, construction materials, and vehicles.

Significance: Iraq’s close political, security, religious, and cultural ties with Iran make it unlikely that Iraq will be in a position to comply fully with tightening US sanctions on Iran. It is also unlikely that Iraq can comply fully with US sanctions on dollar payments to Iran. Although Iraq’s central bank had prohibited trade transactions with Iran in dollars as of August 2018, it is unlikely to have complete oversight over the extensive network of smaller independent banks and currency trading houses. If the US does not grant Iraq an extension of its waiver, and Iraq is forced to reduce its trade with Iran, there will be an increased risk of pro-Iran militant groups seeking retaliation against the US by pushing through an official parliamentary request for the military withdrawal of US forces from the country (see Iraq: 7 May 2018: New Iraqi government likely to seek US military withdrawal regardless of election outcome, Shia infighting increasingly likely). For Iraq to be unable to find an alternative source for its electricity imports from Iran would indicate likely renewed violent protests in southern Iraq, particularly towards the summer months in Iraq.