Iraq Activating Iran Payment Mechanism

EghtesadOnline: Iran and Iraq will invoke past agreements to expedite settlement of Iraqi arrears using a trading mechanism designed to supply basic goods to Iran.

News ID: ۷۵۰۲۶۹

20 June 2020

Governor of the Central Bank of Iran Abdolnasser Hemmati made the statement on Wednesday following a meeting with his Iraqi counterpart Ali Mohsen Ismael Al-Alaq in Baghdad, the CBI website reported.

“We had signed deals in previous trips. It was agreed that we use our resources in Iraq for purchasing basic goods that are not subject to [US] sanctions,” Hemmati said, referring to deals between the two neighbors in February 2019.

The agreement signed by the governors of the two central banks called for setting up a monetary channel to facilitate bilateral payments.

Citing senior Iraqi officials, media outlets reported earlier that Baghdad will continue to pay Iran for gas and electricity imports by depositing dinars into a special bank account in Iraq. Iran cannot withdraw its own money, but can use it to buy humanitarian goods.

It is said that the system would work like the so-called INSTEX, a mechanism activated by Britain, Germany and France to trade legitimately with Iran without falling foul of US sanctions.

But that system, despite a lot of noise, has been worthless because the European governments and their banks are very fearful of the US wrath when it comes to any trade (humanitarian or otherwise) with Iran.

Referring to the previous agreement, Al-Alaq said it provides a clear framework for implementing bilateral banking and financial transactions.

In a meeting with Prime Minister Mustafa Al-Kadhimi, Hemmati said Iran does not want to cause any difficulty for the Arab neighbor by implementing the agreement.

“We agreed to work on [trading] unsanctionable goods in the framework of the mutual agreement,” he said, implying to the unending US animosity and threats to countries and companies wanting to trade with Iran and Washington’s mounting pressure on Iraq to stop importing energy from Iran.

Iraq's economy relies almost exclusively on oil revenues, paid in dollars, which leaves Baghdad extremely vulnerable to any punitive measures the US could take in response to a violation.

US penalties on paper don’t include humanitarian goods, like food and medicine. But in actuality this too has been obstructed because of US hostility and the tough restrictions on banking ties to Iran.

PM’s Assurance

Al-Kadhimi ensured Hemmati that he had personally ordered the removal of hurdles ahead of the overdue payments to Iran.  “Payments to Iran should be reimbursed completely”.

The US imposed tough sanctions on Iran in 2018 but has granted Iraq several temporary waivers to keep purchasing electricity and gas from Iran.

Iraq is the biggest importer of electricity from Iran. It needs more than 23,000 MW (per day) to meet growing domestic demand. Years of war, civil strife, terror attacks and the failed US invasion in 2003 almost destroyed its power infrastructure, creating a whopping 7,000 MW daily deficit.

Besides importing electricity from Iran, Iraqi power plants also depend on Iranian natural gas to generate power. A shortage in previous summers fueled unrest in some provinces.

Iran has exported close to 65 billion kilowatt hours of electricity to Iraq since 2005 worth $6.2 billion, of which $5.9 billion has been paid.

The first electricity export contract between the two sides was signed in 2005 and has been renewed on yearly-basis. The agreement was extended for two years (2020 and 2021) during a meeting of the Iraqi Minister of Electricity Majid Mahdi Hantoush and Iran’s Energy Minister Reza Ardakanian earlier in the month in Baghdad.

Ardakanian said during the visit that the Iraqis had settled nearly $400 of its dues related to energy imports.