Iraq has recently struck an agreement with the United States to settle part of its debts to Iran through a unique mechanism that allows for the exchange of food, medicine, and other goods rather than cash. This arrangement aims to ensure the continuity of Iraq’s electricity supply while adhering to US sanctions in place since 2018.
Addressing Iran’s Energy Dues
This development comes amid an ongoing struggle faced by Baghdad in handling a long-standing financial obligation to Tehran. Reports indicate that Iran is demanding approximately $11 billion in outstanding payments for energy, with a significant portion of these funds trapped at the Trade Bank of Iraq—funds that cannot be accessed due to current US sanctions. According to Riyadh Uday, a member of the Electricity and Energy Committee, negotiations between Iraqi and Iranian officials continue to discuss these frozen assets and work towards resuming the flow of Iranian gas, essential for powering Iraqi electricity stations.
Importance of Iranian Gas for Iraq
The ongoing payment dispute is intricately linked to Iraq’s energy security, particularly as the country relies heavily on Iranian gas to fuel a large share of its electricity generation. This dependency becomes even more critical during the peak summer months when energy demand escalates. Iranian Central Bank Governor Abd al-Naser Hemmati has reiterated several times that Iraq’s debts to Iran are substantial—between $10 billion and $11 billion—further complicating the issue.
Historic Bilateral Agreements and Current Challenges
Under previous agreements, Iraq would channel payments for imported gas and electricity into designated accounts at both the Central Bank of Iraq and the Trade Bank of Iraq. Payments for gas were traditionally made in euros, while electricity reimbursements were in US dollars. However, these arrangements became obsolete after the US exited the 2015 nuclear deal and reimposed sanctions on Iran, which made transferring funds to Iran nearly impossible. As a result, Iraq finds itself in a dilemma: accumulating debts in its domestic banks without a viable method to settle them.
New Mechanism for Debt Settlement
The newly proposed mechanism enables Iraq to minimize part of its owed amounts by trading goods instead of cash. This pathway not only provides a semblance of compliance with US sanctions but also allows Iraq to meet its immediate energy needs. Maintaining a stable supply of gas is a top priority for the Iraqi government as it endeavors to increase local gas production, diversify its energy sources, and build electricity connections with neighboring countries.
In essence, this goods-for-debt framework marks a significant step toward addressing Iraq’s energy crisis while respecting sanctions. It could potentially lessen Iraq’s long-term reliance on Iranian gas, fostering a more sustainable and diversified energy landscape for the country in the years to come.