This report has been updated with additional research by Kharon.
The U.S. extended a 120-day waiver allowing Iraq to continue importing Iranian electricity and gas, Iraqi media reported.
The previous 120-day waiver was granted on June 15, and it was due to expire this week. The U.S. State Department, as of mid-afternoon Wednesday, has not issued a statement about the waiver.
Secretary of State Michael Pompeo spoke Tuesday with Iraqi President Barham Salih, but the topic of the electricity waivers was not included in the U.S. read-out. Natural gas and electricity from Iran is a vital import for Iraq, but the purchases fall under U.S. sanctions.
Iraq has struggled to pay for its energy purchases, and it has an outstanding debt of USD 2 billion, according to Iran’s oil minister, Bijan Zanganeh. Iranian officials earlier this year announced the establishment of a non-dollar-denominated financial mechanism which would allow Iraq to pay its debts — by depositing Iraqi dinars into an account at state-owned Trade Bank of Iraq (TBI).
The joint financial mechanism was announced after months of negotiations with Iraqi, Iranian and U.S. authorities, Iraqi officials said.
The bank, with assets at around USD 30 billion, funds about 80 percent of trade finance business in Iraq, according to Reuters. Established following the US-led invasion in 2003, TBI was originally managed by a JP Morgan-led consortium of 13 banks representing 13 countries, including France, the U.K., Japan, Turkey and Kuwait. The bank continues to maintain correspondent accounts with major western banks.
Iran’s ambassador to Iraq said earlier this year that the Central Bank of Iran (CBI) will open an account at TBI, in coordination with the Central Bank of Iraq. The CBI was sanctioned in September by the U.S. Treasury Department for providing billions of dollars in financial support to the Islamic Revolutionary Guard Corps - Quds Force (IRGC-QF) and Hizballah.
Between USD 4 billion and 5 billion would be deposited into the accounts to begin settling Iraqi debt, Secretary of Iran-Iraq Joint Chamber of Commerce Seyyed Hamid Hosseini said in August. He did not specify when the deposit would occur or when the mechanism will be operational.
Iran and Iraq have officially been removing the dollar from their bilateral trade to limit their exposure to U.S. sanctions. Much of the annual USD 12 billion worth of trade between the two countries is cash-based and resistant to official financial regulation. Iranian President Hassan Rouhani said in April that he hopes the trade would expand to USD 20 billion in the coming months or years.
Iraq cannot utilize the dollar to pay for its energy imports from Iran, as a condition of the waiver granted by the U.S. State Department in June. It’s unclear whether the condition is a part of the renewed waiver.
TBI will facilitate a gas and electricity barter program, where Iraq will pay for the energy in Iraqi dinars and Iran will use the earnings to purchase exclusively humanitarian goods from Iraq. It is unclear whether the U.S. government would issue waivers to companies willing to do business via the mechanism.
Iraq has run an energy deficit after decades of war, and attacks in recent years by the Islamic State of Iraq and al-Sham (ISIS) have caused an estimated USD 4 billion to 5 billion in damages to Iraq's electricity network, reducing the grid's capacity by a quarter. Blackouts are common and are acutely felt during the summer. This has led to forced holidays and has been a factor in protests around the country, the most recent of which began Oct. 1.
Iraq has had production capacity in 2019 to meet around two-thirds of its domestic electricity demand, according to Iraqi Energy Minister Luay Al Khateeb. About 30 to 40 percent of Iraq’s imported electricity is sourced from Iran, in the form of electricity and natural gas, which it used to fuel domestic power plants.
The State Department in June, when granting the last waiver, said that it was intended to help Iraq mitigate energy shortages, and that the U.S. is continuing to work with Iraq to end its dependency on Iranian resources. Baghdad in September signed a USD 1.3 billion agreement with German industrial firm Siemens that will reportedly add 1.7 gigawatts of power capacity to Iraq’s grid.
In September, Iraq signed a deal to connect to the shared power grid of the Gulf Cooperation Council (GCC).The country needs four more years to curtail its dependence for electricity, Iraqi officials say.