However, domestic developments in both countries threaten those prospects, as US sanctions will only serve to create obstacles in the way.
According to the Islamic Republic of Iran's Customs Administration, during the first half of the current Iranian year that ended on Sept. 22, Iran’s non-oil exports to Iraq stood at 9.61 million tons worth more than $4.56 billion, up 45.32% and 44.58% in volume and value respectively year-on-year. This makes Iraq the second major export destination for Iran after China, which imported $4.63 billion worth of Iranian non-oil goods during the same period, up 12% YOY.
Iran mainly exported liquefied gas, hydrocarbons, mineral products, fresh or frozen tomatoes and evaporative coolers to Iraq during the six-month period, according to Financial Tribune.
"Iraq can easily surpass China to become Iran's top export destination," Hamid Hosseini, secretary-general of Iran-Iraq Chamber of Commerce, told IRNA.
From another perspective, Iran's total exports grew by 14% during the first six months of the current year.
The IRICA data show Iran's H1 exports, excluding crude oil, mazut, kerosene and suitcase trade, hit 56.64 million tons worth $23.12 billion, indicating a 3% decrease in weight and a 13% increase in value YOY.
According to Hosseini, as Iraq is beginning to rebuild in the wake of destruction caused by terrorists, a number of its cities, especially Mosul and Kirkuk, can be a suitable market for Iranian construction materials and foodstuff.
"Iraq has six million displaced citizens, four million of whom have returned after Daesh was defeated. Iranian products can be the best option to provide for these people, but our share in the markets of Mosul and Kirkuk is relatively low at present and we need to increase it," he said.
Hosseini said a trade delegation from Mosul recently visited Tehran for the first time in 15 years which, according to the official, is a testament to Iraqis' rising attention to Iranian goods.
> Threat of Currency Repatriation
Iraq could easily become Iran's top export destination if the current rising trajectory of exports were to continue, but a variety of factors threatens those prospects.
For one thing, the current policy of mandatory currency repatriation adopted by the government will negatively impact Iran's exports to regional neighbors, especially Iraq and Afghanistan.
When the government attempted to fix the rate of the rial in April to combat an expanding currency crisis, it also mandated all exporters to repatriate their foreign currency yields into the economic cycle of the country.
The move was aimed at boosting strained currency reserves, at least in the short term, under increasingly harsh conditions. But it understandably received negative feedback from private sector players.
Iraq and Afghanistan were exempt from currency repatriation before, providing exports with room to grow. However, the new head of the Central Bank of Iran's Foreign Exchange Department Gholamreza Panahi last week informed the head of Trade Promotion Organization, Mojtaba Khosrotaj, in a letter that exporters to Iraq and Afghanistan are no longer exempt from currency repatriation rules.
The letter further said "all commodity exchanges in border marketplaces" are also subject to currency repatriation. This will especially hurt Iran's trade expansion through markets bordering Iraq has been the main factor contributing to the growth of exports.
"Regulations devised by the government for repatriating foreign currency yields from exports fail to consider any exceptions for neighboring countries, trade with whom is conducted in national currencies or rial," Hossein Salimi, the president of Iran-Afghanistan Chamber of Commerce, said on Monday.
"The exemption of exports to Iraq and Afghanistan from currency repatriation is necessary for maintaining the current level of trade with these countries," he was quoted as saying by the official news website of Iran Chamber of Commerce, Industries, Mines and Agriculture.
The official, a veteran of Iran's financial markets, elaborated that since Iran works with these two countries in local currencies and the law has not accorded any exception to the central bank in terms of currency repatriation, Iran's exports to Iraq and Afghanistan will inevitably decline.
The falling trajectory will continue until traders find legal ways to move forward unhindered.
The main reason behind this, he explained, is that if Iranian traders are forced to repatriate the rials they get from exports to Afghanistan, they will have to exchange them to US dollars in order to be able to register in the Nima system designed by the government for forex repatriation. This exchange rate will impose losses on traders, as rial has experienced steep fluctuations in recent months, deterring them from expanding exports.
"We will follow up on creating different mechanisms to repatriate yields from these countries, but if the result is not favorable, we will face problems in trading with them and will be left with no other choice but to reduce exports," Salimi said.
Government regulations obligate exporters to return 95% of their currency yields–by accepting imported goods, reimbursing currency debts, selling foreign currencies to banks and exchanges, or making deposits in banks– within three months of receiving their customs export permit. The repatriation period was initially set at six months, but was later reduced.
> Other Factors Deterring Bilateral Trade
In addition to currency repatriation, a number of other local and international developments also hinder trade between Iran and Iraq.
For instance, both countries have prohibited the export of a number of products. In case of Iranian exports, a recent decision to ban the export of tomatoes and tomato paste will prove harmful to trade with Iraq since as mentioned above, tomatoes are among Iran's chief exports to Iraq.
According to the President of Iran-Iraq Chamber of Commerce Yahya Al-e Es'haq, Iran's customs administration calculates exports to Iraq based on the government-unified rate of 42,000 rials to the US dollar, which impacts the value of the products.
"This not only leads to lower exports, but will also lead to losing the Iraqi market," he told IBENA on Tuesday.
Lastly, US sanctions will impact Iran-Iraq trade by creating problems for traders.
"The only case through which the Americans can pressure the Iraqis is through banks and dollar-denominated transactions," the secretary-general of the joint chamber explained.
"We may face a number of issues in this regard, but in other cases there is no possibility of interfering in trade ties between Iran and Iraq," Hosseini said.
"If we are to transfer the currencies physically and in suitcases, then we will face anti-money laundering laws while existing limitations in the banking system don't allow us to use it," Salimi from the Iran-Afghanistan chamber explained.
This will leave exporters with little or no choice but to take recourse to the services of non-banking channels and exchange shops. In addition to their own set of unique risks, these channels will impose much higher costs on exporters than the banking channel.